Part 18 Technical Analysis – Using Fibonacci lines (video)

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Part 18: Technical Analysis – Using Fibonacci lines (video)

Today, we will focus on the application of Fibonacci lines in more detail. As we have already spent some time on this topic, to get a better grasp of the issue I recommend you read the following articles:

For those who already know the articles or don’t want to read them now, I have found a video on the internet. The author of the video is Manesh Patel (probably coming from India) who explains in his videos how to trade. He makes more videos like the one we are presenting. If you look at YouTube you will find them all.

Fibonacci retracement and Initial Balance video

In the following video, trader Minesh Patel explains how the “Fibo” lines work, how and when to use them. Thought the length of the video is nearly one hour, I believe that you will not regard it as wasted time.

I recommend that you replay also this video (https://www.youtube.com/watch?v=nPArE_sblnk ) focused on Initial Balance, an indicator similar to Fibonacci lines using specific values applied to a specific time span. This indicator is certainly worth examining in more detail. I use it for making analyses almost every day.

Where to get the above indicators

Both the indicators are available freely over the internet or as part of strategies BERSI, BERSI 2.0 and BERSI Scalp (the latest version). All the strategies use weekly IB lines. The first two versions also include daily IB lines and BERSI Scalp Fibonacci lines.

I am of the opinion that all traders should know that these indicators exist. They can help with retracement or the identification of pullback’s bottom. Read the below articles to learn more:

Author

More about the author J. Pro

Unlike Stephen (the other author) I have been thinking mainly about online business lately. I wasn’t very successfull with dropshipping on Amazon and other ways of making money online, and I’d only earn a few hundreds of dollars in years. But then binary options caught my attention with it’s simplicity. Now I’m glad it did because it really is worth it. More posts by this author

Part 24: Technical Analysis – Fibonacci Sequence

Fibonacci sequence is a well-known term not only among technical analysis traders. What about you? Did you know this term? Let’s take a short look at the technical aspects of the Fibonacci sequence, various modifications that can be used and the way the sequence is displayed in a chart.

Fibonacci sequence

In mathematics, the Fibonacci numbers are the numbers in the following integer sequence, called the Fibonacci sequence, and characterized by the fact that every number after the first two is the sum of the two preceding ones. The fibonacci sequence starts with zero and one and, before you look at the below line, try to guess the next numbers.

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0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, …

Leonardo Fibonacci demonstrated the sequence in nature. Numerous shapes of the Fibonacci sequence can be found in various fields. Fibonacci used for his demonstration of the growth of an idealized (biologically unrealistic) rabbit population. Yet, this phenomenon can be found also in beehives and other shapes in nature. It seems that almost everything in the realm of plants, fruits, and trees has something to do with the Fibonacci sequence.

How Fibonacci sequence relates to the Forex market?

Although our magazine is dedicated to trading, it might be of your interest to learn where in nature the Fibonacci sequence can be found. A few examples:

  • Look at the number of petals: Lilies and iris have 3 petals; buttercups have 5 petals some delphiniums have 8; corn marigolds have 13 petals; some asters have 21 whereas daisies can be found with 34.
  • If you cut a banana in half you will see 3 segments across the middle. If you cut the apple you will get 5 segments from the middle.
  • The shape of a Nautilus shell is one more illustration of the Fibonacci numbers. Other examples include the African continent and many more.

Fibonacci sequence in trading

How to use Fibonacci numbers in trading has already been described in one of our previous articles. (The link is shown at the end of this text). Now, let’s refresh some typical illustrations of the Fibonacci sequence in a market.

Most traders (including me) use Fibonacci primarily for identifying middle-term low and middle-term high. Then they connect the two lines and, following the Fibonacci principle, draw support/resistance lines in relevant points. Look at the below picture showing how beautifully the lines work.

Fibonacci lines and price bounces demonstrated on the index S&P500 (timeframe 4 hours)

The same principle can be applied to time zones, showing potential moments of important price movements (see picture below).

