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Trade the Bollonger Band Squeeze

Fibonacci - Fact or Fiction

Chart Forum » Hilarius' Hall Of Fame » Fibonacci - Fact or Fiction

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ivor
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Hello All,
Have been reading through a book that I recently purchased -
The Universal Principles of Successful Trading - Brent Penfold.
On page 208 he produces a Histogram of percentage retracements and extensions.
Out of 18 separate markets and multiple time frame swing charts he measured all the retracements and extensions, in all 36,411 swings, and created a histogram, hoping to see outlying values for the Fibonacci numbers 38.2 etc.
What a disappointment. None of the Fib ratios showed out any more than any other ratios.
Even the golden ratio 1.618 only occurred 87 times in 36,411 swings.
All you can say is that markets do retrace and extend, but the percentages form the usual bell shaped curve, and that there is nothing magical about any individual percentage ratio.
NOTHING.
Yet there is a whole industry within the trading community that keeps championing Fibonacci as a wonderful and reliable tool for identifying support and resistance levels.
Is it any wonder so many traders have failed to trade with the trend successfully, when one of the main tools for identifying retracement levels is essentially WORTHLESS.

Regards to all
Ivor


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breaker_1
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Champion Ivor I agree I have been most successful with volume and emas but it does relate to flower petals







When one door closes another door opens; but we so often look so long and so regretfully upon the closed door, that we do not see the ones which open for us.

Alexander Graham Bell





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colin_twiggs
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Ivor,

Does he give the mean (the average retracement) and the standard deviation of the bell curve?

Regards,
Colin


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ivor
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Colin,

No he doesn't. Only shows a histogram that rapidly rises from zero to about .50 (50%) and then tapers off slowly to past 2.89+.
States that retracements are normally distributed, and that no specific ratio stands out above any other.
There is nothing abnormal or special about Fibonacci ratios.
Regards
Ivor.

PS. It is a very interesting book too read with a number of unique insights into trading


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colin_twiggs
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Ivor,

That is what I suspected: that the most common retracement is around 50% (the peak of the bell curve). And it is arguable whether 50% is really a Fibonacci ratio.

Regards,
Colin


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ivor
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Hi Colin,

There's no way 50% is a Fibonacci ratio.
It doesn't fit the pattern of Fibonacci numbers at all.
Point the author is making though, is that there is no standout retracement ratio.
Just that 50% is around the peak of the histogram, but in itself is not a standout number.
This is explained by many punters buying in after a 50% or so retracement.

Regards
Ivor


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colin_twiggs
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Ivor,

The peak of the histogram is the most commonly occurring number in a bell curve -- just as the tails of the curve are the least-occurring numbers.

Regards, Colin


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p3t3
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quote:

The peak of the histogram is the most commonly occurring number in a bell curve...


Doesn't that suggest that the most likely (highest probability) area of a support level in a pullback will fall between the 31.2% and 61.8% fib levels, precisely because of that normal distribution. The numbers themselves might not be "magic" (1/3 and 2/3 levels might work equally well) but they do suggest boundaries of a high-probability zone in which a change in price behaviour is likely.

just my view
p3t3


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colin_twiggs
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P3t3,

That depends on the shape of the curve.

Ivor,

Any chance of posting an image of the bell curve so we can get a better idea of the distribution?

Regards,
Colin


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ivor
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Hi Colin

Not able to do that.
Don't know how to take an image from a book and show it on a computer. But if you can get hold of a copy of the book, the image is on page 208.

Regards
Ivor


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colin_twiggs
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Thank you Ivor,

Does anyone else have a copy of the book? You will need a scanner to capture the image.

Regards, Colin


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resillent1
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Abstract

There is a widespread belief in financial markets that trends in prices are arrested at support and
resistance levels that are to some degree predictable from the past behaviour of the price series. Here
we examine whether ratios of the length and duration of successive price trends in the Dow Jones
Industrial Average cluster around round fractions or Fibonacci ratios. We identify turning points by
heuristics similar to those used in business cycle analysis, and test for clustering using a block
bootstrap procedure. A few significant ratios appear, but no more than would be expected by chance
given the large number of tests we conduct.

I'm guessing the Historgram refered to by Penfold would be similar to this example from this paper



Conclusion

Our conclusion must be that there is no significant difference between the frequencies
with which price and time ratios occur in cycles in the Dow Jones Industrial Average,
and frequencies which we would expect to occur at random in such a time series. In
our introduction, we noted that empirical evidence from academic studies suggests
that not all of technical analysis can be dismissed prima facie. The evidence from this
paper suggests that the idea that round fractions and Fibonacci ratios occur in the Dow
can be dismissed.


https://forum.incrediblecharts.com/userscripts/forums/show.plx?tpc=427230&post=136922


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ivor
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Hi Resilliant 1,

Penfold histogram is a similar shape to the one above, but has individual ratio spikes.
Comes to the same conclusion though.
No evidence to show that a particular ratio is of any significance over any other.

