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In the upcoming sections, we are going to study different types of channels, the purposes that they serve and how they can be used to identify relevant entry and exit positions in the market. Major channel The major channel is the big picture channel and is drawn in agreement with the long term visual flow of the chart. The direction of the channel tells us whether to look for buy or sell trades.

As with trend lines, if the major channel is pointing up, then we look for potential buying opportunities; if the major channel is pointing down then we look for potential selling opportunities. That is trading with the trend. Entering short positions on upward pointing channels or entering long positions on downward pointing channels is trading against the trend. In Figure 2. As the major channel is pointing down, we are looking for potential short positions. If the visual flow of the chart is up, as it is in Figure 2.

This is clear from Figure 2. You can see where the price action is likely to bounce up in the direction of the channel as it hits the bottom line of the channel and also where it is likely to bounce down against the direction of the channel as it hits the top line of the channel. It is important, however, to remain disciplined and only consider trades that are in the direction of the channel. It is clear from the charts that we have looked at so far that the strongest moves are those which are in the same direction as the channel.

This indicates that we would only be considering potential sell positions. This chart is also a great example of why we only trade in the direction of the channel, even though a channel highlights potential price action turning points in both directions.

Notice how the downward movements of the price action as it bounces off the top of the channel are much sharper and faster than the upward movements off the bottom of the channel. Again, notice how the price movements which are in line with the direction of the channel are generally much more decisive than the movements which are against it. It is this channel that you use to determine whether you should be considering a buy or a sell position. Remember that when drawing these major channels: you first assess the general direction of the price action and then identify a single-sided trend line.

Next, you copy the trend line and place it on the opposite side of the price action to form the channel. This ensures that your channel is made up of two parallel lines. Minor channels Minor channels are channels which are located inside a major channel. Minor channels can either be in agreement with the direction of the major channel or counter to the direction of the major channel.

A minor channel which is in agreement with the major channel I call an agreeing minor channel and a minor channel which runs counter to the direction of a major channel I call a disagreeing minor channel.

Agreeing minor channels As minor channels are found inside major channels, the first step in identifying a minor channel is to find a major channel. To do this, we must first draw a downward trend line across the peaks of the price action, as the visual flow of the chart is going down. We then copy the trend line and paste it below the troughs of the corresponding price action, giving us our major channel. To identify a minor agreeing channel, look for downward trend lines within the channel.

Remember, we first identify the major channel. Once it has been drawn, we can look for an agreeing minor channel. You may have noticed from the last two examples that the agreeing minor channels are always at a steeper angle than the major channel. This is also true of the disagreeing minor channels. Once an agreeing minor channel has been identified, we can use it to understand how to make trading decisions.

Generally speaking, we do not use the agreeing minor channels to determine an entry into the market, but rather to address an exit from an already open position. In other words, imagine everything to the right of the dotted line on the following chart is in the future and has not happened yet.

This type of exercise will help build the skill of anticipating future market movements. While the price action is still within the agreeing minor channel, we can feel safe that the current downward movement is likely to continue. While this is the case, it would not be unreasonable or greedy to hold the position in the hope of collecting more profit.

However, once the price action breaks through the upper line of the agreeing minor channel, we need to consider exiting the trade immediately. Especially, as in the case above, if the break out of the agreeing minor channel occurs as the price reaches the lower part of the major channel. The circle in Figure 2. But that is the wrong way to look at things. At the point of exit, we had no idea that the price would fall a little bit more.

We did know, however, by the movement of the price action in the major and agreeing minor channels, that an upward move was likely to begin soon. You will never catch an entire move. The idea is to capture the bulk of the move before the price action changes directions and turns your profit into a loss.

You may be wondering why we are talking about exiting positions without first understanding when to enter a position. This is because exiting is generally more difficult than entering the market and, as we are introducing certain types of channels, it is important that you understand the purpose they serve.

Later in this chapter, we will discuss how and when channels highlight market entries. This time we are in a long position.

Such a turn would not be good for our long position. Once the price action broke out of the agreeing minor channel, it went on to drop right down to the bottom of the major channel. In summary, agreeing minor channels can only be drawn once we have an established major channel.

It is impossible to draw a minor channel that is in agreement with a major channel which does not yet exist. Agreeing minor channels bring a further element of clarity to our trading charts and assist us in knowing when we should exit existing positions in the market. Disagreeing minor channels A disagreeing minor channel is a channel found inside a major channel and pointing in the opposite direction of the major channel.

It is referred to as disagreeing because it is not in agreement with the major channel. As disagreeing minor channels are found inside major channels, it is essential that we determine our major channel before identifying any possible disagreeing minor channels. It is moving against the visual flow of the chart and counter to the major channel. The price action has formed a major channel pointing up. Before we move on to the next chart, see if you can spot this disagreeing minor channel in Figure 2.

