Fibonacci and other Indicators

Fibonacci Theory

Leonardo Fibonacci was a 13th century Italian mathematician who calculated a sequence of numbers that ultimately led to the discovery of a numerical ratio of 1.618. This ratio and 0.618 which is its inverse susposidly occur thoughout nature. The Fibonacci sequence is a numerical series where every number is the sum of the preceding two: 1, 1, 2, 3, 5, 8, 13, 21, 34 etc. The sequence of numbers has some interesting properties, for example any number in the series is a multiple of approximately 1.618 of its preceding number. Because of the seemingly universal significance of this ratio, traders long ago began applying it to trading the financial markets. Technical analysts have many tools that are derived from the Golden Ratio and Fibonacci’s work, the most important and popular of these is the Fibonacci Retracement.

Fibonacci retracements help outline key support and resistance levels on retracements from the primary price move. For example, it should be expected that within an uptrend, price will retrace at some point. When it does, Fibonacci theory suggests that price will likely retrace a magnitude of 38.2%, 50%, or 61.8% of the original move.

These are the most significant levels according to Fibonacci trading theory. Other important retracement levels include 23.6%, 76.4%, and 100%. Knowing where all of these levels occur on a given price chart can be instrumental in finding out where traders may be paying particular attention. As such, Fibonacci levels can be considered to some extent, a self fulfilling prophecy much like the pivot points. The various Fibonacci tools, especially retracements, are extremely popular with foreign exchange traders.

Elliott Wave Theory

Related to Fibonacci methodology, Elliott Wave Theory states that price movement is predictable and can be classified into a series of identifiable waves. The basic wave structure is a series of five waves comprising the primary trend movement with three waves comprising the corrective movement. Several rules and guidelines company this basic structure that makes Elliott Wave Theory a complete philosophy of trading and is used by some of the most competent traders and analysts in the world.

Some consider Elliott Wave analysis as too subjective to be consistently effective, the fact that scores of successful traders have long abided by the tenets of this theory makes this a trading methodology that should not be ignored by foreign exchange traders. In Elliott's model, market prices alternate between an impulsive and a corrective phase on all time scales of trend. Impulses are always subdivided into a set of 5 lower-degree waves, alternating again between motive and corrective character, so that waves 1, 3, and 5 are impulses, and waves 2 and 4 are smaller retraces of waves 1 and 3.

Corrective waves subdivide into 3 smaller-degree waves starting with a five-wave counter-trend impulse, a retrace, and another impulse. In a bear market the dominant trend is downward, so the pattern is reversed—five waves down and three up. Motive waves always move with the trend, while corrective waves move against it.