- January 03, 2020
- Team Kalkine

Refers to a straight line - establishing a relationship between price and time. It's represented as 1 unit of price for 1 unit of time.

Technological analysis of the market assuming it to be cyclical and geometric. Also comprises of sequence of lines which are superimposed over a price chart to demonstrate possible support as well as resistance levels

What is a tariff? A tariff is a tax levied on foreign goods and services imported into a country. Tariffs make goods and services more expensive and thus, consumers shift to the domestic alternatives. Tariffs are usually imposed as an economic tool to improve the balance of trade as they decrease the imports. They are also targeted at protecting the domestic producers from competitive foreign goods. Tariffs can also be imposed on exports of goods and services, although that is seldom the case. It is done to discourage exports of certain goods and services. Tariffs are also used as a political tool. Governments may sometimes favour certain countries with whom they have political ties, while they may try to limit trade with other countries owing to technological, economic and political spats. How are tariffs levied? Tariffs have three broad types based on how they are levied: Ad-Valorem Tariff: Ad valorem taxes are the taxes that are levied as a fraction of the value of goods and services. They are represented as a percentage of the total value of imports and are proportionate to the value of imports. Specific Tariff: Specific tariffs are levied per unit of quantity. Specific duties are flat fees applied over a specific quantity of goods and services. For instance, a tariff of $10 levied per 20 kgs of wheat is an example of a specific tax. This tax is proportionate to the quantity of the imported good. Compound Tarifs: Compound tariffs are a mix of both specific tariff and ad valorem taxes. For instance, a tariff that has a specific tax up to a certain amount followed by an ad valorem tax afterwards is an example of a compound tariff. What impacts can a tariff have? Import tariffs can be beneficial to an economy in many ways. As imports become expensive, consumers shift towards domestic goods. This competitive advantage enjoyed by domestic goods translates into increased production along with higher profits to domestic firms. Thus, as firms start gaining increased profits, they expand and hire more workers. This increases the overall employment in the economy. Therefore, tariffs affect two major areas positively: the domestic competitiveness of firms as well as the employment rate in the economy. Tariffs can sometimes also be implemented to protect the domestic economy from infiltration of foreign produce. Sometimes, highly developed nations impose import duties to safeguard their economies from dumping of foreign goods. This kind of tariff is called an anti-dumping duty which is used when a country is suspected of exporting a good at a rate which is lower than the rate at which the same good is sold in their domestic markets. How does a tariff work? Consider the following diagram: In the figure above, point O represents the situation of autarky or a closed economy that has no trade with foreign countries. Now consider the effects of the economy opening its borders to international trade. The international price of the same good is Pw, which is significantly lower than Pd, the domestic price. Under the assumptions of free trade and a small domestic economy, the domestic prices would also become equal to Pw. At price Pw, the domestic demand is Q4 while the domestic supply is Q1. The difference between the two is met by the quantity of imports. The lower price of the imports would make them preferable to the domestic produce. However, when a specific tariff is introduced on the imports, the price of the imported good rises to Pw + T. This makes the good more expensive and thus reduces its imports into the economy from Q1Q4 to Q2Q3. Who are the winners and losers when a tariff is implemented? The welfare implications of a tariff are a subject of popular debate. Many theorists argue that tariffs bring distortions into the economy. The red box ABCD represents the revenue earned by the government through the tariff. The line AD represents the value of tax while the link DC represents the amount of imports. The domestic prices would rise to Pw +T when the tariff is introduced. As a result, domestic consumption falls to Q3, while the domestic produce increases to Q2. Therefore, domestic producers gain from a tariff. The supply has increased from Point E to point A. The demand has come down from point F to point B. The government also gains a lumpsum amount equal to AD multiplied with DC, which is the tariff revenue. Thus, both producers and the government are gaining from a tariff. However, the entire process is giving rise to a deadweight loss which is represented through triangles AED and BCF, both coloured in blue. These two triangles are not utilised anywhere and are lost in the process of tariff implementation. Thus, there is a welfare loss associated with tariffs, that is paid by the consumers. The consumers could afford a greater amount of the good at price Pw. However, when prices are increased to PW + T, part of welfare lost by consumers goes to producers, and a part of it goes to the government. But triangles AED and BCF are lost in this process. Therefore, tariffs cause a distortion in a free market and can even lead to many adverse economic repercussions. Thus, for a small economy, tariffs need to be implemented with proper regulation and without any intent of harming any country’s producers. Rather, the intent should be to protect the domestic producers. The same might not be true for a large economy as any protectionist intent by one country can trigger a trade war between several countries as seen in a few past scenarios.