To trend trade successfully, you must train your eyes to identify these patterns in the price action. Earlier in this chapter, we discussed how the agreeing minor channel could be used to help determine when to exit a profitable position. With that in mind, we can do just the opposite with a disagreeing minor channel, using it to identify an entry into the market.

When the price action breaks out of a disagreeing minor channel and begins to move in the direction of the major channel, this is an indication that the strength of the major channel is taking over again. This is a good time to enter a trade. The chart in Figure 2. The dotted line indicates the current time and everything to the right of it is in the future. Again, we will use the dotted line to mark our current position. In summary, disagreeing minor channels can only be drawn once you have an established major channel.

Disagreeing minor channels bring a further element of clarity to our trading charts and assist us in knowing when to enter positions in the market. Channel zone projection As we saw in Chapter One, the skill of profitable trading is the ability to differentiate between relevant and irrelevant information on a chart and then to project the relevant information into the future.

One aim of technical analysis is to highlight price levels on the chart that the price action is likely to either break through or bounce off — something the price action will react to. This statement is true regardless of the type of trading style or system used to analyse the price action.

In this section, we are going to look at how a channel projects information into the future which can be used to anticipate certain movements of the price action. We are also going to see how the projection of the channel creates zones that can be used to add clarity and objectivity to our trading.

Whenever we draw a channel in accordance with the method defined earlier in this chapter, a channel projection naturally occurs. A channel projection is the continuation of a channel into the future, beyond where the price action is currently trading.

The names of these zones are the breakdown zone, the standard zone and the overextended zone. Each message is very important to future trading decisions. Referring to Figure 2. Breakdown zone The breakdown zone represents the breaking down of the current channel.

In this example the channel is pointing down, meaning the price action is being held down by the trend line which has formed at the top of the channel. While the price action remains in this downward pointing channel, we can be confident to manage, and even open, short positions.

Once the price action begins to trade in the breakdown zone, however, we should no longer consider opening short positions as the downward channel has broken down. If we are currently managing any short positions, we must think seriously about either closing them down or tightening our stop loss orders. Standard zone The standard zone is the zone in which we can be confident to maintain and open short positions.

When the price action is trading within this zone, we consider it to be behaving in a normal and relatively predictable manner. The majority of our channel trading is done in this zone.

You could think of the standard zone as the comfort zone for the price action. Just as people generally become more predictable when they are feeling comfortable, so does the price action. Overextended zone An overextended zone occurs when the price action extends out of the channel, but does so in line with the direction of the channel. In our example, the channel is pointing down so the overextended zone is below the channel. Once the price action extends into this zone, it is best to be cautious about placing any trades.

We would certainly not want to place any new long orders, as this would be trading against the direction of the channel, and we should be wary of placing any sell orders because the price action has become overextended, increasing the possibility of a sharp pull back.

This is not to say, however, that we can never open a position in the overextended zone. This zone is still in agreement with the major channel that it has extended out of.

The safe way to trade in an overextended zone is through the addition of a trend line. This is because the zones are not defined by their order from top to bottom, but rather by their relationship to the direction of the channel which they are associated with. The movement of the price action out of the upward channel into the breakdown zone indicates a breakdown of the channel and signals that we should not enter any buy positions.

If we have a long position, it is time to tighten up the stop loss or close the position down. If the price action moves up into the overextend zone, we proceed with caution, knowing that the price action is overextending to the upwards and that a downward pullback is becoming more and more likely. If we happen to be in a long position when the price action breaks into the overextended zone, it is time to consider exiting the trade with a profit. While the price action is in the standard zone, however, we can feel comfortable to execute long positions in the confidence that the price is trading in a stable, relatively predictable zone.

Defining the standard, breakdown and overextend zones brings further clarity and objectivity. Objective trading is a characteristic of most, if not all, successful technical traders. Objective trading removes the temptation to over-analyze the market.

This is important, as over-analysis often leads to confusion. Entry and Exit Strategies We began this chapter by not only defining what a channel is but also by explaining what message a channel can give. We then went on to study the characteristics of a channel and to demonstrate the process of clearly identifying and drawing a channel on our chart.

We explored major and minor channels and discovered the difference between agreeing and disagreeing channels. Finally, we learned to project channels and create trading zones.

Now we will look at two channel strategies which clearly define the entry, risk exit stop loss and target exit take profit of the trade: Channel bounce strategy Channel break strategy 1. Channel bounce strategy The aim of the channel bounce strategy is to profit from the movement of the price action from one side of the channel to the other. The angle of the channel determines whether we should trade long or short.

If the channel is pointing up, then we are looking for long setups, if the channel is pointing down, then we are looking for short setups.

Entry Figure 2. This will be our example chart. This chart shows an upward channel, so we are looking for long setups. Second, we need to define the projected zones of the channel. It is this line that we are expecting the price action to bounce off. We enter the moment that the candlestick which touched the channel line closes above the channel line.

