Part 5 Technical Analysis – Using the Fibonacci Line

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Fibonacci Levels in Technical Analysis

Every technical trader heard of the Fibonacci numbers. In a way, it is impossible not to. The most famous trading theories use these ratios.

Before the personal computer (PC), technical traders tracked the movement of a security on a piece of paper. Even then, the Fibonacci levels played an important role.

Today, any trading platform offers a special Fibonacci tool. There are multiple, separate Fibonacci tools to use, like Fibonacci retracement, expansion, arcs, fan, time zones, and so on.

In fact, for trading purposes, it depends very much what your technical setup is. Some may use the Fibonacci retracement only, others will base their entries on the time zones, and so on.

No matter the trading theory, the Fibonacci sequence is the same. Out of the tools mentioned above, the Fibonacci retracement and Fibonacci expansion levels are the most popular ones.

Traders use technical analysis tools to find out places to buy or sell a currency pair. The more visible the setup is, the more likely traders will use it again. Either on a different currency pair or on a different time frame.

However, diversification matters too. For example, if you open a chart and draw ten different Fibonacci retracement tools on the screen, the result is worthless.

The idea is to combine the strength of the Fibonacci ratios with other technical analysis tools. Or, with other trading theories. Or, both! The more reasons or arguments for a trade.

The Most Important Fibonacci Levels

It all starts with the golden ratio. That’s the 61.8% retracement level. Any move, swing or dip, will see some “unusual” activity around the 61.8% level.

Just look at any currency pair you want. Pick one from the Forex dashboard. Next, drag the Fibonacci retracement. Finally, find the 61.8% level.

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If the market can retrace to it, it will have a hard time to break it from the first time. Everyone using Fibonacci’s focuses on the 61.8% level.

Elliott Waves traders use the golden ratio to hunt the most powerful wave in an impulsive move. The 3rd wave.

For this, they wait for a five-wave structure to complete. Furthermore, they wait for a pullback in the 61.8% area and then enter a trade.

As a target, they use the Fibonacci extension of 161.8% of the previous five-wave structure. Again,without Fibonacci levels, technical analysis would not exist.

In the chart above, because of it refers to current levels, the USDJPY bounced right from the 61.8% area. Again, bulls respected the golden ratio.

The first assumption is that the 3rd wave in an impulsive move will follow. Because traders don’t know for a fact if the 2nd wave ended here, they look for the possibility of the 2nd wave to form a running correction.

Only when the price moves much higher and the structure unveils, they’ll know the correct count. Yet, the golden ratio gave a nice bounce for the short to medium-term traders.Besides the golden ratio and its derived levels, other levels have important meanings in different trading theories:

6%, 38.2%, 123.6%, 138.2%, 161.8% and 261.8% in Elliott Waves Theory;

2% and 78.6% in harmonic trading.

How to Draw the Fibonacci Retracement Tool

One of the major problems traders face is not knowing how to drag the Fibonacci retracement tool. This matters, because:

Important: The main use of a Fibonacci level is to find important support and resistance levels.

The key comes from the technical approach used. Look at the previous chart. The Fibonacci tool isn’t dragged from top to bottom. Yet, the 61.8% area proves to be correct. How come?

The answer comes from the Elliott Waves Theory rules: drag the Fibonacci tool from the start of a move until its end.

However, there’s a catch. The end of a wave is not always its lowest or highest point. Hence, the derived Fibonacci levels differ.

A similar example comes from the EURUSD daily chart. Note that this chart is zoomed out, so the actual time frame is even bigger.

The drop you see on the left side of it started from the 1.40 level. The ECB (European Central Bank) just announced it will cut rates to fight inflation.

As such, Euro bears sold the common currency in a frenzy. For whatever the reason, after an almost four-thousand pip fall, the pair bounced.

How do we know the bounce is for real? It reached the 23.6% level. And, it was rejected.

This validates the way to drag the Fibonacci tool. However, after the first rejection, the price tried again for the 23.6% level.

As a rule of thumb, the more it tests it, the bigger the chances it will break it.

Side Note: Don’t use any level more than two times for a trade in the same direction.

Next, traders focus on finding other clues to help with the new direction. In this case, the EURUSD formed a possible double bottom and now broke the 23.6% retracement level.

Look for Confluence Areas

In the previous chart, the double bottom’s measured move points to the 50% retracement level. Obviously, until then, the 38.2% may act the same way the 23.6% did.

A confluence area has two meanings. One is to look for different Fibonacci levels to form around the same place. Everyone knows that.

However, another one is to look for different currency pair to point to the same scenario/direction. In doing that, traders favour alternation between the confirmation factors.

Above is the AUDUSD daily chart. The moment Governor Stevens said the Aussie dollar is overvalued against its American counterpart, the AUDUSD pair collapsed.

Using the same logic like in the EURUSD case, the pair found a bottom and jumped to the 23.6% level. Moreover, in doing that, it formed a head and shoulders pattern.

