Technical Analysis Flashcards
What is technical analysis?
Study of collective market sentiment,
expressed in buying and selling of assets;
prices are determined by the interaction of supply and demand
Technical Analysis Summary
1: - Charts
2: - Trends
3: - Price Based Indicators
4: -Non Price Based Indicators
5: -Ellliot Wave Theory
Charts
Low Calorie Rice
Prepared By Variender
1: - Line Charts
2: - Candle Sticks
3: - Volume Chart
4: - Point & Fig
5: - Bar Charts
6: - Relative Strength Chart
Trends
1: - Up-Trend
2: - Down-Trend
Chart Patterns
Reversal and Continuation
1: - Reversal Patterns
a: - Head and Shoulders & Inverse Head and Shoulders
b: - Top
i. Double Top
ii. Triple Top
c: - Bottom
i. Triple Bottom
ii. Triple Bottom
2: - Continuation Patterns
a: - Triangles
b: - Rectangles
c: - Flags
d: - Pennants
Price Based Indicators
**A:- Oscillators **
1: - Rate of Change Oscillators
2: - Relative Strength Index
3: - Moving Average Convergence and Divergence (MACD)
4: - Stochastic Oscillator
* * B:- Moving Average Lines**
C:- Bollinger Bands
Non Price Based Indicators
1: - Arms Index or Short Term Trading Index
2: - Put/Call Ratio
3: - Opinion Polls
4: - Mutual Fund Cash Position
6: -New and Secondary Equity Offering
7: -Short Index Ratio
What does price and volume reflect?
the collective behavior of buyers and sellers
What is the key assumption of TA?
1: -Market prices reflect both rational and irrational investor behavior;
2: - Implies that the efficient markets hypothesis does not hold
What do TAs believe about investor behavior?
it is reflected in trends and patterns that tend to repeat and can be identified and used for forecasting prices
What are two advantages of TA?
1) Actual price and volume data is observable whereas much of fundamental data is subject to assumptions or restatements
2) It can be applied to prices of assets that do not produce future cash flows
If prices have changes exponentially over long periods of time what might an analyst do to his charts?
draw a chart on a logarithmic scale instead of a linear scale
Charts
1: - Line Charts
2: - Candle Sticks
3: - Volume Chart
4: - Point & Fig
5: - Bar Charts
6: - Relative Strength Chart
What are the three main types of charts?
1) line charts
2) bar charts
3) candlestick charts
Candlestick Chart
1: -Bar Chart that draws a box from the opening price to the closing price on the vertical line for each trading period
2: - The box is empty if the close is higher than the open and filled if close is lower than the open
Note:-See where is open and where is close .When the price goes down then the close is below
Candlestick Chart
Candlestick Chart
Bar Charts
1: -Vertical lines from the high to low price for each trading period.
2: - A mark on the left side of the line indicates the opening price and a mark on the right side of the vertical line indicates the closing price
Line Charts
Closing prices for each period are connected by a line
Volume Chart
1: -Vertical line from zero to the number of shares (bonds,contracts) exchanged during each trading period .
2: - Often displayed below a bar or candlestick chart of the same asset over the same range of time.
Point and Figure
1: - Displays price tends on a grid
2: -Price is on the vertical axis and each unit on the horizontal axis presents a change in the direction of price trend
Resistance and Support Levels in Point and Figure Charts
Relative Strength Chart
1: -Line chart of the ratios of closing prices to a benchmark index .
2: -These charts illustrate how one asset or market is performing to another
3: - Relative strength charts are useful for performing inter-market analysis and for identifying attractive asset classes and assets with in each class that are out performing others
What does relative strength mean?
a trend that indicates the asset is outperforming the benchmark
What does relative weakness mean?
a trend that indicates the asset is underperforming the benchmark
Trends
1: - Up-Trend
2: - Down-Trend
What is an uptrend?
if prices are consistently reaching higher highs and retracing to higher lows;
Demand is increasing relative to supply
An upward sloping trend-line can be drawn that connects the low points for a stock in an uptrend
What is a downtrend?
1: - If prices are consistently declining to lower lows and retracing to lower highs;
2: -Supply is increasing relative to demand
3: -A downward sloping trend line can be drawn that connects the high points in a downtrend .
BreakDown from Uptrend
BreakOut from Downtrend
DUOD
When the prices crosses the trendline by what the analyst considers a significant amount
A breakDown from the Uptrend
or
A breakOut from the Downtrend
is
said to occur
Either a breakdown or breakout may signal the end of previous trend .