If the candlestick that first touched the line goes on to close below it, then the trade is off. If it closes above the channel line, we enter immediately. We are not concerned if the price action dips below the channel line, during the formation of the candle as long as it closes above it. For instance, as this is a 60 minute chart, the candlestick does not lock into a closed position until the 60 minutes are up.

During that time period, the price action may fall below the channel line, as long as it closes above it. Please note that the image is still of the original chart, just zoomed in further for clarity. Label the projected zones of the channel. Wait for the price action to touch the channel. If the channel is up, then it must touch the bottom of the channel. If the channel is down it must touch the top.

Enter as the candlestick that touched the appropriate channel line closes in the standard zone. Exit — Risk Now that we know our entry, we need to identify where our stop loss most be placed. Here you have two options. The first option is to place the stop loss 5 pips beneath either the previous swing low or level of support as shown in figure 2.

The further away your stop loss order, the less likely you will be stopped out. However, your reward will be smaller if you win. With the first option on the other hand, you are more likely to be stopped out, but your reward will be greater if you hit your profit target.

Psychologically, some traders are more comfortable to win on more trades but make less money per winning trade. Others prefer to win on fewer trades but win more money when they do.

Either approach is fine. The key is to be consistent in your approach. Exit — Target At this point, we know where and when to enter the trade and also where to place our stop loss is. The next step is to determine where our target will be.

As with the stop loss placement, there are two options for deciding the target of the trade. The first option is to place the target at the price level where the price action last touched the opposite channel line. In the second option, we plan to take the profit when the price action reaches the top channel line. This is more difficult to define because, as time goes on and the candlesticks continue to move to the right, the price level of the top channel line moves higher and higher.

What we need to do therefore, is to either make an estimate as to when we believe that the price action will reach this channel line and set our target there or to manually close the trade down once the price action hits the line. Estimating when the price action will hit the top channel line is not a science.

Do not be discouraged if you rarely get it exactly right. The most important thing is that you estimate the general area where the touch will occur. The second option requires more thought and time, but the potential reward is greater.

Again, either option is fine provided that you choose a style and stick with it. We now understand where our entry, stop loss and target prices should be located. Just to be clear, the top dotted line is the target, the middle dotted line is the entry and the bottom dotted line is the stop loss. We have gone with the first stop loss option, placing it just below the previous level of support as opposed to the previous touch on the channel line.

We have also gone with the first option for taking profit, placing the target where the price action reaches the previous touch of the top channel line as opposed to waiting for it to reach the top channel line itself. The dotted line is the target price where we exited the trade profitably. As you can see, the price action actually bounced all the way up to the top line of the channel.

Remember that we want to trade in the standard zone. The dotted lines in Figure 2. The higher dotted line is the stop loss while the lower dotted line is the target. If we get our entry signal, we can calmly enter knowing that we have done our analysis and are in complete control.

We now have a short position on this currency pair. The dotted line is the original target price which was set before the trade triggered. As I said earlier, there is nothing wrong with that. It is rare to estimate perfectly when the price will hit the channel. An alternative would have been to wait and manually take profit the moment that the price action hit the bottom channel line.

The advantage of doing so would have been that we would have collected more pips and therefore more money. The disadvantage to taking profit manually, however, is the necessity of being present at the trading screen when the touch occurs.

This means that an order can not be set to automatically exit the trade. Either way, this was a well planned and profitable channel trade. Trading the channel bounce strategy consistently on currency pairs that we are familiar with is a very good way to generate considerable, long-term trading profit. Channel break strategy The purpose of the channel break strategy is similar to that of the channel bounce strategy but it goes about it in a slightly different way.

Both strategies aim to capture profit on the price movement from one side of the channel to the other. As we go through the entries and exits of the channel break strategy, you will see that this strategy is more aggressive than the channel bounce strategy in some ways, yet more cautious in others.

Entry The first step in trading the channel break strategy is to determine the direction of the major channel. This is important as it reveals the type of trade we are considering — long or short.

And notice the presence of a disagreeing minor channel here - a required feature of the channel break strategy. Next, we must break the major channel down into its three projected zones. These should be fairly familiar by now, but just to be sure Figure 2. It is interesting to note that if we broke down the three zones of the disagreeing minor channel the breakdown zone of the minor channel would overlap with the standard zone of the major channel.

This is the result of the strength of the major channel overcoming the strength of the disagreeing minor channel. There are two criteria for the setup of this strategy. First, the top line of the major channel must be touched by a candlestick located in the disagreeing minor channel. Second, a candlestick either the same candlestick that touched the top of the channel line or a subsequent candlestick must breakout of the bottom of the disagreeing channel and close there.

