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Frank started market timing in 1982 when the Federal Reserve cut interest rates and sparked the 1980’s bull rally. Realizing that this rally could have been forecasted, he began to search for indicators which had similar forecasting ability. Within a year, his first newsletter was launched,... More
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  • The Basics On Fibonacci Ratios & Elliott Wave Theory

    This report takes a look at the basics of using Fibonacci ratios and Elliott Wave theory.

    Fibonacci ratios and Elliott Waves help us look ahead and be prepared for what the financial markets will do over the coming weeks and months.

    What are Fibonacci Ratios?

    Leonardo Fibonacci was a 13th century accountant who worked for the royal families of Italy. In 1242 he published a paper entitled "liber abaci." The basis of the work came from a two-year study of the pyramids at Gizeh.

    Fibonacci found that the dimensions of the pyramid were almost exactly the same as the golden mean or (.618).

    Fibonacci is most famous for his Fibonacci Summation Series which enabled the Old World in the 13th century to switch from Roman numbering (XXIV=24), to the arithmetic numbering (24), that we use today. For his work in mathematics, Fibonacci was awarded the equivalent of today's Nobel Prize.

    Fibonacci Summation Series

    The Fibonacci Summation Series takes 0 and adds 1. Succeeding numbers in the series adds the previous two numbers and thus we have 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89 to infinity. At the eighth series, by dividing 55 by 89, you have the golden mean: .618. If you divide 89 by 55 you have 1.618.

    Do you see the pattern? 1+1=2, 1+2=3, 2+3=5, 3+5=8, 5+8=13.....

    These ratios, and several others derived from them, appear in nature everywhere, and in the financial markets they often indicate levels at which strong resistance and support will be found. They are easily seen in nature (seashell spirals, flower petals, structure of tree branches, etc.), art, geometry, architecture and music.

    Why are they important to the financial markets? Because the markets tend to reverse right at levels that coincide with the Fibonacci ratios. Whether you see this as cosmic or coincidence makes little difference. It happens and tens of thousands of traders make decisions based on Fibonacci ratios, thus amplifying the results.

    For example, if the Nasdaq rallies 100 points and then corrects, it will often correct 61.8%. Right at, or close to the 61.8% retracement (you have heard us use this term many, many times) the Nasdaq is likely to reverse and start advancing again. Of course it is not this simple. Fibonacci support and resistance levels can fail. There are other Fibonacci levels which may turn the markets (78.6%, 127.2%, 161.8%, etc.). But the fact that it does happen is what is called a trader's "edge."

    A trader has an edge when he knows the probabilities of a particular action are greater than normal. Trading strategies are built around this information, or multiple similar probabilities.

    Elliot Wave Patterns

    Elliot Wave Patterns, in short, are usually a three or five wave series of advances, or declines, that define a trend. They are the result of crowd psychology, and thus are usually more reliable when found in broader based indices, such as the S&P 500 Index, Nasdaq Composite Index, etc.

    Typically, if the S&P 500 Index moves higher in a 5 wave pattern, and then falls below the top of wave 3, it signals the start of a retracement that normally consists of 3 waves.

    In a bear market it works the other way. A five wave pattern defining a declining trend, which is then reversed by a 3 wave rally, which eventually reverses and another five wave pattern begins to the downside.

    Finding a wave pattern that completes at a strong Fibonacci support or resistance level can be a very reliable indicator of a change in trend.

    By having an Elliott Wave pattern complete right "at" a Fibonacci support or resistance level, you in essence have increased the probabilities of being correct.

    Trading Patterns

    Because the markets often move in 5 wave and 3 wave patterns, and the turning points that create these patterns are often at Fibonacci support and resistance levels (61.8, 161.8, etc), you can expect that eventually, a way would be found to use them to forecast the future direction of the financial markets.

    There are several trading patterns used by advanced traders, including day traders, which take advantage of the combined strength of Elliott Waves and Fibonacci retracements.

    These patterns commonly repeat in stock and index charts and traders who use them are called "pattern traders."

    Although pattern recognition is a potent tool in trading, we suggest that no one try using them without thorough training in pattern trading. There is more to it than just knowing the patterns, including risk management and money management, without which the patterns are more likely to cause headaches than profits.

    An excellent book on such patterns is, "Profitable Patterns for Stock Trading" by Larry Pesavento. Larry is an authority on trading patterns, and I studied with him at his home in Arizona some years ago.

    How We Use Them

    At Fibtimer, we use Elliott Wave Theory and Fibonacci support and resistance levels to map out where we think the financial markets are headed.

    Recognizing that these tools are NOT always right, we use them to prepare for what is to come, but not for actual trading decisions. It is always good to have a feel for what the markets will do so that we are ready emotionally for the trading decisions ahead.

    Although both Fibonacci support and resistance levels and Elliott Wave theory are good tools, they fail too many times to be used for market timing. Many would disagree with this statement, but our research shows that over the years they will give accurate forecasts only about 50% of the time.

    They are great when looking at previous chart data, but because there are so many variables, they are not as accurate looking forward. Good... Useful... But not good enough for us.

