Chapter | 7
PRICE PROJECTIONS BY REVERSE-ENGINEERING INDICATORS

A clarification is needed in this second edition about reverse-engineering indicators. This is an analytic method and not a trading tool. It is a calculation to define a worst case scenario. It might be needed in trading someday, but not every day. Often it is professional analysts who have to guide their firm in extreme scenarios. Prepare beforehand because it is more difficult when chaos surrounds us.

The example that follows of the USDJPY in Figure 7.8 was indeed a real-time calculation and result. However, to my surprise, I have never been asked why I elected to calculate “y” in Figure 7.1 as a “what-if” scenario to drive the oscillator to point ‘2’ and not some other momentum extreme for y. The level y was the first price level that contained both a Fibonacci and Gann Wheel confluence zone. Not every confluence zone derived from Gann will overlay the major levels identified from multiple Fibonacci ratios derived from different ranges. However, when the two methods identify the same target, it is as if the market is stating that the Great Wall of China has been found at this level. So the method that follows has a step in front of it. I create the support grid described in Chapter 6. Then I apply Gann as an overlay described in Chapter 9, to find the strongest levels that coincide with the Fibonacci analysis. I study my oscillator to see the displacement that correlates with the two overlapping confluence zones. Only then do I play the “what-if” game to see what price is needed in the next bar to drive the oscillator back to that specific displacement. Now you are in better shape to read what was first written without further changes.