The dotted line represents our short entry price as the break candlestick has closed in the breakdown zone of the disagreeing minor channel. This is also the standard zone of the major channel. In summary, the six steps of entering a channel break trade are: Determine the direction of the major channel — up or down. Label the projected zones of the major channel. Identify a disagreeing minor channel. Wait for the price action within the disagreeing minor channel to touch the major channel.

If the major channel is up, then it must touch the bottom of the channel. If the major channel is down, it must touch the top. This is the touch candlestick. Wait for the price action to simultaneously enter the breakdown zone of the disagreeing minor channel and standard zone of the major channel. This is the break candlestick.

Enter as soon as the break candlestick closes. The entry for the channel break strategy has two extra steps than the channel bounce strategy.

This is because the entry is less aggressive than the channel bounce strategy. As a result, stop loss management in a channel break trade can be more aggressive. Exit — Risk As this is a short trade, the stop loss for the channel break strategy is located 5 pips above the touch bar. The dotted line in Figure 2. We will continue to look at the magnified image for the moment. This is alright as the entry is much more conservative. Exit — Target The methods of targeting this trade are identical to those used in the channel bounce strategy.

You can either target the price of the last touch on the opposite channel or take profit as the price action runs into the opposite channel line. The latter option requires us to make an initial estimate about where this will happen, meaning that we have to stay at the computer and exit the trade manually. Taking profit at the previous touch of the opposite channel line, however, allows us to place an order that will automatically close the trade down. You must recognise, however, that the price action will not always make it to the next channel line.

The most important point is that, regardless of the target option, the trade was profitable. We have just gone through the use of the channel break strategy in a trade with a downward pointing channel. In the next example, we will look at a long trade in an upward pointing channel.

Second, we break down the three zones of the major channel, as illustrated in Figure 2. We have highlighted the disagreeing minor channel. The touch candlestick has formed in the disagreeing minor channel, indicating that a long trade is imminent.

We now wait for the break candlestick to occur in the standard zone of the major channel. Image 2. You will collect less profit, but the price action is more likely to hit your target. We have also explored the messages that each type of channel gives and how these channels naturally create useful zones which bring clarity to our trading experience. Most importantly, we have learned how to execute profitable trades by drawing a few simple channels.

Key 3. Fibonacci Retracement Levels In this chapter, we are going to look at the Fibonacci number sequence and how we can apply it to our charts to identify key turning points in the price action. It would be very easy to get caught up in the interesting, but unnecessary, facts about the unique characteristics of the Fibonacci number sequence. We will avoid that. Instead, I will remark that, while the Fibonacci number sequence can be used in several ways, we are going to focus only on its retracement aspect.

These retracement levels are significant because the price action responds to them and so we must make sure that these levels are marked on our charts.

Without the knowledge of these levels certain movements of the price action will seem random and confusing. They explain why the price action has behaved in a specific way, bringing further certainty and clarity to the trading experience. Fibonacci retracement level characteristics The 5 main Fibonacci retracement levels are: These levels create support and resistance levels which are otherwise hidden unless they are drawn on the chart.

From the swing high For example, if the price subsequently moved up to This level is there to allow us to see the low of the original down swing. Figure 3. This is partly because these two levels look like standard trending levels. In other words, they are the levels most people would naturally use if asked to draw what a trend looks like. We will revisit these retracement levels later in this chapter when we look at the Fibonacci bounce and break strategies. For now, you should just be aware that these levels regularly cause a reaction in the price action.

Fibonacci types As far as the time frame aspect of Fibonacci retracement levels are concerned, they can be broken down into two types: major and minor Fibonacci. In this section we define these two types and discuss how to use them to get the full Fibonacci perspective on any currency pair. Major Fibonacci Major Fibonacci is referring to Fibonacci retracements that occur on either the daily or the 4 hour charts.

A principle of Fibonacci retracement is that the larger the time frame the greater the significance. Therefore, the Fibonacci retracement levels found on a daily chart would take precedence over those on a 4 hour chart, a 4 hour chart would take precedence over those found on a 1 hour chart and so on. Larger time frames affect trading decisions on smaller time frames more than the smaller time frames affect trading decisions on larger time frames.

The reason for this is simple. Larger time frames are seen by more traders. For instance, a large percentage of foreign exchange traders look at the daily chart for each of the currency pairs that they trade. This is because the daily chart represents the broadest view of what the price action is doing and as traders, we want to trade using levels which the institutional traders, such as banks and hedge funds, are using, because they are the ones who move the market.

Of course, one can regard Fibonacci levels as nothing more than self-fulfilling prophecies - traders expect the price action to react to the Fibonacci levels, and so make trading decisions based on the Fibonacci levels, which in turn causes the price to react to the Fibonacci levels. It is common for traders to specialize in a specific currency pair. In determining our major Fibonacci levels, we would be interested in the Fibonacci retracement levels on both the daily and 4 hour charts, examples of which follow.