What are Fibonacci numbers Fibonacci numbers are a unique never-ending series of key numbers which were identified by a famous Italian mathematician Leonardo Pisano, later known by his nickname “Fibonacci” in the 13th century. What makes this sequence more interesting is that, all the numbers in this series are strongly related to the golden ratio. In mathematics, two numbers are considered to have a golden ration when their ratio is very close or exactly equal to the ratio of their sum to the larger of the two numbers. Fibonacci once experimented with this sequence while solving a rabbit population problem. He started with a pair of rabbit (male and female) and started exploring how many rabbits can be produced in a year if each pair produce one pair in a month. Although a little bit unrealistic approach, this led to the widespread recognition to the Fibonacci numbers which we are familiar with today. So what exactly are these numbers Fibonacci numbers are a series of numbers where each number is exactly the sum of the previous two numbers. The formula to identify a Fibonacci number (denoted by F) is F0 = 0, F1 = 1 Fn = Fn-1 + Fn-2 Let's take the actual series of Fibonacci numbers to demonstrate 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 If you observe closely every number in the series is the sum of the preceding 2 numbers. That is: 1 + 0 = 1 1 + 2 = 3 3 + 2 = 5 and so on… Fibonacci ratio The ratio between the two Fibonacci numbers is very close to the golden ratio but what’s more interesting is any two successive numbers in the entire series would be having almost the same ratio of 1.61 which is considered as a golden ratio. For example 3/2 = 1.5, 5/3 = 1.66, 8/5 = 1.6, 13/8 = 1.62 and so on. Diving further into these ratios, a remarkable consistency is seen when any Fibonacci number is divided by its immediate successor. For example, (This time picking up Fibonacci numbers randomly) 89/144 = 0.61, 144/233 = 0.61, 377/610 = 0.61 and so on. Practical application of Fibonacci numbers and ratios The Fibonacci numbers and ratios are not only present in the mathematic books; they have their magic spread in nature too. Like. Number of petals in a flower (if all petals are intact) are generally in the Fibonacci number. No. of organs of a human body is also a Fibonacci number. DNA molecule measures 34 angstroms long by 21 angstroms wide, both of which are Fibonacci numbers. Fibonacci numbers in the stock market There is extensive use of Fibonacci numbers being carried out in the financial markets. A lot of tools have also been made upon these magical numbers which are used by many analysts around the world and are quite popular with the Elliot waves practitioners. Some of these tools are Fibonacci Retracement Fibonacci retracements are probably the most widely used tool due to its simplicity in application and interpretation. The retracement levels are horizontal lines which depict the probable support and resistance areas based on the Fibonacci ratios. These are projected from the swing high to swing low. This tool measures a specific price move from low to high in an uptrend and high to low in a downtrend to marks these levels on the chart with respect to that price move. The key levels to look for are 23.6%, 38.2%, 50%, 61.8%. Image source: © Kalkine Group As can be seen on the above chart, this asset under study has taken constant support at 23.6% retracement levels. Fibonacci Projections Fibonacci projections is another tool which works on the Fibonacci ratios, but instead of measuring a retracement, it tries to project the potential move ahead, in the direction of the ongoing trend. To use theses projection levels analyst needs two waves, one to measure the magnitude of the move and the next wave, which would be the retracement of this wave. It is projected from the swing low to swing high. The length of both the waves combined gives the projected levels where the market is expected to reach based on the Fibonacci ratio. The key levels are 23.6 %, 38.2%, 50%, 61.8% 100%, 161%, Image source: © Kalkine Group The above chart shows projection levels considering Wave 1 (from 0-1) and wave 2 (from 1-2) Fibonacci Time Projection The Fibonacci time projection tries to project the specific time period around which a major price change is expected to take place. The method of applying it is quite subjective. The starting point of this tool is selecting a major swing high and swing low on the chart within the time frame of the analysis. Then the tool projects some vertical lines into the future, estimating another major swing high or low to be formed on the dates which meet those projection levels. Image source: © Kalkine Group In the above chart Fibonacci time projection can be seen plotted on a chart Fibonacci fan The Fibonacci fan is essentially a combination of a few trendlines originating from the same point but with different angles of ascent. This gives the tool a fan-like appearance, hence its name. The slopes of these trendlines are drawn with respect to Fibonacci ratios of 38.2%, 50% and 61.%. Once drawn, these trendlines extend into the future and act as a support or resistance as a normal trendline does. The difference between the two is, the trendline is drawn based on price action but fan lines are projected based on Fibonacci ratio of ascent, irrespective of the price action. Image source: © Kalkine Group Fibonacci fan lines working as support and resistance can be clearly seen on the above chart. Fibonacci Arc Fibonacci Arc is relatively a little complex tool to use, and therefore, it is not widely used. However, the incorporated Fibonacci ratios do not make it any less worth than other Fibonacci tools. To plot these arches, a prominent high and low needs to be identified. Then a straight line is drawn connecting both the points which automatically plots a half-circle with the curved lines. There arches intersect the line at 23.6%, 38.2%, 50%, 61.8% and more Fibonacci levels can be added. The point of intersection at these levels marks the support or resistance areas on the chart. Image source: © Kalkine Group Application of Fibonacci fan can be seen in the above chart. Fibonacci Confluence There are many more Fibonacci tools which an investor or a trader can use to effectively analyse the market. However, it is to be noted that none of these tools are infallible. Therefore, it is recommended to use various tools together, which increases the reliability if two or more tools conform to the approximate same analysis or projections.