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Fibonacci profit

Anyone who has been involved in the market for long has probably heard about Fibonacci numbers and ratios. We know they somehow mysteriously affect the market; however, most of us resist trying to understand how they work. I resisted because I thought that Fibonacci numbers, wave analysis and related systems were very difficult concepts to learn.

Eventually, my desire to better understand the market and to win bigger overcame my prejudice. I quickly discovered that applying Fibonacci techniques to the market is not very difficult, and that a trader does not need to be an Elliott Wave technician to apply Fibonacci concepts.

The Fibonacci number series (1, 2, 3, 5, 8, 13, 21, etc.) and the resulting Fibonacci ratios (0.146, 0.382, 0.5, 0.618, 1.0, 1.382, 1.5, 1.618, 2.618, etc.) are the heart of Fibonacci analysis. My technique of using Fibonacci expansion analysis uses only three ratios: 0.618, 1.0 and 1.618.

With these three ratios, I calculate logical profit objectives. I can ignore most of the other ratios, as well as the entire number series from which those ratios are derived.

Profit objectives

I use three simple equations to establish logical profit objectives, where A, B and C (Figures 1a and 1b) are specific points in a market move. The first objective is the contracted objective point (COP). It utilizes the Fibonacci ratio 0.618:

COP = 0.618(B–A)+C

FIGURE 1a:

FIGURE 1b:

FIGURE 2:

The second objective is the objective point (OP), which uses the Fibonacci ratio 1.0:

OP = B–A+C

The third objective is the expanded objective point (XOP), which uses the Fibonacci ratio 1.618.

XOP = 1.618(B–A)+C

This simple set of equations has allowed me to calculate the major turning points in a variety of

markets—days, weeks, sometimes months ahead.

In Figure 1a, point A marks the beginning of an up move, B marks the highest high of that move and C marks the lowest low following point B.

In Figure 1b, point A marks the beginning of a down move, B marks the lowest low of that move and C marks the highest high following B.

Once all three points have been located on a bar chart, their respective values can be entered into the equations, and all three profit objectives can be quickly determined