It is important to look at the Fibonacci retracement levels on both of these charts. If you consider only one without the other, your major Fibonacci analysis will be incomplete. The chart in Figure 3.

The upward swing measured in this example is from mid-January to mid-January In this example, the upward swing is almost exactly one year, although the specific length of the swing is not a significant factor.

Sometimes the swing we choose to measure on the daily chart will be longer than a year, sometimes it will be much shorter. Remember, you want to be looking at what the institutional traders are looking at - the more obvious the swing, the better.

You can see how the Fibonacci levels will be useful in the future to determine potential levels of support and resistance. The swing here is between the end of October and the beginning of January You can see the resemblance of this period of time on the daily chart.

Had we not drawn in these Fibonacci retracement levels, the support and resistance would have been hidden from us. Figures 3.

Later in the chapter we will explore the significance of stacked Fibonacci levels occurring on different time frames. Minor Fibonacci Minor Fibonacci refers to Fibonacci retracement levels drawn on time frames of less than 4 hours. We call them minor because their influence over the daily and 4 hour charts, or the major Fibonacci charts, are very small. The usual time frames for minor Fibonacci levels are the 1 hour, 30 minute, 15 minute or 5 minute charts.

It is not essential to consider all of these time frames. Choosing two of them to get comfortable with is sufficient for minor Fibonacci analysis.

The downward swing measured in this example is from the middle to the end of December There is no rule about which time period you should measure when it comes to Fibonacci retracement levels — major or minor. The important thing is to measure the most obvious swing.

This increases the chance of plotting the retracement levels of a market movement which other traders are also studying. The Fibonacci levels provide us with key levels of support and resistance, when this happens, bringing clarity to our charts.

You can see in Jan , the price hit 1. The swing we will measure, as it is the most obvious on the chart, took place from the early morning of January 10th to late at night on January 12th The best way to get a complete Fibonacci perspective is to analyse both the major and minor Fibonacci levels.

As you can see from this example, there are times when the swings that you measure disagree with different time frames. There is also disagreement between the time frames in the minor Fibonacci. The Fibonacci retracement levels are plotted against the downward swing on the 1 hour chart, while the 15 minute chart plots the levels against an upward swing. These disagreements are not problematic and happen often. Our main concern is simply to expose hidden support and resistance levels.

In the next section, we will look at what it means when Fibonacci levels overlap each other. Overlapping Fibonacci levels Overlapping Fibonacci levels are points on a chart where Fibonacci levels from different time frames, or from different swings in the same time frame, overlap each other. When Fibonacci levels overlap, we consider them to be more reliable than non-overlapping Fibonacci levels.

Think of the principle that we have spoken about. Fibonacci is primarily a self-fulfilling prophecy. Therefore, the more traders who are trading off certain levels, the more that the price action will react to those levels.

By looking at an overlapping level, you may be trading off a level which two separate groups of institutional traders are also using. Regardless of which specific Fibonacci setup either group of traders looks at, the level is likely to be important because of the number of traders who are using it to trade.

These overlapping Fibonacci levels can, therefore, be used to identify key intraday and end of day support and resistance levels. The best way to gain an understanding of overlapping Fibonacci levels is to see them on a chart.

The high and low of our chosen downward swing is circled and the relevant Fibonacci level, the As in the daily chart, the high and low of the chosen swing is circled and the relevant Fibonacci level has a rectangle drawn around it. This is just 1 pip different than the While they are not exactly the same, it is acceptable to a difference of 10 or fewer pips to be overlapping.

Having said that, the smaller the gap between overlapping Fibonacci levels the better, especially on larger time frames. The price from the higher time frame is always the most important, so we now know that The fact that two Fibonacci retracement levels, drawn from different swings on different charts overlap, tells us that there is likely to be a large number of traders, both private and institutional, who will be expecting either a strong break through or an equally strong bounce off of this level.

The question is which is more likely to happen? The answer is found in the price action. It is clear from both charts, but especially from the 4 hour chart, that the general flow of the price action is down.

We can see on the 4 hour chart that the peaks and the troughs are getting lower. Based on this, we would anticipate a bounce off of this level as opposed to a break up through it.

Specific break and bounce strategies will be defined in great detail towards the end of this chapter, but there is a very simple trading opportunity I can mention here. If you see an overlapping Fibonacci price level with both of the swings being measured as down, and the price action is making lower peaks and lower troughs as it is in this example, you can enter a sell trade at this overlapping Fibonacci level. You can use the first Fibonacci level above the overlapping level on the daily chart as your stop loss price and the first Fibonacci level below the overlapping level on the daily chart as your take profit price.

