Trend Following Forex - 3 Simple Steps to Catching Big Profits

If you want to catch the big profits in forex trading you need to trend follow forex trends which are longer term. Here we are going to give you a 3 step simple method which if you use it correctly, will help you catch every major forex trend and lead you to long term currency trading success.

Most novice traders don't bother trying to trend following forex longer term - instead they try forex scalping or day trading. These methods focus the trader on small moves and they hope to catch small profits however as most short term moves are random, this leads to equity wipe out.

The other choices are swing trading and long term forex trend following and this article is all about the latter method. If you look at any forex chart, you will see long term trends that last for months or years. These moves can and do yield big profits - here we will outline a simple method to catch them.

Breakouts

By far the best way of catching the big moves is to use a forex trading strategy based around breakouts. A breakout is simply a move on a forex chart where a new high or low is made and resistance or support is broken.

It's a fact that most major moves start from new highs or lows.

While it might appear that you are not buying or selling at the best level, you are in terms of the odds of the trend continuing. Most forex traders make the mistake of waiting for the breakout to come back and get in at a better price but these traders never get on board. The reason for this is if a breakout occurs, then you have a new strong trend and a pullback is not very likely to occur.

Most traders don't buy or sell breakouts and that's exactly why it's such a powerful method.

The only point to keep in mind is a support or resistance which is broken, should be valid and that means at least 3 points in at least 2 different times frames. The more tests and the wider the spacing between the tests the more valid the level is.

Confirmation

Of course not every breakout continues and some reverse, these are false and can cause losses. You therefore need to confirm each move. All you need to do to achieve this is to put a few momentum indicators in your forex trading system to confirm your trading signal.

These indicators give you an idea of the strength and velocity of price and there are many to choose from. We don't have time to discuss them here (simply look up our other articles) but two of the best are - the stochastic and Relative Strength Index RSI

Stops and Targets

Stop levels are easy with breakouts - Simply behind the breakout point.

If you have a big trend then you need to be careful you can milk it, so don't move your stop to soon and keep it outside of normal volatility. If it is a big move, trailing stops should be held a long way back and the 40 day moving average is a good level to use.

You have to keep in mind that when the trend does eventually turn you are going to give some profit back. You don't know when the trend is going to end, so don't predict.

It's ok to give a big back, as that's the nature of trading forex. Keep in mind if you got 50% of every major trend you would be very rich. When you are long term trend following you have accept giving a bit back and taking dips in open equity as the trend develops - this is noise and does not affect the long term trend.

The above is a simple way to trend follow forex and catch the high odds moves that yield the big profits. If you are learning forex trading and want a simple method that is robust and will help you catch every major move, then you should base your Trading on the above method.

Related Posts :

1. Support and Resistance Level
2. How To Identify Forex Market Trends
   

Sources :

1. Trend Following Forex - 3 Simple Steps to Catching Big Profits

Reading Price Action

Reading Price Action means different things to different traders, just like “going long” means different things to a trader than a porn star. Price action can talk in several layers (like onions, not everyone likes onions, cake! .. everyone likes cake! .. cakes have layers). The talk comes from the macro level of price patterns and formations, to the micro level of single bars or candlesticks. Looking at what micro level price action is telling you gives you hints on when macro level patterns might play out.

Reviewing each type of macro pattern is beyond the scope of this article (and beyond the knowledge of this author), but some specific patterns will be addressed in later articles. Instead we can look at the micro level from a days action on the currency markets.

The concept for me for micro analysis is quite simple. Look for where buyers are, where buyers were and vice versa. A chart is nothing more than a story of buyers and sellers battling it out for supremacy, with their blood trails left behind for us all to see.

I will caveat this analysis with one thing, when it comes to forex analysis, single candle analysis (note not candle formations) on a daily or a four hour chart is pointless. The currency market is a market with no daily close except for the friday weekend close, which even in itself is slightly different for all.

A daily close is essentially invented by which session we deem most important, but this can change between markets and between currencies depending on the happenings at the time.

A four hour candle depends entirely on when your broker starts the day off for you. Mine might open Monday markets at 7am Sydney time, your at 8am, that would mean my four hour candles close and hour before yours, how can we tell which close means what?

So why not exclude the hourly or the weekly from this single candle analysis? The weekly close does make sense, the retail currency market across the globe closes at approximately the same time on a Friday, so a weekly candle close has some significance. True it is approximate, but in a weekly context it is certainly close enough.

