Fibonacci Extensions – Part 2
In the previous article, we examined how to make a projection to determine when a simple ABC zigzag correction will terminate, a technique that we refer to as a Fibonacci extension. In this article we are having a closer look at wave B of the ABC zigzag correction.
When utilizing the Fibonacci extension drawing tool, the question is often raised as to how long wave B should be. As with all other technical methods, it is subjective. However there are certain “guidelines” that we should follow in regard to wave B.
There should be a minimum amount of time in regard to a wave B. For example, what if wave A is 50 bars in length and wave B is 2 bars in length? Would wave B qualify as a wave B? The short answer is no. There should be a minimum amount of time that should pass before we would consider a swing as a wave b. We will discuss this concept more in the next article.
There should be a minimum amount of price in regard to wave B. For example, what if wave A had a price range of 100 points and wave B had a price range of 10 points? Would wave B qualify as a wave B? No. There should be a minimum price retracement of the wave A swing.
What minimums do we expect to see in regard to price and time retracements of wave A? Some technicians will be adamant about using a minimum of a 38.2% price retracement or a 38.2% time retracement of wave A before they would consider a swing as a valid wave B. These minimum thresholds could be important minimum numbers that work. However, we must be aware of “analysis paralysis”. Sometimes opportunities are presented, yet they don’t conform “perfectly” to our minimum levels. They may be off by a point or a minute. Will we throw the baby out with the bathwater? By no means! Use your brain, train your eye, and visually find ABC’s that will have a certain “look and feel”. Sorry guys, this might not be what you want to hear but we need to start using the right side of the brain for trading!
In the next article we will learn how to construct a time and price swing chart.
Ross Beck, DMS, FCSI