Alternatively, you can use the levels above and below your entry level on the 4 hour chart as your stop loss and target prices. The chart you choose to use depends on how long you would like to be in the trade. If you are happy to trade on a longer term basis, you would use the daily chart. If you want to get results more quickly, you would use the levels on the 4 hour chart. Remember, we are going to go through specific bounce and break strategies later in the chapter.

This is just a simple way to use overlapping Fibonacci levels to time your entry and exit into the market. You can see from this image that the price action comes to a standstill at the overlapping Fibonacci level before bouncing back down several pips below the next Fibonacci level. As in the previous example, the low and high of the swing is circled. The The price of that level is 1. In Figure 3.

We therefore expect the price action to bounce strongly off of this level, or break through this level with equal strength. Considering that both the peaks and the troughs of the price action are getting higher and that both sets of Fibonacci levels are plotted against upward swings, we could conclude that a bounce off of this level is more likely than a break down through it.

This trade would have worked on both the 60 and 15 minute charts. The greater the time frame, the longer the position is open, as the levels are further away from the entry, so we decide which chart to use based on how long we want to be in the position. The last two examples consisted of overlapping Fibonacci levels which had been plotted in different time frames. Next, we will look at overlapping Fibonacci levels that are found in the same time frame.

It is generally easier to find these overlapping Fibonacci levels on intraday charts such as the 5, 15, or 60 minute charts, as the swings are over much shorter time spans. The high and low of the swing are circled. There is a rectangle drawn around the The price of the This is a process of trial an error. There are quite a few peaks on the chart and we simply try each one until we discover an overlapping Fibonacci retracement level. The high and low of this swing is circled. There is a rectangle around both the As stated earlier, two Fibonacci levels only need to be within 10 pips of each other to be considered overlapping, but the closer they are the better.

If the price action begins to retrace back upwards, we will expect a bounce off the. This bounce is consistent with the trend and the Fibonacci analysis. Another example. The circles indicate the high and the low of the swing and the rectangle highlights the overlapping As the price action is moving up, we expect the overlapping Fibonacci level to act as a support.

They are useful for identifying strong Fibonacci retracement levels. In the following two sections, we are going to look specifically at some overlapping Fibonacci levels that determine key end of day and intraday Fibonacci retracement levels. Important end of day Fibonacci levels End of day traders enter positions that typically run between three and ten days. Because of this, they spend the majority of their time analysing larger time frames such as daily and 4 hour charts.

It is on these charts that they look for overlapping Fibonacci retracement levels. Therefore, important end of day Fibonacci retracement levels are levels that overlap on the daily and 4 hour charts. As shown by the circles, the high of the downward swing took place on 1 December , while the low took place on 31 December It has a price of.

The downward swing used here took place between 11 January and 2 February We therefore, could expect this level to be very significant. As the general flow of the price action is down on both charts, end of day traders would be anticipating a bounce off around. The overlapping levels, and the reaction of the price action to them, are highlighted with a rectangle.

An end of day trader would have waited for this level to be hit, then entered a short position with the understanding that the trade would be active for about a week. Both possible targets are very close together, in which case it is common to use the more conservative target to exit the market. Remember, later in the chapter we will to go through two Fibonacci strategies thoroughly. The purpose of discussing the trade target now is to begin to train our minds to think methodically about Fibonacci retracement levels.

Important intraday Fibonacci levels The process of identifying key intraday Fibonacci levels is the same as that of identifying key end of day Fibonacci levels, except the 1 hour and 15 minute charts are used instead of the daily and 4 hour charts. Intraday trading involves entering and exiting the market in the same day. This is not to say that some intraday trades do not run into the following day. In foreign exchange there are several days in a day!

By that I mean that a person living and trading in the Australia time frame will have a different day than someone living and trading in the UK time zone. The UK time zone is considered to be the standard time zone because London is known as the foreign exchange capital of the world. In this section, we will look at identifying key intraday Fibonacci retracement levels by finding levels that overlap on the 1 hour and 15 minute charts.

The circles highlight the high and low of the upward swing and the rectangle is drawn around the Intraday traders who use the overlapping Fibonacci retracement technique regularly scan 1 hour and 15 minute charts of currencies that they are familiar with.

Once they find these overlapping levels, they wait patiently for the price action to hit them and then enter trades in the direction of the Fibonacci swings that overlap. Entry and Exit Strategies In this chapter, we first learned that Fibonacci retracement levels reveal hidden levels of support and resistance. We explored the five Fibonacci retracement levels and discovered the difference between major and minor Fibonacci levels.

We then looked at the power of overlapping Fibonacci retracement levels and found out how to use them to identify key end of day and intraday prices. In the final part of this chapter we will learn two specific Fibonacci trading strategies: Fibonacci bounce strategy Fibonacci break strategy 1. Fibonacci bounce strategy We have already identified that the The Fibonacci bounce strategy recognises this.

The goal of this strategy is to catch the move as the price action bounces off the The expected direction of the price swing determines whether we enter long or short position. If the swing is up, then we consider only long positions.