An hourly chart also makes sense. An hour is an hour is an hour, doesn’t matter if it is the 3pm or 10am, it is still the end of an hour everywhere, so everyone is seeing a close of an hourly candle at the same time, giving it some meaning.

An example of one days action on a 15 minute chart is below. This is one I prepared a few days ago (when I originally intended to write this article) on the EURJPY spot currency cross (click to enlarge):


There is an aweful lot of annotations there I know, so I will let the picture do most of the talking. There are a couple of things to note however.

Firstly, trader pain is important, sellers and buyers out of the money are going to look to close at break even more often than not, especially those that get caught out by strong moves with no stops. So watch for a sign of buyers or sellers being reversed upon quickly, chances are they are in panic mode and wanting to close.

The next thing is to ignore colours, in this chart a black candle is one with a lower close than open, a white candle with a higher close than open. They should not be called bull or bear candles based on their colour. The close vs open relationship does not necessarily indicate whether that period was dominated by the bulls or the bears. A candle with a long upper wick yet a slightly higher close (doji) is a bearish candle not a bullish one. It is why the old timers always seem to have better price reading skills (I am talking the pre-computer old-timers). They had to hand draw charts, and so colour was not necessarily a factor and they didn’t have technology to make them lazy.

Don’t let the convenience of technology make you forget that there is a story being told. It is too easy with automated systems, computer generated indicators and complex charting techniques to forget that we are still trading the discrepancy between supply and demand, nothing more.

To be a professional trader, you need to work out how to take money from the ametuer traders, as there is not enough to go around for everyone. If you learn (from yourself and others) what the ametuer trader would do (i.e. no stops, late buying and selling, panic and elation) then you can take advantage of those reactions when reading the charts and refining your entries. Be the exception, not the norm.

Related Posts :

1. Buyers vs Sellers
2. Trading Support and Resistance
   

Sources :

1. Reading Price Action | Written by Akuma99, October 31st, 2008 at 10:26 am.

Buyers vs Sellers

In the land of the squiggly line, it is becoming easier to find someone who thinks George Bush is intelligent than it is to find traders online who read price action for a living. I preface it with the online because I know there are still many professionals out there who trade with minimal or no indicators, but the are usually too busy making copious amounts of money to be hanging around the online world.

A recent article in Technical Analysis of Stocks & Commodities featured an interview with Jack Broz. Jack is a member of the Chicago Board of Trade (CBOT), and trades Bonds and Dow futures in the pits, and from the screen. In this interview he made some interesting observations of floor traders, but it was this paragraph that warmed my heart:

"… The bias of the floor. Are the floor traders trying to buy dips, or are they trying to sell rallies? Are they bullish or do they want to buy strength? What levels are they using? One thing I have noticed as I trade more is that nobody in the pit uses indicators."

Nobody uses indicators in the pit, which of course seems obvious in hindsight considering the chaos that is the pit of CBOT:


Not really a place for the squiggly line is it. The speed and frantic nature of the pits ensure that trading is done with the minimum of frosting.

What I think is forgotten at times is we are trading financial markets. It is called a market for a reason, it is no different than your local farmers market or super market, it is still a place for someone to either buy a product they need from someone who want to sell it to them, or vise versa. It doesn’t matter if you are buying an apple, shoes or gold, either way the process is the same, you buy from someone who wants to sell.

The most successful technical traders are those that know what this might look like on chart. If you have a long bias on an instrument, i.e. looking to buy, who are you buying from? Sellers, stating the obvious I know, however the amount of traders I have worked with that seem to forget this simple fact indicates that perhaps it is not as obvious as it seems.

If you are at a market, that market has fruit and vegetable stalls, arts and craft stalls and hardware stalls and you want an apple, chances are you are going to look for the physical characteristics of someone selling an apple. You might be looking for a Greek man with an apron, a fruit van or other similar products in the general genre of apples. If someone has a stall with pears, chances are their are apples there as well. Certainly a much better chance than if they were selling hammers.

Back to our buying idea, there are two things we need for price to go in our direction:

1. Someone to buy from (sellers)
2. Other buyers to support the purchase (momentum)
   

Knowing where new buyers are can be difficult to spot. In the majority of cases they are the silent minority, they have left little or no footprints as they are not in the market as yet. In fact, you, as a potential buyer, are one of those exact buyers.

Potential sellers however have left tracks, they are already in the market, and so spending your time looking for where they were could be a much more productive use of your charting time. The most desperate sellers are those that are feeling the pain of a losing position. We all know the feeling, when we are holding a losing position and are going through the “if it just comes back to break even” game.

