Gann numbers

Gann numbers - There is no simplistic explanation for Gann numbers, but it basically charts a relationship between price movements and time. Although it is increasingly used in stock trading, there is every chance you could find a reference to it in forex trading too. As you can see from the chart below, Gann numbers are calculated by using angles in charts. This helps in determining the support and resistance areas and could be used to predict the timing of future trend changes.

Fibonacci numbers

Fibonacci numbers! Doesn't that sound a lot like an enormous chapter in high school mathematics' book? If that's what you think then you are absolutely right. We are indeed talking about those kinds of numbers. Fibonacci numbers are a sequence of numbers formed as follows:

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

The sequence begins with 0 and 1.  Then keep adding the last two numbers to get the next. Meaning that:

0+1=1

1+1=2

1+2=3

2+3=5

3+5=8

5+8=13

well, you have got the picture now!

Why this sequence is called Fibonacci? The sequence of numbers was discovered by Leonardo de Pisa, also known as Fibonacci. He lived in 12^th century and was lucky enough to be the one to discover this amazing mathematical sequence. Off the topic Fibonacci numbers can be found EVERYWHERE! Scary enough these numbers represent the natural proportions of things in our enormous universe. And since forex is a part of the universe – Fibonacci numbers are applied here as well in search of a simple proportional solution for trading profits!

Speaking of trading, lets get to the main issue here – forex. You don't have to learn how to calculate any of this by yourself. The forex broker of your choice will provide you with software that calculates everything for you. 

Now here is the mystery – with major ratios calculated from Fibonacci numbers forex traders can actually predict a behavior of trend and countertrend movements in forex market. Spooky!!! 

Here is a set of numbers to remember: 38%, 50% and 62%  

If you take these percentages and apply them to the trending price you will notice not only a certain amount ofretracement, but also where new high and low could go. These marks are very important to forex traders since they are support and resistance areas where the price will either hesitate for a while or will reverse. 

Before grabbing the charts there is one more thing you have to know. The primary trends move all together in 5 waves. First there are 3 forward waves, and then there are 2 backward waves. Now countertrends move differently – 3 waves at a time. First there are 2 forward waves, followed by 1 backward wave.  

Now you are officially eligible to get some charts to "play" with and test your knowledge. Once you figure out how to place the marks correctly (every trading platform is different), you will definitely notice Fibonacci ratios in the price movements as it changes the position from support to resistance and back to support. Then you will realize that looking at certain time frames the trends tend to have similar proportionality. Wow!!

Whether on a hourly or a daily chart the Fibonacci lines that you draw are relevant until the price action has either confirmed or rejected them. Lets say if the price retraces to 38% line and then suddenly reverses again back to its original path crossing over the 0% line then you can for sure say that the cycle is over.    

Standard Deviation Channel

Standard Deviation Channel is built on base of Linear Regression Trend representing a ussual trendline built between two points on the price chart using the method of least squares. As a result, this line proves to be the exact median line of the changing price. It can be considered as an equilibrium price line, and any deflection up or down indicates the superactivity of buyers or sellers respectively.

Standard Deviation Channel consists of two parallel lines, equidistant up and down from the Linear Regression Trend. The distance between frame of the channel and regression line equals to the value of standard close price deviation from the regression line. All price changes take place within Standard Deviation Channel, where the lower frame works as support line, and the upper one does as resistance line. Prices usually exceed the channel frames for a short time. If they keep outside of the channel frames for a longer time than usually, it forecasts the possibility of trend turn.

Linear Regression Channel

The linear regression channel, similar to the Bollinger Bands, is a technical analysis tool that can be used to trade the binary options market.  The linear regression channel is a statistical technical analysis tool that captures the recent ranges and creates a statistical boundary where prices are likely to trade over a specific period of time.

Linear regression is a statistical approach to determining (via modeling) the relationship between one or more variables, where the model depends linearly on the unknown parameters to be estimated from the data.   The conditional mean of the given values (say prices of a financial instrument) are a function of that particular instrument or another instrument.  In essence, one specific variable is dependent, to a degree, on another specific variable.  The degree of dependence is called the R (squared), which is denoted in a percent format.

The linear regression channel is a channel that is created using a specific amount of data points where a regression line is created using the R (squared).  Parallel lines are then drawn that are one or two standard deviations away from the mean line.  The channel incorporates a larger percentage of the recent range of prices and theoretically will be bound where most of the price action over a future period of time.  This is accomplished by increasing or decreasing the standard deviation.  The larger the standard deviation, the more price and potentially future prices will be incorporated into the bands.  The linear regression channel can be used as a mean reverting indicator, where the bands on each end are support and resistance for price action.  In the hourly chart of USD/JPY, the linear regression channel incorporates the majority of price actions during a 20 period range.