What is a breakout?
When price crosses the trendline from a downtrend by what the analyst considers a significant amount
What is a breakdown?
When price crosses the trendline from an uptrend by what the analyst considers a significant amount
What is a support level?
Buying which is expected to emerge that prevents further price decreases
Support and Resistance Level are the prices at which technical analysts expect supply and demand to equalize Past highs are viewed as resistance levels and past lows are viewed as support levels.
What is a resistance level?
selling which is expected to emerge that prevents further price increases
Support and Resistance Level are the prices at which technical analysts expect supply and demand to equalize
Past highs are viewed as resistance levels and past lows are viewed as support levels.
What is a change in polarity?
Belief that breached resistance levels become support levels and that breached support levels become resistance levels
Chart Patterns
1: - Reversal Patterns
a: - Head and Shoulders
b: - Inverse Head and Shoulders
c: - Top
i. Double Top
ii. Triple Top
d: - Triple
i. Triple Top
ii. Triple Bottom
2: - Continuation Patterns
a: - Triangles
b: - Rectangles
c: - Flags
d: - Pennants
Reversal Patterns
These price patterns are thought to indicate that the preceding trend has run its course and a new trend in the opposite direction is likely to emerge
Reversal Patterns Types
a: - Head and Shoulders and
b: -Inverse Head and Shoulder
b: - Top
i. Double Top
ii. Triple Top
c: - Bottom
i. Double Bottom
ii. Triple Triple
What is a head-and-shoulders pattern?
This pattern suggests the demand that has been driving the uptrend is fading especially if each of the highs in the pattern occurs on declining volume
Head and Shoulders
A technical analysis term used to describe a chart formation in which a stock’s price:
- Rises to a peak and subsequently declines.
- Then, the price rises above the former peak and again declines.
- And finally, rises again, but not to the second peak, and declines once more.
The first and third peaks are shoulders, and the second peak forms the head.
Double Top
These are pattern similar to the head and shoulders pattern in that they indicate weakening in the buying pressure that has been driving the uptrend
The price reaches a resistance level at which selling pressure appears repeatedly preventing any further increase in price
As with head and shoulder the size of double and triple top pattern can be used to project a price target for next downtrend
Double Top
Double tops are commonly found during an uptrend in prices where a new high is formed followed by a slight pullback and a retest of the new high, but ultimately failing to surpass the price level established at the first peak.
This results in a movement of prices to a lower level and completes the pattern of the double top.
The second peak does not have to stop exactly at the price reached from the first peak but should be relatively close.
This pattern is usually indicative of a trend that is weakening where buying interest is decreasing.
Triple Top
These are pattern similar to the Head & Hhoulders pattern
in that
they indicate weakening in the buying pressure
that
has been driving the uptrend.
The price reaches a resistance level
at which
selling pressure appears repeatedly preventing
any further
increase in price
As with head and shoulder the size of double and triple top pattern can be used to project a price target for next downtrend
Triple Top
A pattern used in technical analysis to predict the reversal of a prolonged uptrend.
This pattern is identified when the price of an asset creates three peaks at nearly the same price level.
The bounce off the resistance near the third peak is a clear indication that buying interest is becoming exhausted.
It is used by traders to predict the reversal of the uptrend.
When does the Double Top takes place
Uptrend
When does the Triple Top Takes Place
Uptrend
It is used by traders to predict the reversal of the uptrend.
What is the Size of the difference in Head and Shoulders ?
Size is the difference in price between the head (the highest price reached ) and neckline (the support level at which the price retraced after the left shoulder and head have formed)
If the price declines beyond the neckline after the right shoulder forms the down trend is projected to continue
from that breakdown price by about the size of the head and shoulder pattern
Example of Size of Head and Shoulders
Example :-
Top of the head = 80
Size of the pattern = 80-55 = 25
Price Target for ensuing downtrend = 55-25=30
Neckline = 55
Inverted Head and Shoulder
A chart pattern used in technical analysis to predict the reversal of a current downtrend.
This pattern is identified when the price action of a security meets the following characteristics:
- The price falls to a trough and then rises.
- The price falls below the former trough and then rises again.
- Finally, the price falls again, but not as far as the second trough.
Once the final trough is made, the price heads upward toward the resistance found near the top of the previous troughs. Investors typically enter into a long position when the price rises above the resistance of the neckline. The first and third trough are considered shoulders, and the second peak forms the head.