This scenario is most commonly called reverse polarity. This is where support becomes resistance and resistance becomes support. Visually this usually looks like:


So if we are buying, looking for sellers at previous resistance (i.e. where sellers last came into the market), in this instance looks like a fantastically easy way to find who you are going to buy from. Naturally things aren’t always that clear cut, for example:


While there was one polarity change here, we had a couple of turns that seem to turn in mid air. Some might put it down to a mysterious ratio found in the ancient pyramids, sunflowers and the patterns in the hair on my left arm (you know who you are). While others might look for reasons in price itself.

The theory of sellers in a panic wanting to offload them to buyers can take a different visual form. To the left is a close-up of one scenario. Here we have six blue candles, which at first glance makes you think six bullish candles.

Candle three however is anything but a bullish candle. It’s long upper wick indicates this is very much a bearish candle, with heavy selling coming in at the top of the range. Another instance of reverse colour blindness.

The next three candles however returned to strong bullish candles. There must have been a strong reason to be going short in an uptrend. After the close of candle three, those sellers would be feeling rather chuffed at their intelligence, thinking they have picked the top. The next three candles reverse those feelings quickly, and that comfort now turns to panic, and they are now more than happy to offload their positions to anyone wanting to buy.

Let’s go back to the previous chart with this in mind and look at those mysterious turns again:


Not so mysterious .. certainly no ancient mathematics involved in these cases. You can see in the zoomed in versions that each case this time had sellers being reversed on quickly, providing some very eager sellers looking for others wanting to buy what they have (see the link to the farmers market … knew I would get there).

There are many variations on the theme, but breaking things down to the core of market behavior; buyers and sellers, can sometimes clear the brain enough for you to make some money. Have other visual representations of this scenario? Let us know.

Related Posts :

1. Trading Support and Resistance

Sources :

1. Buyers vs Sellers | Written by Akuma99, December 16th, 2008 at 10:05 pm.

Trading Support And Resistance

Do you think you could earn your fortune from one horizontal line? If that horizontal line was a conga line of rich millionaires with holes in their pockets, then certainly you are a big chance. Throw on a Hawaiian shirt, fire up some Beach Boys and you are on your way. For those not fortunate enough to be invited to the last Donald Trump Bar Mitzvah, there could be another way (although granted the first way sounds much more fun).

The theory behind Support and Resistance is really very simple, when price turns and doesn’t return to it at the point of observation, that is resistance or support.


When you see a bounce off support like we did at the closing hour of the SP500 yesterday, trading these levels seems splendidly easy. Of course, as is everything else to do with trading, it isn’t as easy as first glance. Here is the counter-argument for trading Support and Resistance on the SP500.


Six identified support are resistance areas, six failures, not such a good method at all then is it. Recently while getting my thai strethcing massage and a pedicure, I printed out ten years worth of data on the AUDUSD spot currency pair. On it I marked the clear weekly support and resistance levels. I then tested how many of them held for at least one retracement, an attempt to be realistic with real time trading practices.

The result from this study was that clearly many others don’t do the same due diligence. The results were not pretty, well below 50% success. Taking these levels at face value obviously isn’t going to cut it in the age of the smooth equity curve.

Clearly something else is needed to help identify those that hold, so I took advice from the most experience market expert in the business, who has been telling traders what to do for centuries, price. Let’s go back to the chart of ugliness, the six out of six loser chart and see where price told us that a support or resistance level was going to hold :

1. A strong bar up with a close at it’s absolute high, next bar gapped slightly and closed up, certainly no indication there of a reversal.
2. A consistent run up into resistance, even an aggressive trailing entry behind each low would not have got you in here, again no sign.
3. The only one that gave a hint of a turn, a small reversal bar with a lower close bar to follow, the stronger move up compared to the smaller move down either side of the pivot might have hinted of a lack of follow through, but really that is hindsight analysis, so a loser there.
4. A very small pause bar at support, looking for confirmation next bar gave us a strong momentum bar below support, no signal there.
5. Finaly another strong bar up intro resistance, no low was taken out, so no signal until the high right at the top of shot.
   

Six levels, only one of them gave even a hint that it was going to hold. Simply listening to what price is telling you would have kept you on the sidelines avoiding the carnage that the blind traders had to endure. Now to look at the opposite scenario, when price does hold, this time on the Dow Jones.