  

The linear regression channel can be used successfully to trade hit or miss options, range options, one-touch options or above or below options.  For above or below options, an investor can use the high end of the linear regression channel to buy below options, and the low end of the linear regression channel to purchase above options.  For range trading, the channel should be an excellent strategy.  Placing a trade, this pays off if price action trades in a range in the future should be statistically significant.  This strategy is based on the idea that the current range will continue to perpetuate in the future is not other news is added to the market.  A two standard deviation range will incorporate 95% of the current prices, which should act as a very strong guide for future trading.  For example, a range box can be placed in front of the price action with a length that is similar to the trend channel.  

These strategies using the linear regression channels have a lot of statistical merit and should be tested using numerous financial instruments to find the binary option and instrument that match an investor’s risk profile.

Gann Line

Gann Line represents a line drawn at the angle of 45 degrees. This line is also called "one to one" (1x1) what means one change of the price within one unit of time.

According to Gann’s concept, the line having the slope of forty-five degrees represents a long-term trendline (ascending or descending). While prices are above the ascending line, the market holds bull directions. If prices hold below the descending line, the market is characterized as a bear one. Intersection of Gann Line usually signals of the basic trend break. When prices go down to this line during an ascending trend, time and price become fully balanced. The further intersection of Gann Line is the evidence of breaking of this balance and possible changing the trend.

It is necessary to define two points for building a Gann Line.

Gann Fan

Lines of Gann Fan are built at different angles from an important base or peak at the price chart. The trend line of 1х1 was considered by Gann the most important. If the price curve is located above this line, it is the indication of the bull market, if it is below this line it is that of the bear market. Gann thought that the ray of 1x1 is a powerful support line when the trend is ascending, and he considered the breaking this line as an important turn signal. Gann emphasized the following nine basic angles, the angle of 1x1 being the most important of all:

• 1х8 — 82.5 degree
• 1х4 — 75 degree
• 1х3 — 71.25 degree
• 1х2 — 63.75 degree
• 1х1 — 45 degree
• 2х1 — 26.25 degree
• 3х1 — 18.75 degree
• 4х1 — 15 degree
• 8х1 — 7.5 degree

The considered ratios of price and time increments to have corresponding angles of slope in degrees, X and Y axes must have the same scales. It means that a unit interval on X axis (i.e., hour, day, week, month) must correspond with the unit interval on Y axis. The simplest method of chart calibration consists in checking the angle of slope of the ray of 1х1: it must make 45 degrees.

Gann noted that each of the above-listed rays can serve as support or resistance depending on the price trend direction. For example, ray of 1x1 is usually the most important support line when the trend is ascending. If prices fall below 1х1 line, it means the trend turns. According to Gann, prices should then sink down to the next trend line (in this case, it is the ray of 2х1). In other words, if one of rays is broken, the price consolidation should be expected to occur near the next ray.

Fibonacci Channel

Fibonacci Channels are built using several parallel trend lines. To build this instrument, the channel having the width taken as a unit width is used. Then, parallel lines are drawn at the values equal to the Fibonacci Numbers, beginning with 0.618-fold size of the channel, then 1.000-fold, 1.618-fold, 2.618-fold, 4.236-fold, etc. As soon as the fifth wave finishes, correction in the direction opposite to the trend can be expected.

It is necessary to remember for a correct Fibonacci Channel building: base line limits the upper part of the channel when trend is ascending, and the lower part of it when trend is descending.

Forex Technical Analysis

This article provides insight into one of the two major methods of analysis used to forecast the behavior of the Forex market. Technical analysis and fundamental analysis differ greatly, but both can be useful forecast tools for the Forex trader. They have the same goal - to predict a price or movement. The technical analyst studies the effect while the fundamentalist studies the cause of market movement. Many successful traders combine a mixture of both approaches for superior results.

Technical analysis

Technical analysis is a method of predicting price movements and future market trends by studying charts of past market action. Technical analysis is concerned with what has actually happened in the market, rather than what should happen and takes into account the price of instruments and the volume of trading, and creates charts from that data to use as the primary tool. One major advantage of technical analysis is that experienced analysts can follow many markets and market instruments simultaneously.

Technical analysis is built on three essential principles:

1. Market action discounts everything! This means that the actual price is a reflection of everything that is known to the market that could affect it, for example, supply and demand, political factors and market sentiment. However, the pure technical analyst is only concerned with price movements, not with the reasons for any changes.
2. Prices move in trends. Technical analysis is used to identify patterns of market behavior that have long been recognized as significant. For many given patterns there is a high probability that they will produce the expected results. Also, there are recognized patterns that repeat themselves on a consistent basis.
3. History repeats itself. Forex chart patterns have been recognized and categorized for over 100 years and the manner in which many patterns are repeated leads to the conclusion that human psychology changes little over time.

Forex charts are based on market action involving price. There are five categories in Forex technical analysis theory:

• Indicators (oscillators, e.g.: Relative Strength Index (RSI)
• Number theory (Fibonacci numbers, Gann numbers)
• Fibonacci Studies
• Gann Tools
• Channels
• Waves (Elliott wave theory)
• Gaps (high-low, open-closing)
• Trends (following moving average).