Fibonacci and Gann Applications in Financial Markets

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Conclusion 197 watching it develop relieves much of the market boredom that exists in quiet periods. This is even more on display with screen charts showing the development of a candle, for who can deny the attractiveness of fat multicoloured charts on a modern flat screen. Having a formal training in technical analysis keeps the mind focused. There is great excitement in our community when some new way of analysing a market is thought up and everyone is keen to try it out, as there has been an explosion of new techniques to try over the last decades. This should be encouraged, as openness to new developments in technical analysis ultimately makes the tasks of being a good technician easier. Some new techniques may not be appropriate for every market or indeed should not be effective every time, but ongoing learning gives the enthusiastic analyst an opportunity to look at markets in interesting ways. I remember being invited by the Society of Technical Analysts to give a talk at one of the monthly meetings and was greatly honoured by having the front row filled with enthusiastic long-term users of technical analysis of whom I had been in awe throughout my working life. The daunting task for me was to show how and when and when not to use traditional technical tools within intraday markets. My audience was mainly filled with analysts who look at markets on a daily or longer timeframe and who wanted to know the pitfalls I had come across, and often fallen into, when using traditional daily tools in a very short-term environment. Earlier in this book the fractal nature of charts was discussed in some detail and while it is true that a barchart is a barchart, whether of hourly, daily, weekly or annual data, some application of the art of technical analysis has to be used when looking at sub-daily timeframes. This took many years for me to come to that conclusion, as I had rigorously applied rules that are effective in daily charting analysis to hourly and halfhourly charting only to find that target levels were not reachable and more importantly money management tools such as stop losses were set too far off. It was through deeper investigation and back-testing that I was able to adapt rules to fit hourly data. Indeed, futures market analysis – where much of the intraday trading and analysis takes place – requires tweaking of hard and fast rules that have worked well in daily environments. This is in part due to the size of the prices themselves. In STIR (short-term interest rate) markets where the prices are always less than 100 but do not tend to move very far lower than 90 in the main (the noticeable caveat here is the Exchange Rate Mechanism problem for sterling in 1992), waiting for a 3% break of a trendline as confirmation of a major reversal of trend is too long to wait, as much financial opportunity is lost while waiting for this rule to be met. A much smaller percentage should be applied to a trendline break in STIR markets in order to ‘catch’ the move before it has gone too far. While some of these markets are dull and not at all volatile, trendline breaks and breaks in retracement can be significant and should be treated as such, but moves in momentum that trigger buy or sell
198 Fibonacci and Gann Applications in Financial Markets signals in more traditional timeframes can often give false and misleading entry and exit signs. Analysts have to be careful with false indicators. Forex markets analysis is quite different. An intraday chart (hourly, for example) is very different from that of a future. This is in part due to the volume of trading taking place. The sheer number of players and number of trades gives intraday Forex charts a different feel and look. This makes them look ‘smoother’ in a way that is not as clear on other types of chart. Naturally Forex charts have other drawbacks with regard to application of some techniques, but generally exchange rate charts offer interesting opportunities for analysis as they do not show ‘holes’ or occasions when there is no trading within a timeframe. Lack of hourly trading (and therefore interest) in some quiet markets is frustrating in the extreme and a good chart should always show some traded price within the particular timeframe used. In earlier chapters the lack of interest in Emerging Market instruments in Europe was discussed. Trading volumes collapsed as they were seen to be too risky for investors in the early 2000–2001 period and there were many days when only an exchange-generated end-of-day price was displayed, which made previously interesting charts difficult to analyse. Momentum studies became useless and patterns difficult to see and even switching from barcharts to line charts did not make much difference. A balance between duty to holders of instruments which are in the doldrums who want to know analyst opinion as to future price objectives and the worthwhile application of precious analytical time has to be made. Analysing a market that is in its death throes is very disheartening, as it gets very difficult to be confident when making predictions. This is also the case with ‘new’ markets where there is a significant amount of volatility. Previous chapters looked at launch and early activity in some new futures contracts. Wide ranges in the early trading history of such instruments as the BTP undoubtedly made some investors a lot of money, but this same volatility was not a help to the technical analyst. Any contract or other asset that has a daily range in excess of a Big Figure, or multiples thereof, is very difficult to analyse and the technical analyst has to run fast just to keep up. However, in my experience, juvenile behaviour in new contracts does not last long and this could be in part due to more investors and traders starting to take the instrument seriously. The effect of big players entering a market for the first time and staying there cannot be overlooked as they have a huge effect on the price action. In the case of the BTP, as mentioned before, the entry of some of the big investment banks to this market saw the volatility in price moderated to a great extent and this continued for some time until the launch of euro-based instruments. While interest in European sovereign futures contracts has waned significantly since Monetary Union, they still remain attractive hedging instruments for holders of domestic cash debt and so their treatment within the investment community has changed with time. Indeed, some contracts that were
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FIBONACCI AND GANN APPLICATIONS IN
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Contents Preface ix 1 Introduction
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For Angus and Jenny for all the ski
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Preface Technical analysis is not a
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1 Introduction to and History of th
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Introduction to and History of the
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10 Fibonacci and Gann Applications
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3 Other Applications of the Fibonac
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Other Applications of the Fibonacci
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4 Charting and Difficulties: A Hist
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Charting and Difficulties: A Histor
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5 Common Errors in Application of F
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Common Errors in Application of Fib
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7 Application and Common Errors in
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Application and Common Errors in Fi
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Page 204 and 205: 11 Conclusion The application of Fi
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Page 228 and 229: Glossary of Common Terms 217 Month
Page 230: Glossary of Common Terms 219 Englan
Page 235 and 236: 224 Index commodity markets, 12, 17
Page 237 and 238: 226 Index Gann theory (cont.) probl
Page 239 and 240: 228 Index pi, discovery, 1-2 pit tr
Page 241: 230 Index ‘V’ bottoms/tops, 15-
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Fibonacci and Gann Applications in Financial Markets

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