There are various modifications of Fibonacci levels: Fibonacci lines, Fibonacci fun showing angles as well as Fibonacci channel. No matter which one you choose a common denominator of all is the Fibonacci sequence. Individual trading strategies employing Fibonacci sequence will be examined in one of our next articles. For the time being, try out to place the patterns on historical data. Can you see the reactions at the critical levels?

Fibonacci time zones

More details about Fibonacci numbers and how to use them in trading

TIP: Fibonacci lines have already been described in our articles. Relevant links are shown below.

Author

More about the author J. Pro

Unlike Stephen (the other author) I have been thinking mainly about online business lately. I wasn’t very successfull with dropshipping on Amazon and other ways of making money online, and I’d only earn a few hundreds of dollars in years. But then binary options caught my attention with it’s simplicity. Now I’m glad it did because it really is worth it. More posts by this author

2 Responses to “Part 24: Technical Analysis – Fibonacci Sequence”

Fibonacci is the only tool you need, but the problem is effectively drawing it on charts ��

Hello Malik, if you have enough experience is not that hard. Anyway – Technical analysis is one of my favorite things and I use it more than the fundamental analysis.

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Forex Candlestick Tutorial — Part 18 — Dark Cloud Pattern

This is part 18 of the tutorial. In this video, you will look at the dark cloud pattern.

The dark cloud pattern is formed at the top of an uptrend or after a series of green candles. The pattern is made of two candles. The first candle of the dark cloud pattern should be green. The second candle should be red. The price of the second candle should open above the closing price of the first candle. The second candle should close more than halfway down the length of the first candle. We should also see a volume increase on the day of the second candle. Usually, the first day of the piercing pattern sees strong uptrend in progress. On the second day, the bulls take the price up even further. However, the bears step in with strength and start moving the price back down closer to the first day opening price. Please keep in mind that the lower the second candle moves down and pierces the first candle, the stronger the reversal.

When the dark cloud appears at the top of an uptrend or after a series of green candles and possibly in overbought conditions, this indicates that a bearish reversal is about to occur. Get ready to sell, or to go short. However, further bearish confirmation is required. If the next day, the price opens near or below the previous day close, this is the bearish confirmation that the reversal has occurred and that the bears are stepping in with greater strength. Time to sell or to go short. How do we know if the reversal has not occurred? Again, simple. The reversal has not occurred if the price opens near the previous day close, moves up and closes the trading day more than halfway up the red candle of the previous day. Be patient and wait for further bearish patterns to form.

Technical Analysis (Part 18): Alternative Concepts in Technical Analysis

In the last couple of articles we have looked at price confirmation tools. This week, we are going to look at some of the more alternative concepts in technical analysis. There are some very strange and bizarre concepts out there – some that defy logic and are hard to digest. If they work for the user though, who am I to argue against them?!

To call the concepts that I am going to look at in this week article ‘alternative’ is a little unfair. I only class them as alternative, as they aren’t in my every day world of technical analysis and trading. However, for some, these concepts are the life and soul of their trading and they would consider them to be ‘mainstream’. These alternative concepts can become a lifetime’s study. I would say, though, that they are more suitable for advanced or experienced users of technical analysis. A thorough understanding of technical analysis generally, will enable you to more easily understand these alternative concepts and deploy them in your analysis and trading.

The Development of Alternative Concepts:

Technical analysis has evolved beyond comprehension in the last ten years and this is mostly due to the increased availability of sophisticated charting and IT software. This has allowed analysts to create their own alternative concepts and applications away from the mainstream technical analysis syllabus. Most of this ‘new’ stuff is a derivative of the old, but there are some fresh, new exciting concepts starting to show through.

There are literally thousands of ideas I could have taken a look at, but here, we are going to look at just a few of the most well documented, alternative concepts that are readily available:

  • Elliott Wave Theory
  • Gann
  • Market Profile

Elliott Wave Theory:

This theory is the most ‘mainstream’ of the three we are going to take a look at. Devised by Ralph Elliott, Elliott Wave Theory (EWT) is a methodology used to measure cycles and forecast trends. Its premise is that the market behaves in an irregular cyclic fashion. Around this idea and through technical analysis, measurement techniques have been developed to help quantify it (in a very loose mathematical way) . EWT can be used in conjunction with Fibonacci and often is.

