by Rick Ratchford
Want a basic way to forecast future tops and bottoms? Try using Fibonacci ratios. The most popular ratios to use are .618 and 1.618. Several software packages have these ratios included as part of their tool set, and for good reason. For whatever the underlying cause, whether it is natural laws of the market or a self-fulfilled prophecy as some may conclude, using these ratios can help you find market turns. What you do with those turns are up to you.
Simply locate two concurrent tops or bottoms. Make sure they are no mere blips on the screen, but clearly trend changes. Count the number of price bars from one top or bottom to the other top or bottom. Okay, you have the distance in time from two extremes, now let’s forecast out into the future.
Let’s assume you are going to use the last two tops. Say the distance between them is 20 days. Take this distance (20), and multiply it by both .618 and 1.618, adding the result to second of the two extremes. Rounding for this article, .618 of 20 is around 12. Therefore, count 12-days from the second top or bottom of the two extremes you're using to arrive at your forecasted turning date.
How valuable is this information? Back in 1990, I was getting beaten up pretty good by market action. The Stochastic, moving averages, etc. were not helping. Then I came upon Fibonacci ratios and their applications, and from there went on a wonderful long streak of wins in Pork Bellies by forecasting exactly when the market would turn. All my debts were quickly wiped out and soon I was in the black by several thousands. This was the beginning of my trading career.
Today, I don’t use Fibonacci time days as they are too far apart, and further study and experimentation has brought me to market geometry, which although Fibonacci no doubt is in there somewhere, it makes up only a small part of the whole equation. That is how Fdates was born early 1997. But the fact remains you can still use your hand calculator to get some time days, and you can learn to properly use the information for profit. Once you solve for a time day, simply wait to see if you will have an opportunity to use it. So pull out your calculator and try a few charts using these ratios. Soon you will find it easy to do. What I mean by this is that, even if you have a time day, there are other factors you should keep in mind. One of those is trading with the trend, not against it, and where to enter price wise. These are lessons for another day.