8 Day Intensive Course

Lesson 3

A) What are Fibonacci Retracements?

Fibonacci Retracements
What are Fibonacci retracements?
Levels at which the market is expected to retrace to after a strong trend.
Based on mathematical numbers that repeat themselves in all walks of life, Fibonacci
retracements attempt to measure the likely points that a currency pair will retrace, or pull
back to within a range. The key numbers in FX trading are 38.2%, 50%, and 61.8%.
Consider the following example to see how Fibonacci retracements work:
Suppose an asset is on an uptrend, going from 0 and 1000. After the asset reaches 1,000,
how far will it retrace meaning how far will it fall before resuming its initial uptrend?
We can do this by using the Fibonacci retracement numbers to gauge how deep of a
pullback we could expect after the top boundary is reached.
So, mathematically, it works like this:
The 38.2% line. Calculate 38.2% of the size of the significant price move. The size of
the significant price move in this case is (1,000) minus the lower boundary (0). In this
case, the size of the significant price move is 1,000 pips. .382 x 1000 = 382 pips. It is
expected that the asset will retrace 382 points from its peak. Assuming the asset is going
up from 0 to 1,000, it would retrace 382 pips from 1,000. 1,000 382 = 618.
Accordingly, this is a key level to look out for; you may want to buy here (at 618), as it is
expected the upward trend will resume after reaching this retracement level.
The 50.0% line. Same situation; 50% of the significant price move (1,000 pips) is 500.
Take that off from top (1,000) since it is an the upward trend. 1,000 500 = 500. Look
for the upward trend to resume at that point.
The 61.8% line. 61.8% of the significant price move is 618. 1,000 618 = 382. If the
asset retraces to this point, it is viewed as an opportunity to buy.
If the asset were trending lower meaning it had gone from 1,000 to 0 then you would
use the Fibonacci numbers to calculate the retracement regarding how far the price may
rise before resuming the downtrend again. You would calculate the Fibonacci
retracements in the same manner, except you would draw from the high point of the

significant price move to the low point of the move.

Parameters: 38.2%, 50.0%, and 61.8% are the most common Fibonacci Levels. The
38.2% level is considered the least significant of the three major Fibonacci levels. The
larger the percentage line (i.e. 61.8%) the greater the likelihood that the price will find
support.
Please keep in mind that other retracement levels exist in Fibonacci Studies that are not
widely watched by the market. These levels include 21.4% and 78.6% as well as 127.2%
and 161.8% extensions. Most charting packages do not even reference these levels and
most traders would argue that if the market retraces 100% of a previous move, the
original trend is no longer valid. Other Fibonacci studies called fans and arcs are quite
mathematically complicated and are similarly ignored by most traders.
Key Concept: Look for Confirmation
Traders should enter when confirmation - for example key candlestick patterns emerge
at Fibonacci levels. Traders can also seek confirmation from a variety of other indicators,
as we will see as the course continues.
Attached Images

B) How to Draw Fibonacci Lines

Fibonacci Retracements: How to Draw Them
Drawing Fibonacci lines is easy. It can be broken down into three easy steps:
1. Identify the bottom and top of the overall trend. The bottom is referred to as
support, and the top is referred to as resistance. While they are subjective, support
and resistance levels can easily be determined simply by looking at a chart.

2. Using a charting package you are comfortable with, draw Fibonacci lines from the
support level to the resistance level. The three lines should appear: one at 38.2% of
the difference from the top and the bottom; one at 50%; and another at 61.8%.
These are the key Fibonacci levels around which you should look for potential
opportunities to enter trades.

3. After that, simply look for price action to confirm an opportunity to enter a trade.

C) Fibonacci Retracements: Historical Trades

Fibonacci Retracements: Historical Trades
Below are two examples of how Fibonacci retracements, when used in conjunction
with candlestick patterns, can be useful indicators for suggesting when a trend will
reverse itself. Note how Fibonacci retracements work in both bullish (upwards
trending) and bearish (downwards trending) markets.

A Look at a Poor Fibonacci Trade

In order to learn how best to use Fibonacci retracements when trading the FX
market, it is worth examining examples of traders often use them poorly.
The following example shows how being over eager can cause a trader to enter the
market without justification.

In the chart below, see that price comes very close to touching the fib level (by 13
pips) but does not quite break it. While many traders may take that as a positive
sign (they may rationalize that the level was so strong that traders did not wait for it
to touch the fib level), you ideally want to see the level being breached. The reason
for it is because breakout traders may come into the market, thinking that price will
go lower, maybe even down to a lower fib level. When the market reverses and
starts to go back into the trend, these short traders will now have to eventually
cover their trades at a loss. Short traders who need to cover their positions will add
to the buying pressure, thereby increasing the probability of your trade going in your
favor.

D) Assignment
ASSIGNMENT: Using a charting application of your choice, draw Fibonacci
retracement lines on charts for the various currency pairs accessible through the
trading station. Then, upon analyzing the charts, look for trading opportunities based
on Fibonacci retracements. Reply to this thread telling us what trade you placed and
why you placed it. In this case, the trade could be an entry order that is waiting for
the price to retrace to a given Fib level. Feel free to upload an image of the chart you
were looking at as well. If possible, try to focus on a longer time frame, such as a
daily chart. You may use current or past situations.