Maybe Fibonacci was having a slow day, and thought up his sequence for something to do ?

Regards
Ivor


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efficiency
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50% isn't in the Fibonacci sequence, but.......it is a midpoint.

Potent.


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resillent1
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Ivor

I reckon when Leanardo Pisano was documenting the series back in c-1200 he was focusing on its occurrence in nature and in particular biology. And thank god it exists because it describes some of the most pleasing sights that a person can admire.

But its applicability to the market seems to be more based on unsubstantiated opinion rather than evidence. But from what I have observed there is a limitless supply of people who donít let facts stand in the road. And thank god they exist too Ė it makes my life so much easier.


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billt
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Donít you just hate it when those 50% fibs fall short by 0000.75! I want more precision!

Today's action on XJO: 4563.35 (50% fib) v 4564.10

Is 49.901587718147224773651751738617% a fibo?







I am off to write to Mr Fibonacci and demand my money back! Typical Italians, always short change you by less than a point! I will remind him that 50% is NOT a fib number, and to ask him to explain himself and issue an apology....


(4473.42 = 61.8% for those asking...)


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ivor
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Resillient,

I think it's a bit like listening to the cricket broadcasts and a batsman reaches the score of 87.
It's described as unlucky or the devil's number.

Was thought up by a famous Australian sportsman, Keith Miller, on a slow broadcast day for something to talk about. (Cricket's a fairly boring game to broadcast).
He subtracted 13 from 100 and created the myth, and modern broadcasters still use it.

Think Fibbo was a bit the same. Had too much time on his hands.

Regards
Ivor


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ken
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Fifty percent is a Fibonacci ratio. The Fibonacci sequence starts with 0,1,1,2,3,5,8,13,etc. The next number is the sum of the previous two numbers.

0.50 = 1/2 just as 0.618 is near 8/13 .

Ken


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resillent1
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Think somebody forgot to tell the market it was supposed to respect 50%! Or is the insignificant counter swing yesterday enough to reinforce faith for the fib believers?

So whatís the next prediction?

Fibonacci, like any TA can be used to set boundaries and rules form which you can basis trade risk management.

But for predicting the future, itís as futile as everything else man has tried.

What amazes me is that despite such massive empirical evidence that predicting the future is futile, otherwise intelligent men devote so much time trying to achieve it.


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colin_twiggs
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Resillent,

Predicting outcomes is futile, but attaching probabilities to outcomes is very useful. In the same way as an insurance company calculates life expectancies, we should be able to attach expectancies to different retracement levels: >50%, 67%, 100%, etc.

Regards, Colin


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p3t3
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Higher probability of a bounce, here or hereabouts? Possibly.

How the price action behaves around this level is certainly of interest.

The more so for those who look at charts, likely support/resistance levels, and/or Fib levels.

These things can be self-fulfilling, if enough people are persuaded by them. As traders we look at the market moves, and how the other traders in the market are responding to them. there can be useful guides to more or less likely outcomes.

The precision is, to me, an illusion. I'm always with "there or thereabouts".

just my view
p3t3


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resillent1
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Probabilities are still predictions, just that they are generally based on history. The statistical evidence from the paper suggests there are no increased probabilities arising from fibs or round numbers.

The tail of the distribution makes it evident that predicting a change, rather than simply running with what is, is the wrong approach.

Learn to read what is. Stay on the right side according to your time frame and control your downside losses through trade management. Do those three points well and the tail (trends) will then give you a positive risk/reward over time.

Prediction, (pre-conceived ideas about what the market should/could/may do) is the biggest impediment to reading what the market is actually doing and is responsible for luring and keeping many people on the wrong side of the trend.

A four year old looking at the chart over a time frame you are interested in should be able to tell you which way the price action is currently going Ė thatís about as complicated as the TA really needs to get for success.

Those that make it more complicated are generally looking for the holy grail of future predictability (or at least high probabilities) to compensate for a lack of risk management.

Even when an authentic high probability occurrence is identified the very nature of the market will mean that it is transient, and a lack of occurrences whilst it does persist will probably negate the probability advantage anyway.

Thatís my observations anyway.


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colin_twiggs
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resillent1 wrote on Thursday, March 17, 2011 - 12:27 pm:

Stay on the right side according to your time frame




Hi Resillent,

And which is the right side if you should ignore probabilities/expectancy?