    All trading signals at Fibtimer are generated by non-emotional and non-discretionary trend indicators. Our trend indicators catch "every" trend and when a trend fails, they quickly tell us to reverse so any losses are very small. Much better for "profitable" market timing as our market timing trade history pages show.

    There is no way to separate emotions from market analysis. If a strategy offers variables that need to be interpreted, emotions will sway those interpretations. It is human nature and cannot be avoided.

    This is why Fibtimer follows non-discretionary trend following indicators... so that emotions cannot sway any buy or sell decision.

    Feb 27 1:02 PM | Link | Comment!
  • Two Emotions That Can Influence Your Trading

    Short term market volatility is powerfully influenced by fear and greed.

    But fear and greed aren't the only emotions that influence market decisions.

    Other emotions, such as "disappointment" and "regret," can also impact what market timers do and can have adverse effects on their timing decisions.

    It is only normal to feel disappointment when our trades fail to meet our expectations. We feel regret when we think that we have made a poor decision that could have easily been avoided.

    There's an assumption that underlies both emotions, and both of these assumptions can be dangerous to our ability to be profitable.

    Must We Always Be Right?

    We may believe irrationally that as market timers we must always be right and each buy and sell outcome must meet our expectations. If those expectations are not met, we believe it's not only unacceptable, but our fault. That it proves we are unlucky as timers, or that the markets always move against us.

    This assumption, however, must be questioned. And by doing so, you will be able to create a mind set that will help you to make your timing decisions decisively and without worry.

    It may be unpleasant or an inconvenience when our expectations are not met, but it isn't so terrible, awful, unacceptable or our fault.

    Changing Our Perspective

    First, you have to be able to execute. Following a tested timing strategy is crucial to your ability to execute trades. The common error of not taking trades until you see if they are profitable, or jumping the gun and taking trades ahead of time because you "think" a signal will be issued soon, can be a disaster to your profitability.

    By not sticking to a timing strategy, you allow emotions to rule your finances, and that places you right in with the majority of investors. Those who are the cause of the market's volatility. The "herd" followers.

    At Fibtimer, all of our strategies are non-discretionary. Emotions are not allowed. Our strategies offer disciplined execution of non-emotional buy and sell signals.

    The reason for following any timing strategy is to remove yourself from making emotional trades. To remove yourself from the herd, which is often headed in the wrong direction.

    By merely changing our perspective, we can change how we respond emotionally to market timing setbacks. If we believe they are our fault, or a result of some rain cloud that follows over us, or that we are just not cut out for market timing, then we are going to experience extreme feelings of disappointment and regret.

    Extreme feelings of disappointment and regret cause us to miss trades! This is the single most common reason timers fail. Timers allow their emotions to keep them from following their strategies. And this almost always occurs at the most inopportune times. Those times when emotions are at their peak, and trades are imminent.

    However, if we assume that setbacks and losses are inevitable, that they are to be expected in even the most successful of market timing strategies, in fact that they are caused by market fluctuations that are beyond anyone's control, we will be prepared to cope with them.

    We will come to expect them, and we are likely to then think that they aren't as terrible as we had assumed they might be.

    Anticipatory Approach To Trading

    By taking an anticipatory approach to trading, not only can we rein in our emotions, but we can put a market timing buy or sell signal in the proper perspective.

    Remembering that a single trade is just one trade among a series of trades and the only outcome that matters in the end is the overall profit across the series of trades.

    Across a typical series of trades there will be winners and losers, and usually more losers than winners. But the winning trades are much larger than the losing trades because they are made when the market trends! And market trends, by their very nature, last for considerable time frames.

    Once we accept this fact of trading, we will be able to see that setbacks aren't as terrible and devastating as we had thought. They are just part of the game. There's no point in overreacting.

    Control Unpleasant Emotions

    Control unpleasant emotions by taking the proper perspective.

    Humans tend to overstate the adverse effects of a dreaded outcome. But there are a few simple strategies we can use to control these emotions. For example, if we control our risk on the trade, and plan it out carefully, the risk will be minimized and the actual potential loss will not be catastrophic at all. Remember that all timing strategies at Fibtimer use strict risk management. That is why losses, when they occur, are kept so small.

    Once the risk is truly minimized, a useful thinking strategy can be used; remind yourself, "I'm making more out of this potential loss than it deserves; it is not going to be as unpleasant as I am thinking it will be."

    The Relative Insignificance Of A Single Trade

    Another way to minimize disappointment and regret is to try to impersonalize the trade. Think in terms of probabilities, "This is just one of many trades. The outcome of any single trade means nothing. The big picture is all that counts."

    By reminding yourself of the relative insignificance of a single trade, you'll minimize the potential regret should you lose. Similarly, it's also important to avoid over-interpreting the significance of a trade; a single losing trade (or even a few losing trades) doesn't mean that you have a poor market timing strategy. It is an unavoidable fact of trading in the markets. You ARE going to have losses.

    With good risk management techniques, such as those we strictly adhere to in Fibtimer strategies, any losses are kept very small.

    Remind yourself that by following the strategy, you will never miss a good gain, and that those gains, which are usually considerable in size, over time, will make you very profitable and successful at timing. But you must be there at the time the signal is issued, and you MUST take the trade.

