Matthew Kerkhoff, options expert and editor of Dow Theory Letters, continues his 14-part educational...
The Symmetry of the Markets—Beautiful By Any Name (Part 1)
01/28/2008 12:00 am EST
Whether you are a full-time trader or just trying to learn how to trade, you've probably encountered the lines I've drawn on the right side of this chart
They are one of the most popular tools in all of trading. Do the numbers 38.2, 61.8, 1.272 and 1.618 ring a bell? The trading community refers to these numbers as 'Fib numbers' or 'Fib retracements and projections'. In fact, I plead guilty to using the same terms at times when describing these numbers.
At a recent Traders Expo session an aspiring trader asked me if I use 'Fib numbers' in my trading. I paused for a moment before answering her and filed the question away for further thought and then I answered that I did use 'Fib numbers', particularly the major retracements and projections. Because of their popularity, it is wise to know where these levels are at all times and when possible, to use them to your own advantage in stop and entry order placement.
I think she was asking me if I thought they worked. And indeed, they do have an uncanny ability to help pinpoint areas where price is likely to turn-whether it is because they have innate predictive powers or because they have become self-fulfilling prophecies because of the number of traders that look at them. But I paused in answering her because they really are not 'Fib' numbers [Fib' being a shortened version of the name Fibonacci, whose name was really Leonardo of Pisa].
More tomorrow in Part .
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