the hAnDbook oF teChnICAl AnAlysIs
The 100 percent downside projection level is:
= − ×
=− ×
Lower Peak Price Range Projection Ratio
C Price Range 1 0
( )
(. )
==−×
=
$ ($. )
$
180 50 1 0
130
The 461.8 percent downside projection level is
= − ×
=− ×
Lower Peak Price Range Projection Ratio
C Price Range 4 61
( )
(. 88
180 50 4 618
50 90
)
$ ($. )
$.
=−×
=−
In the last example, we find that a 461.8 percent downside projection of the
observed price range from point C gives a negative price value of $50.90. This
is why analysts must be prudent when attempting to forecast potential support
in the market using projection, expansion, and extension techniques. The real
market is subject to numerous constraints and the analyst must be cognizant of
the limitations and boundaries of his or her technical tools and forecasts. Making
highly unrealistic forecasts that are disconnected from actual market conditions
may cause irreparable damage to one’s standing and reputation as a professional
technical analyst! An analyst should endeavor to see the broader picture and al-
ways strive to make forecasts and recommendations within the context of the
market.
10.8 Why Should Fibonacci Ratios or Numbers Work at All?
Indeed, why should any indicator or technical tool work for that matter? Man
has always been enthralled with the geometric and mathematical properties of the
Fibonacci sequence and its Φ ratio. There are literally hundreds of books and liter-
ary works on the subject. The Fibonacci sequence and Divine Ratio are purported
to be the underlying matrix governing the very physiology, biology, geometry,
mathematics, and physics of nature and the universe.
The fact that we may never be able to conclusively prove that such a math-
ematical relationship or matrix underlies all of creation, or at the very least the fi-
nancial markets, does not necessarily render the application of Fibonacci ratios and
numbers or indeed any indicator to the markets any less effective. This is because
the markets are essentially behaviorally driven. The main reason for any technical
indicator being effective or at least statistically reliable lies more with the psychol-
ogy of the market participants than with the actual mathematical properties or
construction of an indicator. If a sufficient number of traders react to the signals
from a particular indicator or oscillator, it is highly probable that the market will
be influenced by the concerted action of traders all risking capital on those signals.
