Fibonacci Retracement

The Fibonacci Retracement is probably the most heavily used Fibonacci tool in the toolset. You will find Fibonacci Retracements as a solid tool in identifying key support and resistance areas.

If prices have fallen from a recent swing high down to a swing low, the expectation is that price should retrace distance, high to low, by a ratio of the Fibonacci sequence. .

You can use Fibonacci retracements and extension from a tick chart through a daily, monthly and weekly.  Literally any time frame

It is important to note, the larger price move from swing high to swing low, the more accurate the retracement projections. Identification and selection of the correct swing points are keys to success.

While there are many variations of the ratio set, simple is better, lets focus on four major retracement levels.

• 23.6% -- The shallowest of the retracements. In very strong trending markets price typically quickly bounces in the area of this ratio.

• 38.2% --- This is the first line of defense of the current trend. Breaking this level starts to erode the underlying trend. 

• 50% -- The neutral point of any retracement. This is the critical tipping point.

• 61.8% -- retracing to this typically signals a breakdown in the trend.

• 100% -- Matching the move

In this section we will also show examples of how potential opportunities form when price retraces beyond 100% by following another set of Fibonacci ratios:

• 138.2%
• 161.8%
• 200%

Notice in each case we have simply added 100% to the standard ratio set. I use this set of retracements on a daily basis, from 23.6% all the way to 200% and sometimes 300% For my style of trading I find 38.2%, 50% and 61.8% quite reliable.I use the other primarily as confirmation levels.

So lets take a look at some examples of Fibonacci Retracements in use. 

Example 1:
Take the example below. The EUR/USD had risen from 1.3360 to 1.4278. The next day the EURUSD failed to make a new high and the potential swing point was in place. So I using swing points I placed a Fibonacci retracement on my chart.

The trend was obviously very strong and the first retracement to the 23.6% level was met with a violent change in direction. You can see the dip below the 23.6% level and the sudden reversal. While there are multiple entry methods, the most conservative would be to wait until the level is penetrated and price establishes itself above that level and enter on the open of the next bar as shown.

With the right money management, you can see in this example this could have been a serious winner.

Once you understand the method you can find countless examples. Every market, FOREX, Equities and Futures each exhibit these patterns to some degree. 

Example 2:
Lets look at another example using the USDCAD. You can see in this example there are multiple entry points for both trend and countertrend trades.

Lets zoom in and look at the area highlighted in blue. Fibonacci Ratios work on virtually any size price swing.

The chart below shows the Fibonacci Retracement applied to the smaller price swing.

The blue ellipses show the high potential entry points. Notice, in each of these cases you could have entered the market with a relatively tight stop loss with high reward potential.

Ok, we have shown some examples of well behaved price action. What happens if price retraces 100%?  How far can it go beyond this point? Fibonacci ratios provide some clues to answering this question and finding low risk entry points.

Example 3:
The example below shows the GBPUSD making a bottom and bouncing back. And multiple entry points from the same set Fibonacci  Retracement levels.

Of note are the high potential entry points at 38.2%, 50% and 61.8%. Each of these could have been entry points with solid profit potential. However, notice after the initial breakout above 100%, there were other opportunities to get in the trade. Ultimately price jumped to the 138% point before backtracking.

This example shows yet another way to use Fibonacci Retracements. This example shows why it is valuable to identify potential levels above and beyond the initial 100% retracement.

Retracements are the cornerstone of Fibonacci theory as it applies to the financial markets. Hopefully these examples have provided guidance from which to draw your own retracements and expand your trading toolset.

To recap, while there are other retracement values, my defaults Fibonacci Retracements always include:

23.6%	100%
38.2%	138.2%
50%	161.8%
61.8%	200%

You can never tell when price action it going blow well beyond the 100% level.

12 Major currency pairs

Well to be honest there is no such thing as 12 major currency pairs, there are actually about 7 (depends on how you count) major currencies, and well ... many major currency pairs.

