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I'm not sure how many of you know that Christian - a member of our community and a Baruch undergrad (hopefully a prospect in our program) writes many technical analysis articles on TheTicker.org - the Baruch students newspaper. Here is the latest of his writings.
Fibonacci retracement levels on last week's USD/JPY hourly chart.
The Fibonacci sequence and the Golden Ratio have a long history in mathematics, architecture and nature.
The Fibonacci sequence refers to a series of numbers, starting with "1," where the next number is found by adding the most recent number to the previous one. For example, the Fibonacci sequence begins like this: 1, 1, 2, 3, 5, 8, 13, 21 �, and continues forever.
The golden ratio is related to the Fibonacci sequence because it is determined by the most recent number divided by the previous number. As these numbers become larger and larger (just imagine you have found the one-millionth number in the series), the result of this simple division comes closer and closer to the number 1.618033989. This number is referred to by the Greek letter , or phi.
The golden ratio can be found in the proportion of the Parthenon, properties of DNA structures and in nature, such as formations of flower petals. Now, does this mean that the markets are subject to a sort of ethereal connection between art, science and nature like in the movie Pi? Most likely not - what it means is that an indicator has been created using this strategy, generally accepted by the masses and is now used to determine movements in prices.
The retracement levels in price movements are found by first subtracting the higher number from the lower number, then multiplying the result by the golden ratio (1.618033989) and subtracting or adding the result from the recent high or low that was identified as the reversal point.
One could continue this process until he has found all the retracement levels, but in the process he might miss the trade. Luckily, nearly all charting packages have a very easy to use Fibonacci retracement tool that requires only a line drawn from the lowest low to the highest high (or vice versa) of a price movement, and the retracement levels are found automatically.
To use this indicator, first find either a very strong upward or downward movement in price. Make sure that there is a clear top and bottom before the Fibonacci retracement is drawn. On this USD/JPY chart, points 1 and 2 indicate the bottom and top of the upward price surge. The number '3' indicates the point at which one could begin to identify that a top has formed.
Remember, when looking at charts it's very easy to look back and identify patterns, but in the real world, orders are placed while looking at the furthest right-hand side of the chart, not in the middle.
Now, once a top has been confirmed, one should be interested in the 61.8 percent, 38.2 percent and 23.6 percent retracements. Often the price will drop down from the high, or push up from the low and retrace to the 61.8 percent line before it reverses and moves toward the previous high that was used to draw the Fibonacci retracement.
If the financial instrument is truly being traded with this strategy, the pattern will repeat for the 38.2 percent retracement level and then the 23.6 percent retracement level, which is currently happening as this article is being written. The reversals at each level are marked with a green circle on the USD/JPY chart.
One can even notice the use of these retracement levels for entry levels among traders because of the false spikes that occurred due to stop-loss orders that were placed just below the retracement levels being hit before the price quickly reverses.
Fibonacci Retracements by Christian Lemp
(Article link)
(Article link)
Fibonacci retracement levels on last week's USD/JPY hourly chart.
The Fibonacci sequence refers to a series of numbers, starting with "1," where the next number is found by adding the most recent number to the previous one. For example, the Fibonacci sequence begins like this: 1, 1, 2, 3, 5, 8, 13, 21 �, and continues forever.
The golden ratio is related to the Fibonacci sequence because it is determined by the most recent number divided by the previous number. As these numbers become larger and larger (just imagine you have found the one-millionth number in the series), the result of this simple division comes closer and closer to the number 1.618033989. This number is referred to by the Greek letter , or phi.
The golden ratio can be found in the proportion of the Parthenon, properties of DNA structures and in nature, such as formations of flower petals. Now, does this mean that the markets are subject to a sort of ethereal connection between art, science and nature like in the movie Pi? Most likely not - what it means is that an indicator has been created using this strategy, generally accepted by the masses and is now used to determine movements in prices.
The retracement levels in price movements are found by first subtracting the higher number from the lower number, then multiplying the result by the golden ratio (1.618033989) and subtracting or adding the result from the recent high or low that was identified as the reversal point.
One could continue this process until he has found all the retracement levels, but in the process he might miss the trade. Luckily, nearly all charting packages have a very easy to use Fibonacci retracement tool that requires only a line drawn from the lowest low to the highest high (or vice versa) of a price movement, and the retracement levels are found automatically.
To use this indicator, first find either a very strong upward or downward movement in price. Make sure that there is a clear top and bottom before the Fibonacci retracement is drawn. On this USD/JPY chart, points 1 and 2 indicate the bottom and top of the upward price surge. The number '3' indicates the point at which one could begin to identify that a top has formed.
Remember, when looking at charts it's very easy to look back and identify patterns, but in the real world, orders are placed while looking at the furthest right-hand side of the chart, not in the middle.
Now, once a top has been confirmed, one should be interested in the 61.8 percent, 38.2 percent and 23.6 percent retracements. Often the price will drop down from the high, or push up from the low and retrace to the 61.8 percent line before it reverses and moves toward the previous high that was used to draw the Fibonacci retracement.
If the financial instrument is truly being traded with this strategy, the pattern will repeat for the 38.2 percent retracement level and then the 23.6 percent retracement level, which is currently happening as this article is being written. The reversals at each level are marked with a green circle on the USD/JPY chart.
One can even notice the use of these retracement levels for entry levels among traders because of the false spikes that occurred due to stop-loss orders that were placed just below the retracement levels being hit before the price quickly reverses.
