TECHNICAL ANALYSIS
Elliot waves, Harmonic patterns, Divergence etc.
Fibonacci ratios can be divided into four main groups: • Retracements/ Expansions
• Fans • Arcs • Time zones
In this first article on Fibonacci ratios, we will concentrate on the Retracements,
Fans
and Expansions and understand the basic concepts behind them. The next article will cover the different situations/ patterns, where we should ideally use these ratios.
Using the Fibonacci ratios
For some reason, these ratios seem to play an important role in the financial markets, just as they do in nature, and can be used to determine critical points that cause price to reverse. Price has an uncanny way of respecting Fibonacci
ratios, often quite
precisely. Hence one can use these to ascertain the correct technical levels. Price action is never random, and every wave leaves behind clues for the next move. We can thus use
Fibonacci ratios seem to play an
as they do in nature important role
in the financial markets, just
standard Fibonacci retracement tool for all kinds of situations, with the standard values of 38.2; 50.0; and 61.8.
But every trading situation demands an appropriate Fibonacci ratio with different values.
previous price action to anticipate subsequent price movement.
Most traders tend to use the
FX
Using these ratios in a proper way gives us a tremendous advantage over the crowd and we will attempt to identify the correct situations to apply the appropriate ratio.
The basic rules for plotting ratios
Fibonacci
Let us start by laying down the basic rules of plotting Fibonacci ratios. As mentioned, even though these ratios are used extensively, the basic rules are not followed, which tend to give an incorrect picture.
The following rules apply to all the Fibonacci ratios:
• The Fibonacci
ratios should always be plotted from the left side to the right of the chart.
• They should
always be plotted on pivot points (swing highs/lows). Vi sual ly
identify the levels from where price
changes trend. In short,
identify the waves of the price movement.
• They cannot be plotted on swing points in the middle of a wave.
FX TRADER MAGAZINE April - June 2013 23
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