If the swing is down, then we consider only short positions. Entry Figure 3. The high and low of the swing is circled and the The chart shows that the price action is currently making its way up towards the If the price gets there, we would expect it to bounce. We enter the moment that the candlestick that first touches the If the candlestick that first touches the We are not concerned, however, if the price action goes above the The dotted line represents the exact entry price.

Identify the Wait for the price action to retrace to the Enter as the candlestick that touches the Exit — Risk Now that we know our entry, we need to identify where our stop loss should be placed. Here we have two options. The first, more aggressive, option is to place the stop loss 5 pips above the If this were a long trade then the stop loss would be 5 pips below this level.

The dotted line in Figure 3. The stop loss is above this level because we are going short. For a long trade, the stop loss would be 5 pips below this level. Either option is fine. The right one to use will ultimately be decided by the psychological make up of each trader. The trader who uses option one, will win less trades but have larger wins relative to their risk, while the trader who uses option two will win more trades but have smaller wins relative to their risk.

Exit — Target At this point we know where and when to enter the trade and also where our stop loss should be. The next step is to determine where to place the target. The target for the Fibonacci bounce trade is the When the price action reaches this level, we simply take profit.

The entry, two alternative stop losses and target are each shown with a dotted line. In this case, taking a greater risk of being stopped out, led to a greater reward relative to the risk. As in the first example, the high and low of the swings are circled and the This tells us immediately that we should only look for long positions.

The dotted line represents the exact entry level at the close of the candlestick. The aggressive stop loss is placed 5 pips beneath the In summary, the Fibonacci bounce strategy triggers when a candlestick of the price action touches the The two options in terms of the stop loss location are, aggressively: 5 pips above the The target for this strategy is always the Fibonacci break strategy In the Fibonacci break strategy we want to profit from the move of the price action after it breaks through the The most difficult thing about this strategy is remembering that the Fibonacci retracement levels used to determine the entry and the exit are drawn on a swing that is counter to the general direction of the price action.

The first image in this example is zoomed out a considerable distance to show the visual flow of the price action, which, in this scenario, is up. The high and low of our chosen downward swing are highlighted with circles. This is the level that will ultimately define our entry. The exact entry of the trade occurs when a candlestick crosses above the This is the earliest indication that the downward swing, used to plot the Fibonacci retracement levels, has broken down and the dominant upward pressure of the price action is taking over again.

In summary, the five steps to entering the Fibonacci break trade are: Confirm the general direction of the price action to determine the potential long or short position. Plot the Fibonacci retracement levels on a swing counter to the general direction of the price action. Wait for a candlestick to break through the Enter as the candlestick that broke through the The first option is to place the stop loss 5 pips below the This is a similar approach to the aggressive stop loss placement in the Fibonacci bounce strategy.

The benefit of placing our stop loss here is that our reward to risk ratio is favourable — we are risking a small number of pips for the reward of a relatively large number of pips. As we have said before, the best option is dependent on the psychological makeup of the trader. Exit — Target We now know where and when to enter the trade and we also know where our stop loss is.

There are three ways to target this trade. The first two involve targeting specific Fibonacci retracement levels while the third requires a small amount of trade management. The first way to target the trade is to take profit at the We have discussed the importance of this level throughout this chapter and now understand that the price action is likely to have some form of reaction upon reaching this level.

Again, this is due to the large number of institutional traders who consider this level significant, therefore causing the price action to respond to it. Taking profit here is considered the most conservative target of the three. This is more risky as it depends on the price action retracing all the way back to the high of the swing. When the price action hits the This way, if the price action bounces off of the If, however, the price action continues beyond the The dotted line shows the new stop loss level at the breakeven point.

If we had targeted this trade according to option two as shown in Figure 3. Some may wonder why we would ever choose option three over option two. The reason is that the foreign exchange market can be volatile. By choosing not to move the stop loss to breakeven, as in option three, we protect ourselves against that possibility. This time we will be looking at a short setup.

This tells us that we are looking for short setups. Next, we identify a swing that is counter to the visual flow of the price action to use to plot our Fibonacci retracement levels. The high and low of the upward swing to be used in this example are circled in Figure 3. Once it gets there we need a candlestick to penetrate it and then close beneath it. The image has been zoomed in to show the exact entry, represented by the dotted line. Now that the entry has been decided, we can look at each stop loss option.

The price of the entry can also be a factor when determining your stop loss. If, for instance, the entry to the trade is very close to the If, however, the close of the candlestick that breaks the We consider this to be more aggressive as we are trying to capture almost double the number of pips.

If we had targeted conservatively, we would now be out of the trade, having banked our profit once the price action hit the If we decided to use the breakeven stop loss target option as shown in Figure 3. Given that there are two options for stop loss placement, and three different ways to target this style of trade, there are several possible combinations.