Reversal patterns for downtrend are called Inverse Head and Shoulders,
Double bottom and Triple Bottom patterns and can be analysed in the same way as the reversal patterns for uptrends
Double Bottom
Reversal patterns for downtrend are called inverse head and shoulders,double bottom and triple bottom patterns and can be analysed in the same way as the reversal patterns for uptrends
Double Bottom
A double bottom is simply the opposite of a double top.
This pattern occurs during a downtrend and is a signal of a reversal of the downtrend into an uptrend.
This pattern is easily recognizable after the fact by its resemblance to the letter “W”. The initial downward move will find a support at the first bottom and then the price action will rally off the support to a temporary new high (the middle of the “W”).
Another selloff will take place that will reach the same support level of the first bottom, and consequently cause another rally upwards.
Lastly, the trend is confirmed when the price breaks through the upper resistance to complete the pattern and reversal
When does the Double Bottom Takes Place
Downtrend
Triple Bottom
Reversal patterns for downtrend
are called
1: -Inverse Head and Shoulders,
2: -Double Bottom
3: -Triple Bottom
These can be analysed in the same way as the reversal patterns for uptrends
Triple Bottom
A pattern used in technical analysis to predict the reversal of a prolonged downtrend.
The pattern is identified when the price of an asset creates three troughs at nearly the same price level.
The third bounce off the support is an indication that buying interest (demand) is outweighing selling interest (supply) and that the trend is in the process of reversing.
When does Triple Bottom Takes Place
Continuation Pattern Definition
Def:- It suggests a pause in a trend rather than a reversal
These indicate temporary pauses in a trend which is expected to continue(in the same direction)
Def:- A technical analysis pattern that suggests a trend is exhibiting a temporary diversion in behavior, and will eventually continue on its existing trend.
Continuation Pattern Types
a: - Triangles
b: - Rectangles
c: - Flags
d: - Pennants
What are triangles?
Form when prices reach lower highs and higher lows over a period of time.
Trendlines on the highs and on the lows thus converge when they are projected forward.
Triangles suggest buying and selling pressure have become roughly equal temporarily but they do not imply a change in the of the trend
Triangle Types
1: -Symmetrical (Higher Lows and Lower Highs )
2: -Ascending (Higher Lows and a Resistance Level )
3: -Descending (Lower Highs and a Support Level )
Size of Triangle
The size of a triangle or the difference between the two trend lines at the time when the pattern begin to form can be used to set a price target assuming the price breaks out of the triangle and the previous trend continuos
What are rectangles?
When trading temporarily forms a range between a support level and a resistance level;
It suggests the prevailing trend will resume and can be used to set a price target;
They do not imply a change in direction of a trend
Flags
Flags and pennants refer to rectangles and triangles that appear in the short term price charts
Pennants
Flags and pennants refer to rectangles and triangles that appear in the short term price charts
Price Based Indicators
1: - Oscillators
2: - Moving Average Lines
3: - Bollinger Bands
What is an oscillator?
group of technical tools TAs use to identify overbought/oversold markets; based on market prices but scaled so that they “oscillate” around a given value such as zero or between two values such as zero and 100; extremely high values indicate overbought condition whereas extremely low values indicate oversold condition; can be used to identify convergence or divergence.
What are four examples of oscillators?
1) ROC (rate of change)
2) RSI (relative strength index)
3) MACD (moving average convergence/divergence)
4) stochastic oscillator
What does convergence indicate?
price trend is likely to continue
What does divergence indicate?
potential change in price trend
What is the ROC oscillator?
100 x latest closing price - closing price from n period earlier; buy when ROC changes from negative to positive during an uptrend and sell when ROC changes from positive to negative during downtrend
What is the MACD?
difference between two exponentially smoothed moving averages of the price and the “signal line”; oscillates around 0 but are not bounded; points where the two lines cross can be used as trading signals; MACD line crossing above the smoother signal line is viewed as a buy signal and the MACD line crossing below the signal line is viewed as a sell signal
What is the RSI?
ratio of total price increases to total price decreases over a selected number of periods; oscillated between 0-100; high values (over 70) indicate overbought, low values (below 30) indicate oversold
Oscillators Definition
These are indicators based on market prices but scaled so that they Oscillate around a given value such as Zero or between two values such as zero or 100.
