Advanced Technical Analysis in FX Fibonacci Retracements, Elliot Wave Theory, Gann Fan and...
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Transcript of Advanced Technical Analysis in FX Fibonacci Retracements, Elliot Wave Theory, Gann Fan and...
Advanced Technical Analysis in FX
Fibonacci Retracements, Elliot Wave Theory, Gann Fan and
Andrew’s Pitchfork
Fibonacci
Fibonacci retracement percentages correspond to natural ratios discovered by the Greeks. They referred to the phenomenon as the Golden Ratio. The theory was then rediscovered by
Fibonacci; a medieval, Italian Mathematician.
Fibonacci
As displayed in the following slide, these retracement
levels are a common occurrence in the ebb and
flow of a market trend.
Fibonacci
Fibonacci proved that the Golden Ratio is present in
many aspects of nature and science, and Elliott felt that it had great significance on
the financial markets as well.
Fibonacci
Elliot asserted that these
counter-trend waves will
usually retrace
against the trending
waves by 38.2, 50 and 61.8
percent.
Fibonacci
Commodity prices will frequently consist of an
initial wave, a second wave (often retracing 61.8% of
the initial move), the third wave (usually the largest), then another retracement,
and finally the 5th wave (the last gap), which would
exhaust the movement.
Fibonacci
The Fibonocci Ruler is the most commonly used
retracement measuring tool. Each level of the
ruler highlights the areas in which the market may
experience support or resistance.
Fibonacci
The market will often
reverse its coarse at
these retracement levels. Notice the reversal points on the
next two slides.
Elliot Wave Theory
The Elliot Wave Theory was developed by Ralph
Nelson Elliot. This theory is based on the premise that market behavior is based on waves rather than random timing.
Elliot Wave Theory
Elliot believed that prices fluctuated in a series of
waves based on the Golden Ratio, also referred to as the
Golden mean that was originally proven by
Fibonacci.
Elliot Wave Theory
Elliot believed that the market rises in a series of 5
waves and that a market declines in a series of 3
waves.
Elliot Wave Theory
According to the theory, on the first wave a market
rises, on wave two it declines, begins to rise again on the third wave. The third wave is followed by a period
of decline known as the fourth wave, and finally
completes the rise on the fifth wave.
Elliot Wave Theory
There is a correction period following the five wave
sequence. This declining period is referred to as a three-wave correction.
During this time the market theoretically declines for wave A, begins to rise for wave B, and falls again for
wave C.
Elliot Wave Theory Simplified
Wave one: Normally very short and easy to miss.
Wave two: A retracement wave, usually gives back all or most of what the first one gained.
Elliot Wave Theory Simplified
Wave three: Usually very prominent, as it follows a period of what appears as consolidation, most people trade this wave.
Elliot Wave Theory Simplified
Wave four: Noted to be very intricate yet still a consolidation. One of Elliot’s main rules is that in a 5-wave advance cycle, wave 4 can’t overlap wave 1.
Wave five: Often very active, yet at some point declines and leads to the 3 wave corrective cycle.
Elliot Wave Theory Simplified
Three Wave Decline:
Wave A: Normally seen as a minor pullback, of wave 5 of the advance cycle.
Wave B: Follows Wave A of the downtrend, and is often hard to spot but should result in a third wave continuing down.
Wave C: Usually quite significant and many traders see this selling opportunity.
Elliot Wave Example
Elliot Wave Theory
Drawbacks to the wave counting strategy:
• One man’s wave one, is another’s wave three. In other words the starting point is somewhat ambiguous.
•It is easy to count the waves after they occur, but difficult to identify them as they are occurring.
Andrew’s Pitchfork
Dr. Alan Andrews developed a channel technique to identify areas of support and
resistance from a common baseline. The premise of the theory is
to trade the channel depicted by the “tines of
the pitchfork.
Andrew’s Pitchfork
The center tine begins at the most recent contract high or low. The top tine is determined by looking at the highest move from the contract high or low. The next point is located based on the retracement
of that move.
Resistance tine based on most recent move
from baseline.
Support tine identified by
retracement of the original move
Gann Fan
W.D. Gann designed several techniques for studying price charts. He believed
that specific geometric patterns and angles
contained reoccurrences that could be used to predict price action.
Gann Fan
Gann believed that the ideal balance between price and
time exists within a 45 degree angle of the axis.
The Gann fan is made up of 9 angles and is based on this
concept.
Gann Fan
The corresponding lines represent support and
resistance, once one line is broken by the entire day’s price range the next line becomes new support or
resistance. The drawing of these lines should begin at a relative top or bottom of a
market.
Gann Fan
It is also imperative that when drawing the Gann
Fan, the 45 degree angles are kept in tact.
In other words the center line should keep a 1 to 1
slope.
Gann Fan
During an uptrend, the penetration of one line
suggests that the market will rally to the next, in a
downtrend a broken support line anticipates a drop to the
next line.