So what's with your title, you maybe wondering? Let me justify myself, like i said there is no such thing as 12 major currency pairs, this is my list of currency pairs i like to trade, all my currency pairs are made from major currencies thus the name "12 Major currency pairs", however i do not advice you to use this name in group of professional forex traders, in best case they will get confused ... i do not want to tell what can happen in the worst case here :).

I will give you the list shortly but let me first explain why i choosed this currency pairs. There are few reasons, there are quite big moves on them in short periods of time, small spread, and i find it easy to apply technical analysis to those currency pairs.

Ok here it is:

• EUR/USD - well obvius, there is not a single trader who does not trade this currency pair
• GBP/USD - pretty similar pair to EUR/USD however it is quicker, and the moves are about 50% bigger, 150 PIPs daily is not uncommon for this pair.
• USD/JPY - quite predictible lately, notice that most of the time USD/JPY is bullish it moves slowly up, when there is a correction on this pair, it moves few hundreds pips down in just few days.
• EUR/JPY - pretty much the same as USD/JPY but moves are less predictible
• AUD/USD - good alternative where you have no idea where EUR/USD will go, however moves on this pair are smaller then on EUR/USD
• USD/CAD - pretty predictible, mainly because CAD is highly correlated with oil price, and you know what oil price chart looks like right?
• USD/CHF - very strong correlation between this pair and EUR/USD
• EUR/CHF - the same as USD/JPY slowly moves up and then quickly falls down
• EUR/CAD - high spread, well i do not know i just like to trade, i always find it easy to predict where will it move and how much
• EUR/GBP - very slow currency pair, however sometimes spread can be low on it
• EUR/AUD - this is very personal pick, i like to trade, but spread is very high so i only use it for long term trades
• NZD/USD - yes NZD is not really a major currency, but i like to trade this pair because it has low spread, easy to predict and has weak correlation to any other pair on this list

Well that is all, if you have your own private currency pairs list feel free to share it here in comments section, also i will be happy to answer any of your questions.

Typ of Gaps in Forex Market

An opening outside the previous session's range generates what is termed a price gap.

Price gaps, as plotted on bar charts, are very common in the currency futures market because though currency futures may be traded around the clock, their markets are open for only about a third of the trading day. For instance, the largest currency futures market in the world, the Chicago IMM, is open for business 7:20 am to 2:00 pm CDT. Since the cash market continues to trade around the clock, price gaps may occur in the futures market between two days' price ranges.

There are four types of price gaps: common, breakaway, runaway and exhaustion.

Common Gaps

Common gaps have the least technical significance of all types of gap. They do not indicate a trend start, continuation, reversal or even a general direction of the currency other than in the very short term. Common gaps tend to occur either in relatively quiet periods or in illiquid markets. When price gaps occur in illiquid markets, such as those of distant currency futures expiration dates, they should be completely ignored. The entries for distant expiration dates in currency futures are made only on a closing basis and do not reflect any trading activity. One should avoid trading in an illiquid market because getting out of it is very difficult and expensive. When gaps occur within regular trading ranges, the word on the street has it that, "Gaps must be filled." Common gaps are short term. When currency futures open higher than the previous day's high, they are quickly sold, targeting the level of the previous day's high.

Breakaway Gaps

Breakaway gaps occur at the beginning of a new trend and usually at the end of long consolidation periods, though they may also appear after the completion of some chart formations that tend to act as short-term consolidations. Breakaway gaps signal a brisk change in trading sentiment and occur on increasingly heavy trading. Traders are understandably frustrated by consolidations which are rarely profitable. Therefore, any breakout from a slow moving market is warmly embraced by profit-hungry traders. The price takes a secondary place to participation. As always, naysayers follow the initial breakout. Sooner, rather than later, the pessimists have no choice but to join the new move, thus creating more volume. Breakaway gaps are not likely to be filled either during the breakout or for the duration of the subsequent move. In time they may be filled during a new move on the opposite side.