Regards, Colin

(Message edited by colin_twiggs on March 17, 2011)


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skyhawk
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Hi Colin,

This is an interesting topic and thanks for starting this thread. I am not sure about doing statistical analysis on such things as fibonacci retracements.
All highs and lows are inter connected by previous highs and lows both in price and time.
The trouble is finding out WHICH previous highs and lows they are connected too. All we can do make our projections forward from previous major pivots.

I have attached some charts that I recently posted on the Elliott Wave Watching Thread to demonstrate this. Itís all there staring at us in the face. We just have to dig and find it, which means effort. Even the last turn we had (yesterday/today) was found using the symmetrical triangle which was made up of 13,21,34 sides. Note these are all adjacent fib noís and as such separated by 1.618 in time..

Cheers
application/vnd.ms-excel
spx_fib_time_price_relationship-2949280.xls (396.3 k)
application/vnd.ms-excel
spx_price_and_time_fib_realtionship-2949276.xls (214.5 k)
application/vnd.ms-excel
xao_fib_time_relationship-2949277.xls (185.3 k)
application/vnd.ms-excel
xao fibonacci time relationship.xls (78.3 k)



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resillent1
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colin_twiggs wrote on Thursday, March 17, 2011 - 03:41 pm:

And which is the right side if you should ignore probabilities/expectancy?




Put a chart up for the time frame you are trading and ask a 4 year old which way it is going. If they say itís going up then go long, if they say going down go short if they canít decide then step aside.

The tricky part is deciding the time frame. I let my time frame float by using linear regression channel. Once the channel is breached reverse direction and start a new channel from the previous significant trough/peak and follow it until it in turn gets breached. Win percentage is no better than 50% but you are guaranteed of picking up the long tails (extended trends) ant that makes the system profitable. Same is true for nearly any trend following system. If you like to make it more complicated then divergence indicators (particularly market breadth, volume related, or rate of change) are useful additions but only as a heads up to be on your toes.


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colin_twiggs
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Hi Resillent,

Even 4-year olds understand probabilities.


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resillent1
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colin_twiggs wrote on Tuesday, March 22, 2011 - 11:30 am:

Even 4-year olds understand probabilities




?

Your point?


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colin_twiggs
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This is going off topic. Let's leave it there.


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rash
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Yet there is a whole industry within the trading community that keeps championing Fibonacci as a wonderful and reliable tool for identifying support and resistance levels.
Is it any wonder so many traders have failed to trade with the trend successfully, when one of the main tools for identifying retracement levels is essentially WORTHLESS.

***

Yeah. It's absolutely useless ... worthless ... the dead Italian had no idea what he was doing when he resurrected the work of the Greek masters.

Of course, if you happen to know HOW to draw them properly and HOW to use them ... well, no, I MUST be wrong. All those profits must actually have been losses.

Interesting topic. But a lot less useful than a dead Italian when it comes to the REAL world!

Ciao - RA



1


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skyhawk
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If fibs are used solely for the purpose of retracements,
then they probably of little use.
Used correctly fibs can be used to make
high probability projections both in time and
price.
An example of Which I have posted 4-5 emails
back on this thread.
Fib time counts projected a high probability
low late last week in the XAO and that
is exactly what we got bang on time!!
There are other examples there too...

Cheers


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rash
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Here's the past decade of DJIA monthly bars with Fibonacci retracements and extensions.

The Fib Rx and Xt buttons are perhaps THE most useful of all in the IC toolbar.

Mr Penfold can make any assertion he likes ... but to describe this as "worthless" is up there with the proponents of Random Walk Theory and the Efficient Market Hypothesis.

Two of the really GREAT buttons in the IC toolbox!


dji


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gdd3
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Hi Rash...

Just to add to your chart above and hopefully a little clearer...

To highlight the start point of the larger Fibo Range..




...and to add another Fibo(1999 - 2003(yellow Range) that proved helpful...when extended.




I do note that you used the "close" price as the range for one and not the other; I have tried to keep in constant.


Cheers
Dolphin


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rash
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Hi, Graham!

Thanks for the back-up and additional data. Together with Andrew's detailed posts on Fibonacci timing, I hope the combination of posts is enough to show that the eminent Mr Penfold is not only demonstrably wrong, but that the assertion that Fibonacci is "worthless" is a patent absurdity.

My only concern was that some relative novice might read it and accept the fiction of his academic research and deeply flawed conclusions ... instead of pressing a couple of very easy to use buttons on the IC toolbar and discover the fact of a vital trading tool.

Ciao - RA


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gdd3
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Tuesday, March 22, 2011 - 04:47 pm:Copy highlighted text to 'New Message' boxEdit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



....and if we "zoom-in"(Weekly Chart) to cover only the last 4 years; that is since the ATH(Oct.07), we find the range from Oct.07H to Mar.09L "Mr. Fibo",again, was very useful picking the tops of the two signficant swing highs so far(0.618 and sq.rt. 0.618...0.786...the recent swing high).