Extreme high values of of an oscillator are viewed as indicating that the market is overbought and vice versa
That is
Technical analysis use price based indicators to identify market conditions are
1: - Overbought:- Prices have increased too rapidly and likely to decrease in the near term
2: -Oversold:-Prices have decreased too rapidly and are likely to increase in the near term
Oscillators Convergence
These charts also indicate the convergence or divergence of the Oscillator and market price
Convergence occurs when the oscillator shows the same pattern as the prices eg both reaching higher highs.
Convergence suggests the price trend is likely to continue
Oscillators Divergence
Divergence occurs when oscillator shows a different pattern than prices
(eg failing to reach a higher high when the price does )
Divergence indicate a potential change in trend in the near term
Oscillator Uses
1: -Used to determine relative strength of a trend
2: -When Oscillators reach historically high or low levels they may signal a trend reversal
3: -For a non-trending market oscillators can be used for short term trading decisions
Oscillators Types
1: - Rate of Change Oscillators
2: - Relative Strength Index
3: - Moving Average Convergence and Divergence (MACD)
4: - Stochastic Oscillators
Rate of Change Oscillator
Measures
This measures the percentage change in the price from one period to the next.
** Fluctuates**
It fluctuates above and below the zero line as the Rate of Change moves from positive to negative
** Compares**
This compares the price in current period with the price n periods ago.
Relative Strength Index (RSI)
Based on ratio of total price increases to total price decreases over a selected number of periods scaled to oscillate between 0 & 100.
Ratio of Total Price Increase to Total Price Decrease
Over a selected periods
Scaled to oscillate between 0 to 100
High value indicate over brought
Low value indicate oversold
Moving Average Convergence and Divergence (MACD)
Drawn using exponential moving averages with greater weights in recent observations
MACD Signal line is exponentially smoothed average of MACD line generally 9 days.
This indicator oscillates around 0 but has no limits. Analyst compares the current MACD Level with historical values to get over brought or oversold signal
Stochastic Oscillators
Calculated from the latest closing price and highest and lowest prices reached in a recent period such as 14 days .
% K line :- It is calculated as difference between the recent recent high and low
The % D Line :- It is a 3 period average of % K Line
Points where %D Line crosses %K line can be used as trading signals
What is a moving average?
mean of the last ‘x’ closing prices; often viewed as support or resistance levels
Moving Average Lines
:-Moving average lines area frequently used method to smooth the fluctuations in a price chart.
:-A 20-day moving average is the arithmetic mean of the last 20 closing prices.
:-Moving average lines can help illustrate trends by smoothing short term fluctuations But When the number of periods is large a moving average line can obscure changes in trend
:-The larger number of periods chosen the smoother the resulting moving average line would be
In an uptrend where is price in relation to the moving average?
price is higher than the moving average
In a downtrend where is price in relation to the moving average?
price is lower than the moving average
Bollinger Bands
Are constructed based on the standard deviation of closing prices over the last n periods
What are bollinger bands?
constructed based on the standard deviation of closing prices over the last ‘n’ periods; move away from each other when volatility increases and move closer together when prices are less volatile
How are Bollinger Bands Constructed
Bollinger bands are drawn a given number of standard deviations above and below a moving average line
When is the probability of Price Falling in Bollinger Band
Prices are believed to have a higher probability of falling when they are near the upper band.
When is the probability of Prices Rising in Bollinger Bands
And higher probability of rising when near the lower band
When Price Volatility Increases Bands
Bands move away from each other
When Price Volatility Decreases Bands
Move closer when price less volatile
What does the prices at or above upper Bollinger Band mean
May be viewed as indicating an overbought market one that is too high and likely to decrease in near future
What does prices at or below the Bollinger Band Indicate
Prices at or below the lower Bollinger Band may be viewed as indicating oversold market one that is to low and is likely to increase in near term
What is the Contrarian Strategy for the Bollinger Bands ?
Is to buy when the prices are at the lower band or sell when the prices is at the upper band
Contrarian Strategy
Is to buy when the prices are at the lower band or sell when the prices is at the upper band
What do contrarians believe?
markets get overbought or oversold because most investors tend to buy and sell at the wrong times, and thus it can be profitable to trade in the opposite direction
What is a golden cross?
when short-term average crosses the long-term average from below; ‘buy’ signal; emerging uptrend
What is a dead cross?
when a short-term average crosses the long-term average from above, ‘sell signal’; emerging downtrend
Non Price Based Indicators
1: - Arms Index or Short Term Trading Index
2: - Put/Call Ratio
3: - Opinion Polls
4: - Mutual Fund Cash Position
5: -New and Secondary Equity Offering
6: -Short Index Ratio
What are some non-price-based indicators?
