Forex Trading Articles
USING FIBONACCI RATIOS FOR FOREX TRADING
(Part III)
By Dick Thompson for Forexmentor.com
©2007, Currex Investment Services Inc.
January 12, 2007
In Part 1 and II, we dealt with the basic Fibonacci retracement which is the simplest pattern possible. In this part, we will begin to introduce other characteristic patterns that are used in trading.
We are all familiar with parallel channels in the movement of price. Figure 1 below schematically describes such a channel.
Figure 1
This is, of course, an idealized representation but it reflects reality in a reasonable fashion. The point to be made is that the oscillations within a channel quite frequently are found to move in Fibonacci ratios. In Figure 1, the B-C leg is typically a Fibonacci retracement of the A-B leg and the C-D leg is quite frequently a Fibonacci extension of the B-C leg, and so on.
The Fibonacci pattern I want to introduce is the A–B–C–D zig-zag formation of Figure 1. An equivalent pattern in an uptrend exists as well. Some general characteristics to be expected are as follows:
- Ideally, the swing from A – B will equal C – D. In practice, this occurs only about 50% of the time. When it doesn’t, C - D likely will be a Fibonacci ratio of A-B, e.g. C – D might be 1.272 o6 1.618 of A – B.
- The B – C leg will be a Fibonacci retracement of A – B , and the C – D leg will be a Fibonacci extension of B – C.
- Quite often, the time of the A – B leg will approximate the time of the C – D leg. This is not usually considered in Forex trading.
For trading purposes, these Fibonacci ratios can act like a roadmap, especially on the larger timeframes. Investigation of smaller timeframes for entry opportunities can lead to some nice profits.
Figure 2 below is the daily chart of the USD/JPY from January 2006 and is an example of an A-B-C-D pattern.
Figure 2
Figure 3 below is the USD/CAD daily chart again, showing the channel after the 1-2-3 bottom. I have spotted the various Fibonacci ratios that are present in this channel.
Figure 3
(see Part IV)
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