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You know Fibonaccis, but do you know Fibonacci Time Studies?
Contributed by John Jagerson
Most traders using Fibonacci analysis will stick to retracements, projections and fans, which is fine but Fibonacci analysis can be enhanced by using time projections as well. Fibonacci time forecasts are applied to a chart like other Fibonacci studies but are based on the actual number series rather than the ratio between the numbers in the Fibonacci series.
What is a Fibonacci Time Study?
A time forecast uses the Fibonacci number series (1,1,2,3,5,8,13,21...) to identify potential "areas of interest" in the future. They are applied easily to a chart at a significant price bottom or top. Usually it is applied at the same price point you would have used for the first or second anchor point of a Fibonacci retracement or fan study. The study appears on the chart as a series of progressively wider vertical lines.
Fibonacci Time Study applied to a chart of the SPDR S&P 500 ETF (SPY)
In the chart above you can see how the vertical lines coincided with a short correction to the downside in July and a strong bounce off support recently at the end of August. Picking those two points out of the other potential signals was intentional. Later in this article I will explain why these two points were so interesting.
Most of the time, you should ignore the first five or six very closely clustered vertical lines as noise and not very relevant. However, you should start paying attention to the wider spaced 7, 8, 9 and 10 lines. There are lines beyond that, but they begin trending out so far into the future that you will probably have updated your analysis by then.
When to use Fibonacci time studies
Whenever you're in a trade the time study will help you watch for levels at which reversals are more likely to occur. When you are looking for new trade opportunities with a retracement or fan study, the time forecast can be used to add to the probability of a successful outcome.
Time forecasts also add weight to potential support or resistance levels and help identify when a bounce or change of trend could appear. Knowing where and when you may want to pay the most attention to your analysis is a great way to optimize your trading efforts.
Fibonacci time studies in action
Combining the Fibonacci time projection with a Fibonacci retracement can help clarify the signals and make them much more predictive. In the next chart I have left the time projection at the same point but have layered a Fibonacci retracement anchored between the major high in April and the lowest point of the current channel in July. The chart is getting a little crowded but with a little practice it isn't too difficult to see the signals.
Fibonacci Time Study and Retracement applied to a chart of the SPDR S&P 500 ETF (SPY)
The time study coincided with two of the retracement levels on the chart. Unlike most technical indicators that rely on historical data, Fibonacci retracements and time studies aren't relying on historical data and therefore don't necessarily add any lag to your entries or exits. This is a big advantage when using more than one indicator at a time.
The time projection can tell you, in advance, when you should be paying the most attention to a potential support or resistance bounce. Expanding your chart to the right can show you the future time study levels so you can make sure you are paying attention on those dates specifically.
How to draw time projection studies
We recommend the Fibonacci time projection be applied in combination with a retracement or fan study. The time projection should be attached to a major top or bottom in the trend just like you would with other fibonacci studies. Because the time projection lines or intervals are fixed, a second anchor point is not usually required.
Ignore the first five intervals
Because the time projection is based on the Fibonacci number series the first interval will be drawn one candle away from the anchor, the second interval will also be one candle beyond the first one, the third will be 2 candles away from the second interval, the fourth interval will be 3 candles from the third, the fifth interval will be 5 candles away from the fourth and so on... (1,1,2,3,5,8,13...)
As a result, the first few intervals are not much more than static. Save yourself some effort and feel free to ignore them. The sixth interval is where you should begin your analysis.
Planning a trade
You should design your trade in the same way you would when using a Fibonacci retracement. Do not take more risk than you might normally, as trading is all about consistency and it is bad practice to radically change your position size from trade to trade.
Using time studies to control risk
As with all Fibonacci studies, time projections can be a good warning the current trend could be disrupted. It does not mean you have to get out of your trade just because a time projection interval appears, but it may be a great time to be more conservative in your risk control.
Frequently however, traders get a 'lot size' mentality. They are comfortable trading one contract of many markets, but get skittish at the possibility of having 10 contracts on one instrument and 2 on another. Many traders become anxious if they have different contract sizes in different markets. If you suffer from this anxiety don't let it get you down. Professional and seasoned traders get caught in this trap.
John Jagerson, Analyst at Learning Markets
About Learning Markets
Learning Markets offers daily articles, videos and investing guides - for free - about everything from investing in stocks and options to trading currencies in the forex market and more. Visit LearningMarkets.com to learn more about investing and to interact with other investors just like you.
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Support Tip
How can I find a MetaStock User group in my area?
Contributed by MetaStock Support
For all MetaStock versions
MetaStock has many active user groups located around the world. User groups are created by MetaStock enthusiasts as a place where MetaStock users can meet, share ideas, and learn how to better use their MetaStock software. Most user groups do not have any fees associated with them and meet on a regular basis.
User Group Search (United States and International): https://www.metastock.com/customer/resources/usergroups/
MetaStock Public Forum: http://forum.equis.com/search/SearchResults.aspx?q=user+groups
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MetaStock Features
John Murphy's Chart Pattern Recognition Review
Contributed by Ken Spelman
This multi-award winning add-on from John Murphy is one of the most popular and easiest to use add-ons available for MetaStock. If you can run a basic scan using the Explorer tool in MetaStock, you can use this program.
CPR can be used for all types of securities - Stocks, ETF's, Commodities, e-mini's or Forex. It should be used with daily data and I have found it best when used on a large block of securities. The program can scan for both Reversal Patterns and Continuation Patterns. Here are the patterns it scans for:
Reversal Patterns: Head and Shoulders
Inverse Head and Shoulders
Triple Tops
Triple Bottoms
Double Tops
Double Bottoms
Continuation Patterns:
Symmetrical Triangles
Ascending Triangles
Descending Triangles
John Murphy's Chart Pattern Recognition scans for all patterns at one time and gives you a nice, easy report. CPR goes beyond simply identifying the patterns on your chart. Each pattern is computer-verified and supplemented with John Murphy's own expert commentary. Simply click on the identified pattern to read the specific details on how he feels this pattern rates. Was the breakout from the pattern significant enough to warrant a trade? What is the likely price projection for this type of pattern? How long will it likely take to reach the projected price? You'll get all of this trading detail and more!
Chart Pattern Recognition has won numerous awards from the prestigious Technical Analysis of Stocks and Commodities Magazine Readers' Choice Award plug-ins category. It was the winner from 2006-2009 and first runner up from 2004-2005 and 2010.
If you have any questions regarding this software please call Ken Spelman at 1-800-587-8018 or 001-801-270-3112 or email at Ken.Spelman@thomsonreuters.com.
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