# Correlation, Stochastics, Fibonacci, Dow Indicators

## Q. What is a Correlation Indicator?

A: Correlation is a measurement of the interdependence of the price of a given share compared to an index or share. In ShareScope, this defaults to the FTSE 100.

The value lies between 1 and -1. 1 means that the price is totally in step with the index or share. If a share has a high correlation, say over 0.6, it means it is more likely to be marked up (or down) just because the index or share moves up (or down).

To add this indicator, go to the Graph context menu, highlight the Add indicator menu item, and select the indicator from the list which appears in a sub-menu. This will bring up a dialog box, in which you can select your settings.

A correlation column can also be added to the list screen. The column displays correlation to the FTSE 100 over the period for all price data held in ShareScope. The indicator, however, can have its period and comparison index or share adjusted.

## Q. What are Stochastics and how can they be useful?

A: This is a technical analysis tool which is designed to gauge the strength of a particular trend. It does this by comparing the latest closing price to that of a trading range over a period of time. It works on the basis that when a trend has been established, prices tend to close near the high and when the trend is falling, prices close near the low. A stochastic can thus be used as a signal to either confirm a decision or a warning to beware.

## Q. What is the Fibonacci Indicator?

A: Reply from Stu Whisson; The Fibonacci is useful for identifying retracements and to estimate where the price direction. Fibonacci are based on eighths of the range you select and will usually show three lines within the middle of the top of bottom of the chart. For some bizarre mathematical reason, retracements and gains do tend to follow the 3 main Fibonacci levels the main one being 50%. For example, if we have a stock trending heavily and is starting to fall. We can take the Fibonacci tool and drag it from the top of the trend to the bottom where the stock last consolidated. The tool will show us where we can expect certain levels of recovery - these are usually also confirmed by noting that other previous points of recovery may have happened at the same price range, further strengthening the Fibonacci level. Therefore, you can set a target based on the Fibonacci level. Fibonacci tools work over any range large or small.

Editor Note: Personally, I just don't buy into the fibonacci thing. The only way it could possibly work is if sufficient people took them seriously enough to base their trades on them. That is, people saw a fibonacci level coming up, and think 'right then, I'd better get out'. And I just don't think enough people take them seriously enough to move the markets significantly. In any case depending on your experience I would say there much bigger priorities before fibonacci lines... I would put a very good understanding of charts way before, and if you use fundamentals, a very good understanding of fundies. I would also put a good understanding of risk control and money management way before...

Not that I want to put anyone down from using fibonacci.. If watching fibonacci levels has worked for you in the past then great. But when I started doing this I took them seriously and lost money. And then when I really thought about it I couldn't see any rational reason to suppose they have any relevance. Unless of course many traders used them to base their trading decisions, and then ironically these arbitrary figures would be relevant! (In the same way as resistance levels are, but it's obvious that people do react to these).

## Q. Have you ever used the Dow Indicator and can you make some comments about success or otherwise with the signals it generates?

A: OK, here's the theory: the Wall Street index is very correlated to the movement of some currency pairs (intraday) during the USA trading session and can be of value. However, you need to remember that stocks (of which the index is constituted of) and forex (which it affects) is that except during times of extreme high momemtum times which are usually on the FIRST day of a trend reversal the Dow (and forex) REVERSES direction at specific times of the day.

Normally with stocks, if Wall Street crosses up over its past day close it will continue moving up till 11.30 - noon, EST, at which time it will drop and start back up again at about 2pm, EST and make the second run up to a higher high where it will close.

Forex studies have shown that some currencies follow the same pattern, closing at 5pm, EST, at which time the trend reverses direction, selling off until the Japanese market and then reverses trend at 12.00 (mid-night), EST as it prepares for the interaction of the Asian and European markets.

Some pairs work in the same direction as the DOW, while other currency pairs work in opposite direction, but the reversal times for any direction are usually the same - follow it on your charts and it will help you tremendously since being long in the market when the market reverses at NOON can lead to large draw downs, although your trend direction may very well be correct, and after midnight your trade will come in. You can prevent that, if you wish, by making sure you use a shorter timeframe and closing your trades before NOON or 5PM, EST.

However keep in mind that if you're trading the H1 or longer timeframes, you can get out at the reversal times, trade the opposite direction on the reversal, and then go back to your original direction for the MIDNIGHT reversal, or otherwise you can simply remain on the long trade and realise that the price will be dropping from 5PM until MIDNIGHT - or you can use both, and hold your long position with its drawdowns, and open a hedge SHORT position, which incidentally nulls out your margin decreases, and then close your short before MIDNIGHT!