1) put/call ratio
2) VIX (volatility index)
3) opinion polls
4) margin debt
5) short interest ratio
Arms Index
Or
Short Term Trading Index (TRIN)
1: -It is a measure of funds flowing into advancing and declining stocks
2: -Value less than one indicate more trading volume in advancing stocks than in declining stock while values greater than 1 mean more volume is in declining stocks than in advancing stocks
3: -On the Charts of TRIN for US Stocks Spike upward had coincided with large daily losses in the stock market While spike downward have coincided with large daily gains in the stock market
What is the TRIN index?
Short-term trading index;
Measure of funds flowing into advancing and declining stocks;
What does a TRIN value = 1?
funds are flowing evenly into advancing and declining stocks
What does a TRIN > 1 mean?
majority of volume is in declining stocks
What does a TRIN < 1 mean?
majority of volume is in advancing stocks
Put/Call Ratio
:-Put option volume divided by call option volume
The put/call ratio is a contrarian indicator and contrarian investors seek to profit by doing the opposite of what market sentiment suggests.
If the put/call ratio is decreasing, it implies the volume of call options on a particular stock is greater than the volume of put options.
That would generally indicate a bullish scenario, but because this ratio is a contrarian indicator, a decreasing ratio is actually bearish because sentiment is overly positive and a correction (decline) is likely to occur.
PCR >.5 indicates market is bearish
:- Extremely high ratios indicate strongly bearish investor sentiment and possibly an oversold market while extremely low ratios indicate strongly bullish sentiment and perhaps an overbought market
What is the Put/Call ratio?
Put volume / Call volume;
Reflects activity by investors with negative and positive outlooks about the asset;
Increase in the ratio indicates a negative outlook,
Decrease in the ratio indicates a positive outlook;
Generally viewed as a contrarian indicator
Decreasing Put/Call Ratio Means
** Bullish Scenario and Contraian’s Bearish Strategy **
Extremely low ratios indicate strongly bullish sentiment and perhaps an overbought market
That would generally indicate a bullish scenario, but because this ratio is a contrarian indicator, a decreasing ratio is actually bearish because sentiment is overly positive and a correction (decline) is likely to occur.
PCR >.5 indicates market is bearish
Increasing Put/Call Ratio Means
Bearish Scenario and Contranian’s Bullish Strategy
Extremely high ratios indicate strongly bearish investor sentiment and possibly an oversold market
Opinion Polls
Opinion polls that attempts to measure investor sentiments directly
Mutual Fund Cash Position
:-It is the ratio of mutual funds cash to total assets
:-Mutual fund cash position tend to increase in a falling market and decrease in a rising market
High:-
High cash position means future buying power in the market
Low:-
They are already invested and market prices reflect their purchases
What is the mutual fund cash position?
ratio of mutual fund’s cash to total assets; viewed as a contrarian indicator; high ratio suggests market prices are likely to increase; low ratio indicates they are already invested and prices are likely to decrease
High Mutual Fund Cash Position
High cash position means future buying power in the market
Low Mutual Fund Cash Position
]They are already invested and market prices reflect their purchases
May signal future selling
New and Secondary Equity Offerings
IPOs and Secondary Offerings add to the supply of stocks
Because issuers tend to sell new shares when stock prices are thought to be high,increase in issuance of new shares may coincide with market peaks
Short Index Ratio
Shares sold short divided by average daily trading volume
High Short Index Means
A high short interest ratio means investors expect the stock price to decrease
It also implies future buying demand when short sellers must return their borrowed shares.
Short interest
Short interest is the number of shares investor have borrowed and sold short
Short Index Ratio is the opposite of
Opposite of margin debt
That is increase in shares sold short indicate strong negative sentiment.
Yanni Investor Hope kar rahe hain ki market fall hogi .
Tabhi woh log short kar rahe hain
Volatility Index (VIX)
Measure of volatility on S&P 500 stock index option
High Levels of VIX Index Means
High levels of VIX indicate bearish market sentiments which contrarians interpret as bullish
High Put Call Ratio
High VIX
High Short Interest Ratio
High levels of
Put/Call ratio,
VIX
and
Short Interest Ratio
indicate bearish market sentiments which contrarians interpret as bullish
Margin Debt Outstanding
Amount of margin debt outstanding
Margin Debt
Also used as a sentiment indicator
It is also a useful flow of funds indicator
Increasing margin debt indicate that investors want to buy more stocks
Decreasing margin debt indicates increased selling
What is margin debt?
increase suggest aggressive buying by bullish margin investors; as they reach their limits of margin credit their ability to continue buying decreases which can cause prices to begin declining; as prices decrease investors may need to sell securities to meet margin calls and these sales drive prices lower still; in general increasing margin debt tends to coincide w/increasing prices and decreasing margin debt tends to coincide w/decreasing prices.