1. This is the kind of thing authors eyes get attracted to, it is also what cause sweeping statements about trading support and resistance in public forums. This time price gives us a sign, a move to support, an inside bar to indicate indecision, and a nice momentum bar with a lower tail to indicate the bulls are in control.
2. Not so effective, but a signal none the less, a move to resistance, and nice big long doji bar, and a small move down off resistance. Not a retirement trade, but certainly a chance to lock in break even.
   

It is clear when trading support and resistance it’s just as important to listen to price as it is to have your fly done up. If you don’t, you are in for some embarrassment in hindsight. Listening to price can give you hints about whether a level will hold, whether you apply it to support and resistance, fibonacci (don’t get me started), or any other mathematical bullocks you like.

Listen to price as though the Greater Power is speaking directly to you, as the market too is bigger than all of us, it just speaks to us a little more often.

Related Posts :

1. Buyers vs Sellers
2. Reading Price Action
   

Sources :

1. Trading Support And Resistance | Written by Akuma99, October 24th, 2008 at 4:19 pm.

What is Market Cycle?

Written by ForexCycle.com

A cycle is simply a regularly occurring sequence of events. The sun rising every morning and setting in the evening is a cycle. The four seasons are one cycle. In forex market, a cycle is loosely defined as price movement of a market from a local bottom to a local top and back again.

Cycles, just like price trends, can be long, short or intermediate in length. A specific market may have a 20 day, 52 week and 5 year cycle, all acting together to describe price activity. By adding the cycles together, the actual price activity can be forecast.

Market cycle analysis attempts to find recurring major and minor peaks and troughs in price movement for better trade timing. Here are some examples of forex market cycles.

• The 30-day cycles in the EURUSD daily chart
  

• The 25-week cycles in the AUDUSD weekly chart
  

• The 200-hour cycles in the AUDUSD 8H chart

How to use MetaTrader to find market cycle

Price movement is a series of tops and bottoms, the price runs from one bottom/top to another is called a cycle and each cycle has the similar length. MetaTrader has an excellent tool to help you identify the market cycles.

Now we use EURUSD 4 hours chart to explain how to find the market cycle bottom.

• Step 1 : Run MetaTrader, look at the EURUSD chart and mark up the important bottoms.
  

• Step 2 : Press the “cycle line” button on the tool bar to draw a series of vertical line. Make sure every vertical line is near to the import bottoms.
  

Sources :

1. ForexCycle.com : What is Market Cycle?
2. Blog ForexCycle.com : How to use MetaTrader to find market cycle

Relative Strength Index – Best Oscillator for Market

Written by ForexCycle.com

Relative Strength Index (RSI), one of the most popular financial technical analysis oscillators is best adapted to work in markets, which is range-bound. Developed in 1978 by J.Welles Wilder its popularity is mainly due to its easy interpretation.

RSI helps you measures the strength of all upward movement against the strength of all downward movement in a specific period. Even though the common parameter for RSI period is 14, because, Wilder recommended a smoothing period of 14; users can however choose the period of their choice.

The RSI compares the upward price movement to downward price movement over the specified timeframe, and displays the result as a momentum line oscillating between 0 and 100.


Moreover, relative strength index or RSI can range from zero to hundred, which is a result displayed as a momentum line oscillation. If someone tells you that the RSI is 50, it means that the market is demonstrating an equal strength of upward and downward force. Similarly if RSI is greater than 50 that denotes a strong upward force than the downward force; while, less than 50 denotes a stronger downward force in comparison to the upward force.

To make the process simpler, here is a mathematical representation of RSI:

RSI = 100 - [100/ (1+RS)]
Relative Strength = Average of 'n' day's up closes / Average of 'n' day's down closes

A number of applications use relative strength index like, for detecting the overbought and oversold condition of the market and spot divergence; where, it has been successfully implemented. Just like as considered by Wilder, if RSI is less than 30, the market/security is deemed oversold, an investor should consider buying; similarly, if RSI is greater than 70, the market/security is deemed to be overbought, and an investor should consider selling.


So also is the application of RSI in Spot divergence. Divergences are a universal form of interpretation for the Relative Strength Index. When the relative strength index starts diverging and moving in a different direction along with the value near support/resistance level, it indicates the dwindling of the market trend. This is said to have accomplished a "failure swing" and therefore is confirmed the coming reversal.


The use of relative strength index is the most appropriate as a valuable complement to other stock-picking tools. It is imperative that a trader should understand the technicalities of using RSI. He/She should also be aware that big surges and drops in the asset price would affect the RSI by creating false buy or sell signals.