    Remember that NO ONE knows ahead of time which trade will be the big winner for the year.

    Self-worth On The Line

    Most importantly, never put your self-worth on the line with your money. The outcome of the trade should not influence the positive view you have of yourself as a person.

    Don't let regret and disappointment influence your market timing decisions. Keep in mind that if you make a losing trade, you may feel a little disappointment or regret, but you can handle it.

    Control your emotions. If you do not, you will likely miss the trade that makes the big gains. If you do control your emotions, in the long run you'll achieve the profitable results you've been seeking.

    Feb 20 12:51 PM | Link | Comment!
  • Trading Fears, We All Have Them. Part 2

    Last week we looked at trading fears that can keep you from making the profits that experienced market timers consistently realize.

    Last week's Trading Fears Part 1 can be read by clicking here.

    It is not the timing strategies that keep timers from being profitable, it is the fears, which we all have at one time or another, that keep us from making the trades. In Part 2 we look at more "fears" which must be overcome to be successful in the markets.

    Fear of Letting a Profit Turn into a Loss

    Unfortunately, most market timers (and traders) do the opposite of "let your profits run and cut your losses short." Instead, they take quick profits while letting losers get out of control.

    Why would a timer do this? Too many traders tend to equate their net worth with their self-worth. They want to lock in a quick profit to guarantee that they feel like a winner.

    How should you take profits? At Fibtimer we trade trends. Once a trend begins, we stay with that trade until we have enough evidence that the trend has reversed. Only then do we exit the position. This could be days if the trend signal fails, or months if it is a successful trend.

    Does this sometimes result in small losses? Yes. If we have a false signal to start with it can. But we must look at market history to understand this trading concept. History tells us that while there are times when the markets trade sideways or make failed moves, once a real trend begins, it usually lasts much longer than anyone expects it to.

    That means for the few failed trends, the real ones last a very long time, and generate huge profits. But because no one knows ahead of time which signal is the start of the next big trend, we must trade them all.

    What happens in the short term can be accepted because we are assured of profits in the long term as long as we stay with our timing strategy. We do not try to quickly lock in profits. We stay with the trend until the trend changes.

    This way we obtain every bit of profit that the markets will give us. And... we do not have to worry about locking in gains. We let the markets themselves tell us when to do it.

    Fear of Not Being Right

    Too many market timers care too much about being proven right in their analysis on each trade, as opposed to looking at timing as a probability game in which they will be both right and wrong on individual trades.

    In other words, by following the timing strategy we create positive results over time.

    The desire to focus on being right instead of making money is a function of the individual's ego, and to be successful you must trade without ego at all costs.

    Ego leads to equating the timer's net worth with his self-worth, which results in the desire to take winners too quickly and sit on losers in often-misguided hopes of exiting at a breakeven.

    Timing results are often a mirror for where you are in your life. If you feel any sort of conflict internally with making money or feel the need to be perfect in everything you do, you will not be able to stay with the timing strategy, but instead will allow your emotions to step into the timing process.

    The ego's need to protect its version of the self must be let go in order to rid ourselves of the potential for self-sabotage.

    If you have a perfectionist mentality when trading you are really setting yourself up for failure because it is a given that you will experience losses along the way in timing as in any trading.

    You can't be a perfectionist and expect to be a great market timer. If you cannot take a loss when it is small because of the need to be perfect, then the loss will often times grow to a much larger loss, causing further pain.

    The objective should be excellence in timing, not perfection. You should strive for excellence over a sustained period, as opposed to judging that each buy or sell signal must be perfect.

    The great timers make losing trades, but they are able to keep the impact of those losses small.

    For the market timer who is dealing with excessive ego challenges, this is one of the strongest arguments for mechanical systems. With mechanical systems you grade yourself not on whether your trade analysis was right or wrong. Instead you judge yourself based on how effectively you execute your system's entry and exit signals.

    Mechanical systems are all that we use at FibTimer. Years of trading experience has taught us that there is no way to keep emotions from affecting trading, except by following unemotional, non-discretionary strategies.

    Conclusion

    As a market timer, you must move from a fearful mind set to a mental state of confidence. You have to believe in your ability to execute every trade, regardless of the current market sentiment (which is often at odds with the trade).

    Knowing that the timing strategy you are following will be profitable over time builds the confidence needed to take all of the trades. It also makes it easier to continue to execute new trades after a string of small losing ones.

    Psychologically, this is the critical point where many individuals will pull the plug, because they are too reactive to emotions as opposed to the longer-term mechanics of their timing strategy.

    And typically, when trader's pull the plug and exit their strategy, it is exactly at that time that the next profitable trend begins.

    Too many investors have an "all-or-none" mentality. They're either going to get rich quick or blow out trying. You want to take the opposite mentality - one that signals that you are in this for the longer haul.

    As you focus on the execution of your timing strategy, while managing fear, you realize that giving up is the only way you can truly lose. You will win as you conquer the four major fears, gain confidence in your timing strategy, and over time become a successful (profitable) market timer.

    Feb 13 12:49 PM | Link | Comment!
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