Runaway Gaps

From a technical point of view, runaway, or measurement, gaps are special gaps that occur within solid trends. They are known as measurement gaps because they tend to occur about midway through the life of a trend. Thus, if you measure the total range of the previous trend and extrapolate it from the measurement gap, you can identify the end of the trend and your price objective. Since the pace of price movement on either side of the runaway gap should be similar, you also have a time frame for the duration of the trend.

Exhaustion Gaps

Exhaustion gaps may occur at the top or bottom of a formation when trends change direction in an atypically fast manner. There is no consolidation next to the broken trendline: The trend reversal is very sharp through a bullish move, and looks a lot like a measurement gap, so traders buy the currency and stay long overnight on that assumption. The following day the market opens below the previous low, generating a second gap. If the second gap is filled, or simply does not exist, then the trading signal remains the same. Traders do not have to get caught badly in this exhaustion gap. A sudden trend reversal is unlikely to occur in an information void. Some sort of identifiable event triggers the move, maybe a government fall or a massive and well-timed central bank intervention. Therefore, traders should at least be warned.

CCI ("Commodity Channel Index")

Developed by Donald Lambert, the Commodity Channel Index (CCI) is an indicator designed to identify cyclical turns in currencies or commodities. There are 4 steps involved in the calculation of the CCI:

1. Calculate today's Typical Price (TP) = (H+L+C)/3 where H = high; L = low, and C = close.
2. Calculate today's 20-day Simple Moving Average of the Typical Price (SMATP).
3. Calculate today's Mean Deviation. First, calculate the absolute value of the difference between today's SMATP and the typical price for each of the past 20 days. Add all of these absolute values together and divide by 20 to find the Mean Deviation.
4. The final step is to apply the Typical Price (TP), the Simple Moving Average of the Typical Price (SMATP), the Mean Deviation and a Constant (.015) to the following formula:
   
   

For scaling purposes, Lambert set the constant at .015 to ensure that approximately 70 to 80 percent of CCI values would fall between -100 and +100. The CCI fluctuates above and below zero. The percentage of CCI values that fall between +100 and -100 will depend on the number of periods used. A shorter CCI will be more volatile with a smaller percentage of values between +100 and -100. Conversely, the more periods used to calculate the CCI, the higher the percentage of values between +100 and -100.

Lambert's trading guidelines for the CCI focused on movements above +100 and below -100 to generate buy and sell signals. Because about 70 to 80 percent of the CCI values are between +100 and -100, a buy or sell signal will be in force only 20 to 30 percent of the time. When the CCI moves above +100, a currency is considered to be entering into a strong uptrend and a buy signal is given. The position should be closed when the CCI moves back below +100. When the CCI moves below -100, the security is considered to be in a strong downtrend and a sell signal is given. The position should be closed when the CCI moves back above -100.

Since Lambert's original guidelines, traders have also found the CCI valuable for identifying reversals. The CCI is a versatile indicator capable of producing a wide array of buy and sell signals.

• CCI can be used to identify overbought and oversold levels. A currency would be deemed oversold when the CCI dips below -100 and overbought when it exceeds +100. From oversold levels, a buy signal might be given when the CCI moves back above -100. From overbought levels, a sell signal might be given when the CCI moved back below +100.
• As with most oscillators, divergences can also be applied to increase the robustness of signals. A positive divergence below -100 would increase the robustness of a signal based on a move back above -100. A negative divergence above +100 would increase the robustness of a signal based on a move back below +100.
• Trendline breaks can be used to generate signals. Trendlines can be drawn connecting the peaks and troughs. From oversold levels, an advance above -100 and trendline breakout could be considered bullish. From overbought levels, a decline below +100 and a trendline break could be considered bearish. Rex Takasugi has used this type of system to trade the Russell 2000.

Traders and investors use the CCI to help identify price reversals, price extremes and trend strength. As with most indicators, the CCI should be used in conjunction with other aspects of technical analysis. CCI fits into the momentum category of oscillators. In addition to momentum, volume indicators and the price chart may also influence a technical assessment.