The basics of the theory build out around the concept of the ‘wave’. EWT says the market is a series of waves of various length and size. A wave is determined as a price move in one direction, as set by the reversal points that started and ended the move. The wave is further broken down into two waves: impulse and corrective. The impulse wave is in the direction of the current trend and the corrective, against it.

The impulse wave is made up of 5 subwaves, numbered 1 to 5. The corrective wave is broken into 3 subwaves, labelled A,B,C. The rules to using EWT are too complex and lengthy to be explored in this article (see further reading section below for more info).

EWT is a very useful trading tool, as it can help determine price targets and retracements. It is seen as quite a subjective tool and some would argue, works better after the event. I will leave that up to you to decide. The concept of EWT is worth further investigation, in my opinion, though.

An example using the recent down run in Cocoa (NY) to illustrate the basic principles of EWT (Chart: TradingView):

W.D. Gann was a very successful commodity trader from the early part of the 20th century. He created a concept around angles, fans, lines and grids. He also believed in cycles: seasonality etc. Gann’s forecasting and analytical methods are based on geometry, astronomy and astrology, and ancient mathematics. You can already see why some may class Gann as ‘alternative’!

Gann always believed that the most important angle was 45 degrees (as we have also seen in mainstream theory). One of the easiest concepts of his to use is the ‘fan’ – 9 plotted angles based around the 45 degree central line which can be used as a tool for anticipating reversals.

His concepts have been interpreted many ways and have become very popular. The problem is, they are hard to quantify and measure and because of this, his ideas attract many sceptics.

The Gann Box method (on the left) and Gann Fan method (on the right) very colourfully applied to a weekly WTI crude oil chart: (Charts: Trading View)

Market Profile

This was developed by J. Peter Steidlmayer, a Chicago Pit Trader, from his everyday practical experiences and knowledge of the behaviour of the markets. Market Profile is an intraday charting technique (price vertical, time/activity horizontal) and not a time/price series chart. Steidlmayer wanted to evaluate market value intraday. He found that being able to observe ‘fair value’ created trading opportunity.

His concept recognised the ‘normal’ Gaussian distribution. The Market Profile chart displays market price activity, recorded in relation to time, in a statistical bell curve: fatter at the middle prices, with activity trailing off at higher and lower prices. This then portrays the ease with which the market allows facilitation of trading and the manner in which it takes place.

The chart usefully, and for obvious reasons, identifies the ‘class’ of trader e.g. local or commercial. This allows traders to have a better understanding of who is controlling the price action: floor traders or long term players.

Below is a typical view of how a Market Profile chart would look on the US 10yr Treasury Note (Charts: Bloomberg):

Further reading and learning:

If you are interested in learning more about these alternative concepts, then the following reading may help:

  • The Basis of My Forecasting Method (1935) W.D.Gann
  • Elliott Wave Principle: Key to Market Behavior by A.J. Frost & Robert R. Prechter, Jr. Published by New Classics Library.
  • Applying Elliott Wave Theory Profitably by Steven W. Poser. Published by John Wiley & Sons, Ltd.
  • Market Profile: Steidlmayer on Markets, J.P. Steidlmayer, Wiley 1989
  • Technical Analysis, The Complete Resource for Financial Market Technicians, Charles D Kirkpatrick, FT Press, 2006.
  • Technical Analysis Explained – 5th Edition, Martin J Pring, McGraw-Hill Education, 2020

Conclusion:

These alternative concepts – Elliott Wave Theory, Gann and Market Profile – aren’t my cup of tea, simply because they don’t fit my personality, risk or trading appetite – but they work very nicely for others. As you gain more experience and understanding in the field of technical analysis, they are certainly worth exploring further.

Next time: Technical Analysis (Part 19): Japanese Charts – Heikin Ashi

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