Moreover, there is a strong connection between relative strength index and momentum. If the specified momentum period is greater than one, then this period definitely becomes the model period for comparing closes to resolve gains and losses.

Supposedly, if seven is the momentum period, then you may compare the current close to the close seven periods ago. In case the relative strength index using a momentum period is greater than one, then you can refer to it as Relative Momentum Index (RMI).


Sources :

1. ForexCycle.com : Relative Strength Index – Your Best Oscillator for Market

Determine Market Trends with MACD

Written by ForexCycle.com

MACD Divergence or Moving Average Convergence/Divergence is a useful indicator for spotting major changes in market trend, indicate trend direction and for giving hints of a possible market reversal. It is one of the strongest signals generated by technical indicators such as crossovers and divergence from price on a daily chart.

This MACD method, developed by Gerald Appel also referred to as a trending indicator, indicates the up-trend or a downtrend of a particular stock. It is essential that you first assess the track of the long-term trend, before you invest in any market.

The MACD method as used by Gerald Appel makes applicable a 26-day and 12-day EMA based on the daily close, and a 9-day EMA for the signal line. If you are a bit confused, let me acquaint you with the simplest version of the MACD indicator. It is composed of two lines: the MACD line and a signal line.

While the MACD line is the difference between two exponential moving averages (EMAs), the signal line is the EMA of the MACD line itself. You can find the signal line plotted on top of the MACD, which indicates buy or sell opportunities in the market. The two main sets of signals generated by the MACD are crossovers and divergence.

• Crossovers : One of the two MACD crossovers is Signal Line Crossovers, which refers to when MACD crosses above or below the signal line. When the MACD rises above the signal line, it is buying time, and when the MACD goes below the signal, it is selling time according to MACD trading rule. It is recommended that the Signal Line Crossovers be used in combination with other technical analysis tools to avoid many false signals.

• On the other hand, when MACD crosses above or below the zero line, it is called Zero Line Crossovers. When you need to buy/sell stocks when the MACD crosses above/below the zero line, this zero line helps in producing a signal.

• Divergence : When the MACD makes a higher low but the market makes a lower low, then it is called positive divergence. On the other hand, when the MACD makes a lower high while the market makes a higher high, it is known as negative divergence. While the former situation gives us a hint of a possible reversal to the upside, the latter gives us a hint of a possible reversal to the downside.

However, market experts believe that the best way to use MACD would be an amalgamation of signals to verify one another. There are also recommendations of the addition of fast MACD lines to enhance the signals generated and to provide early warning of trend changes. It is also noteworthy that MACD can provide premonition of important market turns through divergence.

The MACD also has its own set of weaknesses. Just as being a trend indicator, MACD sometimes fails to capture the move when the trend is short lived, even though it reliable enough to capture the majority of the move, when a substantial trend develops.


Sources :

1. ForexCycle.com : Determine Market Trends with MACD

Support and Resistance Levels

Written by ForexCycle.com

Support and resistance are respective price levels at which prices stop going down or up. Support levels indicate the price at which most traders believe that prices will move higher. Resistance levels indicate the place where the most of traders feel prices will move lower.

Trading ranges are formed by support and resistance levels. A trading range can play an important role in determining support and resistance as turning points or as continuation patterns. In a trading range, price fluctuates in a narrow band with no clear trend. Buyers take long positions when the prices move to the support level, and sellers go short at the resistance level.

Support and resistance does not always hold. A break below support level signals that the sellers have won out over the buyers, and bearish movement can be seen to follow. On the other side, a break above resistance level indicates that the bulls have won out over the bears, and the following uptrend can bring market price to a new high.

Here is an example in the forex market. Resistance for the EURUSD is located at 1.4975. The market bounces around below this level and forms a sideways consolidation for several weeks until both buyers and sellers think that fair rate of EURUSD is higher than 1.4975. The market breaks out of its trading range on 26-Feb-2008 and moves higher until most of the traders agree that fair rate is 1.5700.


Some times we can see the price pulls back to the previous resistance level, and then rally again. Why does such interesting thing happen? If the market trades back down to the previous resistance, buyers who missed the earlier breakout will see their second chance to go long. So the market rebounds up off this level which has now turned to support.


