Stock Market Tecnical Indicator: Using Fibonacci Ratios And Momentum

Stock Market Tecnical Indicator: Using Fibonacci Ratios And Momentum
Tuesday, May 01, 2007

Do any of these samples of sage advice sound familiar? “Don’t buy it here, but wait for a pullback.” “I would wait and sell on a bounce.” What does this really mean? Where and when do you act? Here’s one technique for calculating retracement levels using that tried-and-true favorite, Fibonacci ratios, as well as using momentum to define the trend.
Markets trend in a zigzag manner: rallying, leveling off, and surging again, only to be hit by a wave of profit-taking before settling into a trading range, awaiting the next reason to advance or retreat. This activity carries on in the general direction of the trend, easily seen on a price chart. Technically, the trend should be considered up as long as the market unfolds with a series of higher lows and higher highs. Similarly, the rend is considered down if the price action is a series of lower lows, with lower highs before each new low. A market is considered not to be in a trend if the price movement manifests itself in a series of fits and starts or if it fails to sustain levels beyond the previous extreme points, often reversing and forming the range.
During an uptrend, good traders will buy the pullbacks, positioning themselves with the trend, taking advantage of the market’s tendency to ebb and flow. When the market is in a downtrend, however, the strategy is to sell rallies, awaiting for the downtrend to resume. So what is the appropriate strategy to calculate price levels for buying pullbacks or selling rallies? One popular technique is to calculate and project a percentage retracement of the prior swing and use that as an entry level. But what percentage retracement is suitable? One popular set of retracement levels is based on a mathematical series discovered by an Italian mathematician more than 700 years ago...
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Wednesday, April 25, 2007
Stock Market Timing: Short-Term Trading Is Important?

You might think that short-term trading is less important than long-term investing. However, if you look at the amount of money invested by shortterm traders (e.g., specialists, floor traders, day traders) you find that it represents about 30% of daily volume or more, and this is a rather large percent. You might say, “Yes, but these traders produce short-term price moves that last a day or two and can be ignored.” Wrong! Here is where chaos theory and the power of feedback loops show that short-term traders may be able to trigger a movement that can carry on for weeks.
Each group of investors, grouped by the time intention of their trading, can generate feedback-loop movements in that time frame. For example, short-term traders can become nervous and produce extremely fast, but short-term, price changes. Certain instabilities can also exist in the minds of intermediate-term traders that, when triggered, can produce extremely fast intermediate-term price changes. Finally, instabilities can exist in the minds of long-term traders that can influence longer-term price changes.
Long-term trader instability is much less important than the first two because the mechanism behind the feedback loops lies in emotional reactions of the participants, and it is difficult to hold an emotion and react to it over a long period. In fact, I have never seen a feedback-loop decline last longer than 13 weeks. On the other hand, positive feedback loops—instabilities that drive prices higher than economics justifies—seem to be able to carry forward to extremes for up to 6 months.