That’s the alternation in patterns: double bottom in the first case, head and shoulders in the second one. It is like the market screams in your face the two pairs want to move to the next Fibonacci level.

Conclusion

The examples used here have the purpose of showing a few ways to use the Fibonacci tools. Because the retracement tool is the one used in most trading theories and concepts, we focused on it.

However, especially in the Elliott Waves Theory, things go from simple to complicated in a blink of an eye. Complex retracement and expansion levels confirm a pattern or not.

They only come to confirm the importance of the Fibonacci sequence in technical analysis.

This material is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results.

EUR/USD edges higher amid encouraging coronavirus developments

EUR/USD is rising above 1.08 as Europe’s largest countries have reported slowdowns in the number of cases and deaths from coronavirus. The safe-haven dollar is on the back foot. German Factory Orders dropped by 1.4% in February.

GBP/USD recovers amid reports that Johnson is doing well

GBP/USD has risen above 1.23 amid reports that PM Johnson is doing well in the hospital. The 55-year old was admitted as coronavirus symptoms refused to relent.

USD/JPY jumps to over 1-week tops, closer to mid-109.00s

USD/JPY continued gaining positive traction for the third consecutive session on Monday. A strong recovery in the global risk sentiment weighed on the JPY’s safe-haven status. A goodish pickup in the US bond yields underpinned the USD and remained supportive.

EUR/USD edges higher amid encouraging coronavirus developments

EUR/USD is rising above 1.08 as Europe’s largest countries have reported slowdowns in the number of cases and deaths from coronavirus. The safe-haven dollar is on the back foot. German Factory Orders dropped by 1.4% in February.

GBP/USD recovers amid reports that Johnson is doing well

GBP/USD has risen above 1.23 amid reports that PM Johnson is doing well in the hospital. The 55-year old was admitted as coronavirus symptoms refused to relent.

USD/JPY jumps to over 1-week tops, closer to mid-109.00s

USD/JPY continued gaining positive traction for the third consecutive session on Monday. A strong recovery in the global risk sentiment weighed on the JPY’s safe-haven status. A goodish pickup in the US bond yields underpinned the USD and remained supportive.

NFP Quick Analysis: 701K jobs lost only be tip of the iceberg, why King Dollar is ready for coronation

The US lost 701,000 jobs in March, the worst in 11 years. The Non-Farm Payrolls figures are lagging the fast-moving events. Wage growth is also skewed and should be ignored. The safe-haven dollar has room to rise.

Gold: Recovery rally looks exhausted on Hanging Man candle

Gold’s weekly chart is flashing signs of bull fatigue. An inside bar occurs when prices trading within the preceding period’s high and low and is indicative of bull fatigue when it appears after a notable price rise, which is the case here.

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Trading is exciting. Trading is hard. Trading is extremely hard. Some say that it takes more than 10,000 hours to master. Others believe that trading is the way to quick riches. They might be both wrong. What is important to know that no matter how experienced you are, mistakes will be part of the trading process.

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Psychology

Note: All information on this page is subject to change. The use of this website constitutes acceptance of our user agreement. Please read our privacy policy and legal disclaimer.

Trading foreign exchange on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading and seek advice from an independent financial advisor if you have any doubts.

Foundations of Technical Analysis: Fibonacci & RSI

See these tools & methodology used in practice, Join Michael for his Weekly Strategy Webinar on Monday mornings .

In this bi-weekly webinars series on the Foundations of Technical Analysis, we discuss the methodology of constructing a basic trade setup. In this session, we review how to incorporate the use of Fibonacci & RSI in our trading strategy.

Fibonacci retracements can be a useful tool in identifying where a corrective pullback could find support / resistance. This tool is best used in range scenarios or when price action is trading within the confines of a given high / low. In trending markets or breakout scenarios, Fibonacci extensions can project where a given advance / decline may encounter support or resistance.

We also reviewed using the Relative Strength Index (RSI) as a way of gauging when markets may be nearing points of exhaustion. This widely miss-understood oscillator can also provide hints regarding the broader directional trend.

A review of the latest AUD/JPY setup published earlier this month highlight a live example of how we utilities this type of analysis to translate an idea into an actionable trade.

In the next session we’ll discuss how to integrate proper risk management alongside the concepts we’ve been covering to offer a more holistic trading strategy. Click here to register free!

Want more information on technical analysis and trading strategies? Check out our Free DailyFX Trading Guides!

—Written by Michael Boutros, Currency Strategist with DailyFX

Follow Michael on Twitter @MBForex contact him at [email protected] or Clic k H ere to be added to his email distribution list .

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

12. Tech analysis (Web + Sch Note)

Термины в модуле (30)

A) both rational and irrational behavior.

B) rational behavior during calm markets and irrational behavior during volatile markets.

A) all analysts have all current information.

B) the market is efficient.

A) Markets are efficient and all known information is reflected in prices.

B) Prices are determined by supply and demand.

A) the incorporation of psychological reasons behind price changes.

