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Timing the Market Turns

Brandon Wendell
Instructor, CMT

Last week we examined a couple of decision support tools known as the Fibonacci retracements and extensions.  In this article, we will look at another tool that can help predict the timing of the reversals in price, the Fibonacci time extension tool.

Traders must remember that these tools are meant to support your trading decisions that are based on trading the core strategy of supply and demand.  The tools should never be used alone to make your decision to enter or exit a position.

The Fibonacci time extension tool is not as accurate as the Fibonacci retracements or projections but can be used to warn of possible reversals in the current trend.  The time extension tool measures the length of time that a particular price impulse has taken to form and projects several ratios of that distance into the future.

Once price begins to correct from an impulse in the trend you can select the time extension tool on your trading platform.  You must then start the measurement from the candle that began the impulse.  The end of the measurement is the candle that marked the end of the impulse.

There are three main ratios that are used for this projection: 0.618, 1.0, and 1.618. This projection should foretell of a change in the trend, although it will not tell the exact direction of the change. Whatever direction you are in at the time should reverse when you reach the time projection.  In the case of the US Dollar, they not only marked the start of an additional correction but also the beginning of the next two impulses when price changed trend.

The strongest signals from the Fibonacci indicators come when they confirm each other.  In the following chart of IWM, the correction ended at a Fibonacci retracement.  But the new impulse began at the intersection of the retracement and the time extension.  That impulse eventually corrected at the next time extension point.

The same thing happened on the chart of AAPL.  The correction itself did stop at one of the retracement lines, but the new impulse did not begin until price reached an intersection of both of the tools.

One thing that you may have observed in using the Fibonacci tools is that price will often turn in the area but not exactly at the line. This is simply another reminder that we need to rely on our core strategy of supply and demand for entries and exits. The best use of the Fibonacci tools is as a confirming indicator for our zones. The demand zone of the SPY was indicated as a higher probability buying point when the time extensions intersected it and price. The higher zone did pause the correction, but did not hold as it was a bit too high in the curve; another part of the Online Trading Academy core strategy.

Projecting the Fibonacci price extensions from the demand zone offered the trader two potential price targets for the long position.  The 100% projection was lying in the middle of a supply zone which made it the better target.