E) Question of the Day

Question of the Day

Many traders feel that Fibonacci levels are significant only because the levels are
highly publicized and other traders are aware of them. This self-fulfilling prophecy
has the effect of making these levels significant because so many traders regard
them as important levels.
If this is true, what is the danger of using Fib. retracement levels for a small move
that occurs on an hourly chart or an even shorter time frame?

F) Quiz
Quiz: Fibonacci
Please test yourself on your knowledge learned from this lesson.
Go to the Quiz Center and take the Fibonacci Quiz.
The Quiz Center is located at the following link.
http://www.learncurrencytrading.com/main

G) Using Moving Averages

Using Moving Averages
What is a moving average?
Moving averages simply measure the average price or exchange rate of a currency
pair over a specified time frame. For example, if we take the closing prices of the last
10 days, add them together and divide the result by 10, we have created a 10-day
simple moving average (SMA).
There are also exponential moving averages (EMAs). They work the same as a
simple moving average, except they place greater weight on the more recent closing
prices. The mathematics of an exponential moving average are complex, but
fortunately most charting packages calculate them automatically and
instantaneously.
Parameters. The most commonly used time frames for moving averages are 10,
20, 50, and 200 periods on a daily chart. As always, the longer the time frame, the
more reliable the study. However shorter term moving averages will react more
quickly to the market's movements and will provide earlier trading signals.

How to Use Moving Averages in Trading

Enter when a strong trend pulls back to a moving average line
Enter on a moving average crossover
Gauge overall trend. Moving averages display a smoothed out line of the overall
trend. The longer the term of the moving average, the smoother the line will be. In
order to gauge the strength of a trend in a market, plot the 10, 20, 50 and 200 day
SMAs. In an uptrend, the shorter term averages should be above the longer term
ones, and the current price should be above the 10 day SMA. A traders bias in this
case should be to the upside, looking for opportunities to buy when the price moves
lower rather than taking a short position.
Confirmation of price action. As always, traders should look at candlestick
patterns and other indicators to see what is really going on in the market at the
time. The chart above points out the Bullish Engulfing pattern that occurs just as the
pair bounces off the 20 day EMA. Hitting the 20 day EMA, in conjunction with the
candlestick pattern, suggests a bullish trend. Traders should enter once the Bullish
Engulfing candle is cleared.
Crossovers. When a shorter moving average crosses a longer one (i.e. if the 20 day
EMA crossed below the 200 day EMA), that is viewed by many as an indication that
the pair will move in the direction of the shorter MA (so, in the aforementioned
example, it would move down). Historically, moving average crossovers have not
been accurate trade indicators, but they do offer insight into the markets
psychology. Accordingly, should the pair move in the opposite direction of the
shorter EMA and thus cross it, this should be viewed as an opportunity to enter a
position.

H) Moving Averages: Historical

Moving Averages: Historical Trades
The charts (top) below show examples of how moving averages, when confirmed by
price action, can signal trading opportunities.
In second chart we see moving averages applied to the USD/CHF currency pair. Notice
the Hammer candlestick pattern that penetrates the 200 moving average (Black Line).
This reversal pattern and the fact that it bounces off of the 200 moving average shows
that the downside momentum is lost, and signals that a rally may follow.
Here we see a classic candlestick pattern, as only the long wicks breach below the longterm moving average (200-SMA). As it pierces the 200-day SMA on this daily chart for
the USD/CHF, we see a subsequent rally of the pair.
Attached Images

I) Assignment-Place a Trade
ASSIGNMENT: Create moving averages on chart of a currency pair and place a trade
based on the moving averages. Reply to this thread telling us what trade you placed
and why you placed it. Feel free to upload an image of the chart to this thread. If
possible, try to focus on a longer time frame, such as a daily chart. You may use
current or past situations.

J) Question of the Day

Question of the Day
Yesterday we presented the concept that Fibonacci retracement levels are valuable
only because a large number of traders are aware of them, and they become a selffulfilling prophecy.
The same concept can be raised for Moving Averages. Generally the 200, 100, 50,
20, and 10 day moving averages are the most commonly used, but that does not
necesarily mean that other moving averages are not valid. In fact, some indicators

that we will discuss in future lessons are created from moving averages. You can also
plot moving averages on shorter term charts.
In your opinion--and there is no right answer for this one--do you think a moving
average has value as an indicator if it is not one of the common ones? For an
example using a completely random number, do you think the 15 day MA could be
useful.

K) Animated Lesson:
The following link(s) illustrate how the various indicators can be used to identify the best
times to initiate a position, keep losses relatively small, and take advantage of trading
situations that may occur over the course of a trading day. Please feel free to pause each
animation or replay it as many times as you wish. In addition, please turn your speakers
on to listen to the audio segment as well.

http://www.learncurrencytrading.com...hFibonacciM.swf
http://www.learncurrencytrading.com...averagesIIM.swf