Question of the Week: 3/27/2006

Should fibonacci relationships be measured in absolute numbers or the distance covered on a log scale?


Continuing the recent discussion on Fibonaccci relationships, one of our clients - Karun Verma from New Delhi, India - asked this great question.

If you haven`t noticed, the media loves to present long-term, arithmetic charts because they create a dramatic effect, exaggerating recent market advances. In reality, economic progrress occurs in percentage terms, not in linear terms. Therefore, when possible, it is always best to plot data logarithmically and measure Fibonacci relationships based on the phsycial distance covered on the chart. On very short-term charts you can get away with arithmetic measurements, but when a market more than doubles, or drops more than 50% (in arithmetic terms), a logarithmic plot is essential for proper Fibonacci relationships.

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