Sources :

1. ForexCycle.com : Support and Resistance Levels

The Basics of Swing Trading

Written by ForexCycle.com

Swing trading is a trade method in the gray area between trend following and day trading. A swing trader holds a stock for a small period of time and then will trade the stock when it's in it intra-week or intra-month oscillation. A experience swing trader will generally choose a large-cap stock because of its broadly defined high and low extremes. The trader will ride the stock wave in one direction for a couple of weeks, only to switch to the opposite side of the trade when their particular stock changes direction. A swing trader is best in position to do this when that market is more on the stable side versus it being a bear or bull market. This is because those markets' momentum generally carry stocks in one direction only (and for a long period of time).

The success in swing trading is to be able to identify what type of market is currently being experienced. One of the best ways of doing this is looking at historical data of what was indicative of different markets in the past, particular prime swing markets. If a market is identified as prime for swing trading, but later turns out to be a bear or bull market, a swing trader can find that there are the same up and down oscillations than those that occur in a more stable market. This would ensure that best strategy would be to trade on a long-term directional trend instead of the quicker trends that many of the most experienced swing traders are noted for.

Unlike many stock traders, swing traders are not looking to make it big with one particular trade, but are more concerned with hitting its baseline and confirm its direction. At the profiting level, a swing trader will want to exit the trade as close to the upper or lower channel line without being too close, which can cause a loss in opportunity. In a market where a stock is showing a strong directional trend a swing trader will usually wait for the channel line to be reached before selling, thus when a stock is showing a weaker directional trend, the trader will usually sell before the before it hits the channel line in the event the direction changes and the line does not hit on that particular swing.

Swing trading is a great method for beginning traders, while offering a profit potential to advanced traders. A great trader will be able to know when the stock is ripe and what momentum their particular stock has gained before making a decision. Trend following plays a very important role in swing trading as well knowledge of the physics of the stock market. Like the physics of ocean waves, swings can be unpredictable but when a large wave comes rushing at the shore, then its prime time for swing trading, but remember that swing trading is never as predictable as the swinging of a clock pendulum.


Sources :

1. ForexCycle.com : The Basics of Swing Trading

The Trading Secrets of Fibonacci and the Golden Ratio

Written by ForexCycle.com

We all are familiar with the fact that successful traders use Fibonacci and the Golden ratio. Before, we all get ready to try our luck, it is imperative that we know and understand what they are. While Fibonacci numbers and sequence was first known to appear in a book (Liber Abaci ) written by a famous 13th century mathematician Leonardo Fibonacci da Pisa in 1202 as a solution to a problem. The question quoted "How many pairs of rabbits can be generated from a single pair, if each month each mature pair brings forth a new pair, which, from the second month, becomes productive?"

The Fibonacci numbers were the first introduced in the European countries, which was still using Roman numerals with the decimal system or the Hindu-Arabic numerals as presently used. The Fibonacci sequence: 1,1,2,3,5,8,13,21,34 and so on to infinity, is made by adding the two previous numbers in the sequence, to come up with the next number.

Similarly, Golden ratio is also connected to Fibonacci, as it was recorded that just after the first few numbers in the Fibonacci sequence, the ratio of any number to the next higher number is approximately .618, and the lower number is 1.618. These two numbers are known as the Golden ratio.

Fibonacci numbers like much of its use in spheres of art, music, biology and architecture; finds an ardent follower in traders, who uses Fibonacci numbers to set stop loss orders. Two of the most important Fibonacci percentage retracement levels in trading are 38.2% and 62.8%. While other important retracement percentages include 75%, 50% and 33%. For instance, if a price trend initiates at zero and peaks at 100, to later decline to 50, it would be considered as 50% retracement. Similarly, the same levels can be applied to a market that is in a downward move and then suddenly experiences an upward correction.

There is a great connection between Fibonacci numbers and trading, as it defines stop loss level. A trader can set a stop loss placement just below or above the zone, in case three Fibonacci price levels come together in a relatively tight zone. Moreover, a Fibonacci number can help define stops in eventualities like if the support zone is violated and the price trades below that zone; or a trader trades against a support zone. In such cases, the cause for the trade is annulled and the position closed.

However, using Fibonacci retracements takes away the excitement out of trading and gives a pre-defined exit point. Moreover, Fibonacci numbers gives position sizes depending on the risk you are prepared to take per trade; and also defines profit objectives to bank partial profits or constrict stop loss level, once a pattern is completed against a Fibonacci price zone.

One of the immense advantages of Fibonacci numbers and the Golden ratio in trading is the fact that while taking the excitement out of trading, you can define not only stop losses to exit a market, but also set profit objectives as well.


Sources :

1. ForexCycle.com : The Trading Secrets of Fibonacci and the Golden Ratio