| Using Fibonacci Analysis - Part Five |
Do you have the time? Fibonacci analysis can be enhanced by using time projections. Fibonacci time forecasts are applied to a chart like other Fibonacci studies, and work best when combined with either a retracement or fan study. When you are in a trade, the time study will help you watch for points in which reversals are likely to occur. When you are looking for new trade opportunities with a retracement or fan study, the time forecast can 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. 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 very easily to a chart at a significant price bottom or top. Usually it is applied at the same price point you would use to attach the first anchor point of a Fibonacci retracement or fan study. How it works In the chart below you can see a time projection applied to the top of the August-November trend on the EUR/USD on 11/23. Usually, you will ignore the first five very closely clustered vertical lines as noise (I will explain why a little later), and you will start paying attention to the wider spaced 6, 7, 8 and 9 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. As you can see, the time study below identified some likely volatility “nodes” where reversals may have been expected. In this case, the study proved accurate in the timing of three reversals. EUR/USD  Combining the Fibonacci time projection with a Fibonacci retracement can help clarify the signals and make them more reliable. In the next chart I have left the time projection at the same point on the EUR/USD but have layered a Fibonacci retracement anchored at the 11/23 high to the low on 12/21. The chart is getting a little crowded but with a little practice it isn’t too difficult to see the signals. EUR/USD 
The advantage provided by the time projection in this case study was that it let me know, in advance, when I should be paying the most attention to a potential support bounce. Any analytical method will fail a certain percentage of the time, but in our experience, the Fibonacci time projection helps to identify those opportunities with the highest probability for a successful outcome in advance. How to draw time projection studies We recommend the Fibonacci time projection be applied with a retracement or fan study. The time projection should be attached to the first anchor point of the retracement or fan study. Because the time projection lines or intervals are fixed, a second anchor point is not required. In the video you will see me apply the time study with a retracement and a fan study. Ignore the first 5 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 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…) The point behind this explanation is not only so you will understand how the Fibonacci time study is drawn but also so you can see that 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 we begin to analyze. Planning a trade You should design your trade in the same way you would if you were just 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. Time projections and risk As with all Fibonacci studies, time projections can be a good warning that the current trend could be disrupted. That may be an excellent trigger to tighten stops or apply a hedge. In the example below, I have applied the time projection to a major top on the EUR/JPY on October 15th. As you can see there were 3 significant retracements or volatility points that were identified by the time study. It does not mean that 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. EUR/USD  Variations in charting packages At PFX we make sure we have access to most of the popular charting packages and in almost all cases, Fibonacci time projections are drawn the same way. However, there are a couple of charting programs in which the programmers have misunderstood what a time study is and how it is used. The end result is that they will not project into the future but only cover the past. You can tweak them a little to get a good forecast into the future but if you find this tool useful for your own analysis you can find plenty of alternatives that will correctly display the information.
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3.25 Copyright (C) 2007 Alain Georgette / Copyright (C) 2006 Frantisek Hliva. All rights reserved." |
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