Oct.07 Swing High - Mar.09 Swing Low...




....And zooming in a little further still...Mar.09 - Present, if we take the 1st swing reaction range(Apr.10 - July.10) and 'range extend from the 'close' top you can see the sq.rt. of 0.618(0.786) can to the for again in picking up the current swing high....so thats two (0.786)'s coming in near/at the same point!





Look, we could argue for ever and find many more examples, either long-term right down to the very short term(intraday) where Fibo retracements/extensions(P and T) have proved valuable; equally I'm guessing where retracements/extensions have 'stalled' at obscure % levels; that is under/over shot Fibo %'s BUT I THINK ONE THING HASN'T BEEN SAID HERE THAT SHOULD BE RECOGNISED AND THAT IS (ESPECIALLY OVER THE LAST 20/30YEARS) FIBONACCI LEVELS HAVE BEEN "EMBEDDED" INTO THE BRAINS OF BOTH T.A./F.A.ists THAT IS IT HAS BECOME ALMOST "FAIT ACCOMPLI"....AND THEREFORE SELF FULFILLING AND EXPECTED.



Cheers

Dolphin

}P.S.1.... Rash...are you able to pull up a chart to illustrate the 'significance' of Fibo (T)Time projections forward and back either in a long-term example of shorter term....Boy, I wish I could get my old Wave Trader program up and running!

P.S. 2...Don't forget Mr Gann's 1/3, 1/4 and 1/8ths and the subsequent multiples. E.G. That April.10 to July.10 Swing correction low mention above was exactly 33.3% retracement on the impulse wave up! Similarly, the 1st correction low after the Mar.09 low also came in exactly at 33.3%...yep, history can 'repeat'. }


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gdd3
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Tuesday, March 22, 2011 - 07:38 pm:Copy highlighted text to 'New Message' boxEdit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Apologies to those Fibo fans but as I said in my "P.S." in my last post above....DON'T FOR MR. GANN!

Same chart but focusing on Gann Ranges, Retracements and Extensions....1/4, 1/3, 1/2, 2/3, 3/4, Full. and their equivalent %'s.


The first Chart focuses on the period since the Mar.09 Major Swing Low...I have highlighted 4 ranges here from the Mar.09 Swing low to the April.10 Swing high...first impulse(pink), second impulse(yellow), Mar.09/Apr.10 swing range(green) and intermediate from July.09 to April.10(light blue).

Firstly, have a look at the frequency of a 33.3% retracement of the 3 corrective swings up to the the April.10 High. In addition, the depth of the biggest retracement so far(Apr.10/July.10) was also 33.3% of the whole range(green) but also 50% of the light blue range. You will see 33.3% is to re-occur in the shorter time frame 2nd chart here...but more about that later.

Secondly, note the Gann extension %'s for these ranges to 'co-incide' with higher priced swings going forward. The current high had a cluster of 'extensions'...150%(pink), 66.6%(yellow), 33.3%(light blue) and 25%(green).

Wkly Chart showing Gann retracements and extensions for hte period March.09 to the present.




Now "zoom-in" further and just concentrate on the period from the April.10 Swing high to the Present...

I'll let the following Daily Chart do the 'talking' this time!




Using both Gann %'s and Fibonacci's %'s should help you with picking up "HOT SPOTS" in the price action BUT DON'T FORGET PRICE IS ONLY BUT ONE ELIMENT...WE HAVE TIME AS WELL!




Thats it for me today!

Cheers
Dolphin }


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gdd3
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Thursday, April 21, 2011 - 05:51 pm:Copy highlighted text to 'New Message' boxEdit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Hey Rudy, Rash, Skyhawk and other supporters on the 'valued' use of MR Fibo's borrowed info.... here's another example just posted on the NTU short-term thread to illustrate the "UNWORTHINESS??!!??" of Fibonacci's most 'revered' sequence relationship ... 0.618%.

Which part of it don't they get? Oh well, its Easter and it is really time to reflect and forgive.

Speaking of Easter, hope you lot enjoy the break away from the markets as much as I'm going to...well to be away from my 'screen'.




Cheers
Dolphin







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rdumas
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Friday, April 22, 2011 - 03:58 pm:Copy highlighted text to 'New Message' boxEdit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Hi Dolphin,

In the end if people can't see the use of using a tool then it's their loss. I don't know if it's even worth the effort attempting to change their mind.


I've given you my view based on what I know now. In another 5 minutes that view might change because of additional information. It's the best I can do - Rudy

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