B) ease in interpreting reasons behind stock price trends.

A) tracking the index.

B) outperforming the index.

Relative strength: When prices of an individual stock or industry change, it is difficult to tell if the change is stock specific or caused by market movements. If two variables are changing at the same rate, the ratio created by dividing one of the variables by the other will remain constant. This is called the relative strength ratio.

A) changes of direction in price trends.

B) the length of time over which trends persist.

A) support level.

B) resistance level.

Support and resistance levels. Most stock prices remain relatively stable and fluctuate up and down from their true value. The lower limit to these fluctuations is called a support level – the price range where a stock appears cheap and attracts buyers. The upper limit is called a resistance level – the price range where a stock appears expensive and initiates selling.

A) decrease substantially.

B) increase substantially.

Support and resistance levels. Most stock prices remain relatively stable and fluctuate up and down from their true value. The lower limit to these fluctuations is called a support level – the price range where a stock appears cheap and attracts buyers. The upper limit is called a resistance level – the price range where a stock appears expensive and initiates selling.

A) demand for a stock to increase substantially.

B) supply of a stock to decrease substantially.

Support and resistance levels. Most stock prices remain relatively stable and fluctuate up and down from their true value. The lower limit to these fluctuations is called a support level – the price range where a stock appears cheap and attracts buyers. The upper limit is called a resistance level – the price range where a stock appears expensive and initiates selling.

Technical Analysis from A to Z

by Steven B. Achelis

Leonardo Fibonacci was a mathematician who was born in Italy around the year 1170. It is believed that Mr. Fibonacci discovered the relationship of what are now referred to as Fibonacci numbers while studying the Great Pyramid of Gizeh in Egypt.

Fibonacci numbers are a sequence of numbers in which each successive number is the sum of the two previous numbers:

1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 610, etc.

These numbers possess an intriguing number of interrelationships, such as the fact that any given number is approximately 1.618 times the preceding number and any given number is approximately 0.618 times the following number. The booklet Understanding Fibonacci Numbers by Edward Dobson contains a good discussion of these interrelationships.

There are four popular Fibonacci studies:arcs, fans, retracements, and time zones. The interpretation of these studies involves anticipating changes in trends as prices near the lines created by the Fibonacci studies.

Fibonacci Arcs are displayed by first drawing a trendline between two extreme points, for example, a trough and opposing peak. Three arcs are then drawn, centered on the second extreme point, so they intersect the trendline at the Fibonacci levels of 38.2%, 50.0%, and 61.8%.

The interpretation of Fibonacci Arcs involves anticipating support and resistance as prices approach the arcs. A common technique is to display both Fibonacci Arcs and Fibonacci Fan Lines and to anticipate support/resistance at the points where the Fibonacci studies cross.

Note that the points where the Arcs cross the price data will vary depending on the scaling of the chart, because the Arcs are drawn so they are circular relative to the chart paper or computer screen.

The following British Pound chart illustrates how the arcs can provide support and resistance (points “A,” “B,” and “C”).

Fibonacci Fan Lines are displayed by drawing a trendline between two extreme points, for example, a trough and opposing peak. Then an “invisible” vertical line is drawn through the second extreme point. Three trendlines are then drawn from the first extreme point so they pass through the invisible vertical line at the Fibonacci levels of 38.2%, 50.0%, and 61.8%.. (This technique is similar to Speed Resistance Lines.)

The following chart of Texaco shows how prices found support at the Fan Lines.

You can see that when prices encountered the top Fan Line (point “A”), they were unable to penetrate the line for several days. When prices did penetrate this line, they dropped quickly to the bottom Fan Line (points “B” and “C”) before finding support. Also note that when prices bounced off the bottom line (point “C”), they rose freely to the top line (point “D”) where they again met resistance, fell to the middle line (point “E”) and rebounded.

Fibonacci Retracements are displayed by first drawing a trendline between two extreme points, for example, a trough and opposing peak. A series of nine horizontal lines are drawn intersecting the trendline at the Fibonacci levels of 0.0%, 23.6%, 38.2%, 50%, 61.8%, 100%, 161.8%, 261.8%, and 423.6%. (Some of the lines will probably not be visable because they will be off the scale.)

After a significant price move (either up or down), prices will often retrace a significant portion (if not all) of the original move. As prices retrace, support and resistance levels often occur at or near the Fibonacci Retracement levels.

In the following chart of Eastman Kodak, Fibonacci Retracement lines were drawn between a major trough and peak.

You can see that support and resistance occurred near the Fibonacci levels of 23 and 38%.

Fibonacci Time Zones are a series of vertical lines. They are spaced at the Fibonacci intervals of 1, 2, 3, 5, 8, 13, 21, 34, etc. The interpretation of Fibonacci Time Zones involves looking for significant changes in price near the vertical lines.

In the following example, Fibonacci Time Zones were drawn on the Dow Jones Industrials beginning at the market bottom in 1970.

You can see that significant changes in the Industrials occurred on or near the Time Zone lines.

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