Fibonacci and Gann Applications in Financial Markets

Common Errors in Application of Fibonacci Retracements and Extension 73
Fibonacci analysis is one fairly simple method of finding out what key levels are,
not only now but some distance in the future.
Basic Fibonacci analysis should be kept to the short-term price action if there is
insufficient historical data, and indeed where there is no indication of the historic
high or low. Therefore the relationship between the current price and its position
within the development of the price series cannot be judged. However, it is sufficient
to use as much data as possible to load on to the computer screen. There is a high
risk that an inexperienced analyst or trader loads the default amount of data on to
the chart space, missing out what could be a critical move in the past. It is a welldocumented
fact that markets move in waves and cycles, and although a display
may show a downtrend of six months, this could be just a limited correction within
a much larger bullish move which could restart at any time. For analysts looking at
very short-term positions, the relative position of the current price in the Grand
Scheme is of little importance as it is much more important to have the perspective
of where the price is within the most recent moves. Fibonacci retracements when
applied to corrective moves are ideal for this.
Extension levels should be avoided unless there is previous price action in this
region as accurate predictions and target levels fall short of reality and reflect badly
on the otherwise excellent technician! Although these price objectives are handy,
they really are Third Division levels when conducting analysis. I would much rather
use patterns and measure their objectives than use a Fibonacci extension level as a
preferred target. Other patterns give just as good results, and the analyst can feel
more confident in these suggested levels if they come from either previous price history
(support and resistance levels, especially congestive trading zones) or are part
of a channel or trendline. Indeed, I would prefer to use a Fibonacci fanline or a Gann
fanline first rather than use an extension level as a target, but that is purely personal!