As you trade this strategy consistently and become more familiar with it, you will find the style that suits your personality. Key 3 Summary Fibonacci retracement levels provide an invaluable key to trading the foreign exchange market profitably. They are used by private and institutional traders all over the world to identify potential trading opportunities. Having read this chapter, you should now know the five main Fibonacci retracement levels and which two are most commonly used.

We also know the difference between major and minor Fibonacci retracement levels and how to identify significant end of day and intraday levels by discovering overlapping levels. Most importantly, we should be able to execute profitable trades using these Fibonacci levels. Key 4. Symmetrical Triangles Like the three keys that we have already discussed, symmetrical triangles can be used to identify highly successful trading opportunities based on specific patterns in the price action.

The Theory Primary strength: clear message — indecision A symmetrical triangle can be like a family get together. Once the family comes together, someone needs to decide what everyone should do. At some point, someone is likely to suggest going out for dinner.

Normally everyone agrees to a suggestion like this. The question that arises next, however, is not so easy to answer. It is the question of where the group should go to eat. At this point, no one is willing to give a straight answer. Everyone knows exactly where they want to go but are trying to be polite and easy-going, no one wants to step up and take charge. At first this is not a problem, as everyone is just happy to see each other and catch up on old business.

Not only that, they are happy to relax for a few minutes after travelling to the meeting place. After a while, however, tensions begin to develop. Everyone starts getting hungry until eventually someone speaks up and makes the decision. Now, because everyone is hungry and tired of sitting around, they all make a strong, decisive move to the designated restaurant.

This is similar to the message a symmetrical triangle gives. The price action gets to a point where it settles down and begins to consolidate. The buyers are unwilling to make the decision to push the price action up. The sellers are equally unwilling to make their move and push the price action down.

This is signified by the price action forming lower peaks and higher troughs, thus creating a symmetrical triangle. Once the frustration of the price action gets too strong, however, a decisive move is made by either the buyers or the sellers. Once this decision is made, everyone follows and the market makes a very strong, decisive move. Symmetrical triangle characteristics The two main characteristics of symmetrical triangles are: Converging trend lines caused by the price action forming lower peaks and higher troughs.

Consolidating price action caused by the converging trend lines. Figure 4. By drawing these two trend lines, a symmetrical triangle has been formed.

As the price action that preceded the formation of the triangle was moving up, we can anticipate that the eventual break out of this triangle will also be up.

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The forex market is huge, and the potential to make money from it immense, but how should you structure your trading in order to profit from it? Technical analyst Christopher Weaver shows you how to improve your trading of trending currency pairs using trend lines, channels, Fibonacci retracements and symmetrical triangles. These are the four keys to making money trading forex. And this is no surface guide; the author explores in-depth how every key works, why they are useful, their different variations, and, most importantly, two practical strategies for each which take full advantage of their strengths.

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Product details ASIN : BP17GNC Publisher : Harriman House; 1st edition January 30, Publication date : January 30, Language : English File size : KB Text-to-Speech : Enabled Screen Reader : Supported Enhanced typesetting : Enabled X-Ray : Not Enabled Word Wise : Enabled Print length : pages Lending : Not Enabled Best Sellers Rank: 2,, in Kindle Store See Top in Kindle Store 1, in Foreign Exchange Kindle Store 2, in Foreign Exchange Books 7, in Finance Kindle Store Customer Reviews: 10 ratings.

Editorial Reviews About the Author Christopher Weaver is a technical analyst who has spent extensive time trading and studying the trends and movements of the Foreign Exchange Market.

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Terms of Use. Privacy policy. Read more 4 Keys To Profitable Forex Trend Trading PDF Book Details Product details ASIN : BP17GNC Publisher : Harriman House; 1st edition January 30, Publication date : January 30, Language : English File size : KB Text-to-Speech : Enabled Screen Reader : Supported Enhanced typesetting : Enabled X-Ray : Not Enabled Word Wise : Enabled Print length : pages Lending : Not Enabled Best Sellers Rank: 2,, in Kindle Store See Top in Kindle Store 1, in Foreign Exchange Kindle Store 2, in Foreign Exchange Books 7, in Finance Kindle Store Customer Reviews: 10 ratings About the Author of 4 Keys To Profitable Forex Trend Trading PDF Free Download Book Editorial Reviews About the Author Christopher Weaver is a technical analyst who has spent extensive time trading and studying the trends and movements of the Foreign Exchange Market.

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Consolidating price action caused by the converging trend lines. This trend line has five touches and would therefore be considered the major trend line. Another example. The contributors are varied; including bestselling authors, education specialists, key figures at spread betting firms and technical analysts. Compare that to an obscure stock listed on a minor stock exchange. Exit — Risk Now that we know the entry point, we can define the stop loss.

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