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11 The Primary Numbers The primary Fibonacci numbers are the essential means to gauge price action accurately and to identify potential trade opportunities. These numbers are used to determine pattems as harmonic. The primary numbers consist of: 0.618, 0.786, 1.27, 1.618. These four numbers should become the basis for identifying any potential trade opportunity. A stock chart must be considered harmonic, when price action is observed to reverse off these numbers in a specific fashion. If a stock "bounces" off these numbers, you should assume that more harmonic action would continue in the future. The most important function of these numbers is that they are a means of quantifying price action. By establishing certain areas to study, it is possible to determine or "gauge" a stocks price action. Although stocks often exceed the exact number slightly, it is very common for stocks to make significant reversals after they hit a certain Fibonacci projection. Therefore, Fibonacci numbers create critical areas that must be examined to determine the future trend of a stock. When you initially study stock charts using Fibonacci numbers, I believe you will be su rised by the price action around these critical areas. Frequently, a stock will act "unusually" when it hits a Fibonacci number. In
my opinion, when a stock enters a potential reversal zone, it often will possess price action that is abnormal, as compared with the previous history. Ifthe stock reverses, the price action will possess price bars that are opposite from the predominant trend. If a stock does not reverse, it usually will exhibit a waming sign at these areas. It will take some time to develop the analytical skills required to gauge price action. After you study many examples, you will begin to realize how Fibonacci numbers affect price action. Furthermore, when these numbers are analyzed in combination with the recognition of certain price pattems, you will realize that the harmonic techniques define the price zones that have the greatest probability for reversal.
0.618 Retracement The .618 is probably the most popular Fibonacci retracement percentage that is used by technicians. Often, technicians will round the number andjust state that this percentage is a twothirds retracement. I strongly urge that the exact .618 retracement percentage, carried to three decimal places, be used. I have witnessed many pattems that have completed exactly at the .618. Therefore, utilizing a rounded number of twothirds or 66% will not yield the same resuhs as the precise .618 for Fibonacci calculations. Lets look at some examples of .618 retracements.
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