Increasing Margin Debt
High levels of margin debt indicate bullish sentiment which contrarians interpret as bearish
Increase in total margin debt outstanding suggest aggressive buying by bullish margin investors
Increase in margin coincides coincide with increasing market prices and decrease in margin debt tends to coincide with decreasing market prices
Decreasing Margin Debt
Low levels of margin debt indicate bearish sentiment which contrarians interpret as bullish
Decrease in total margin debt outstanding suggest reduced buying by margin investors
Decrease in margin debt tends to coincide with decreasing market prices
What is intermarket analysis
refers to analysis of the interrelationships among the market values of major asset classes such as stocks, bonds, commodities and currencies; useful for comparing the relative performance of equity market sectors or industries and of various international markets
Cycles
Famous Cycles
Some technical analysts apply cycle theory to financial markets in an attempt to identify cycles in prices.
Cycle periods favoured by technical analyst includes
1: - 4-year Presidential Cycles
2: - 18 Year Cycles
3: - Decennial Patterns or 10 Year Cycles 4:- 54-Year-Cycles called Kondratieff Waves
What is a Kondratieff wave?
a 54-year cycle that some technical analysts believe exists for equity market prices
What is Elliot Wave Theory?
Belief that financial market prices can be described by an interconnected set of cycles; range from few minutes to centuries; if the prevailing trend is down, downward moves have five waves and upward moves have three waves; if prevailing trend is up, uptrend consists of five waves and downward moves occur in three waves.
Elliot Wave Theory
One of the most developed cycle theories is the Elliot Wave Theory which is based on an interconnected set of cycles that range from a few minutes to centuries
According to Elliot wave theory in an uptrend the upward moves in prices consist of five waves and the downward moves occurs in three waves
Each of these waves is composed of smaller waves that exhibit the same pattern
The sizes of these waves are thought to correspond Fibonacci Ratios
Fibonacci numbers are found by starting with 0 and 1 then adding each of two previous numbers to produce the next .
0,1,1,2,3,5,8,13,21 and so on
Ratios of Fibonacci Numbers are useful for estimating price target
For Example a down leg can be 1/2 or 2/3 the size of an up leg or a price target can be 13/8 of the previous high
Ratio of consecutive Fibonacci numbers converge to .618 and 1.618 as the numbers in the sequence gets larger
These 2 values are commonly used to project the price targets
How Many Waves are there in an Elliot Wave Theory Uptrend
According to Elliot wave theory in an uptrend the upward moves in prices consist of five waves
How Many Waves are there in an Elliot Wave Theory Downtrend
The downward moves occurs in three waves
Each of these waves is composed of smaller waves that exhibit the same pattern
The sizes of these waves are thought to correspond Fibonacci Ratios
Fibonacci numbers are found by starting with 0 and 1 then adding each of two previous numbers to produce the next .
0,1,1,2,3,5,8,13,21 and so on
Ratios of Fibonacci Numbers are useful for estimating price target
For Example a down leg can be 1/2 or 2/3 the size of an up leg or a price target can be 13/8 of the previous high
Ratio of consecutive Fibonacci numbers converge to .618 and 1.618 as the numbers in the sequence gets larger
These 2 values are commonly used to project the price targets
How is size of Elliot Waves Determined
The sizes of these waves are thought to correspond Fibonacci Ratios
What are Fibonacci numbers?
Fibonacci numbers are found by starting with 0 and 1 then adding each of two previous numbers to produce the next .
0,1,1,2,3,5,8,13,21 and so on
Ratios of Fibonacci Numbers are useful for estimating price target
How are Fibonacci Numbers and Elliot Wave Connected
Elliot Wave theorists believe that the ratios of Fibonacci numbers are useful for estimating price targets
How is price estimated by Fibonacci Numbers in Elliot Wave Theory
Ratios of Fibonacci Numbers are useful for estimating price target
For Example :-
A down leg can be 1/2 or 2/3 the size of an up leg
or
a price target can be 13/8 of the previous high
Ratio of consecutive Fibonacci numbers converge to .618 and 1.618 as the numbers in the sequence gets larger
These 2 values are commonly used to project the price targets
