Trading with MACD

Trading with MACD

Tutorials for forex beginners

 The MACD is a indicator developed by Gerald Appel based on two moving averages of price (close). This is a trend-following momentum oscillator. The MACD is calculated by taking the difference between two moving averages long and shorter exponential moving averages (EMA). These Type of the exponential averages are used because they show more quickly to changes in price, A “signal” or trigger line is also used, which is the nine-period exponential moving average of the MACD line. Below there is the MACD formula.

MACD = EMA1 – EMA2

Where:

MACD = Moving Average Convergence/Divergence Value

EMA1 = Current value of the first exponential moving average (using shorter period)

EMA2 = Current value of the second exponential moving average (using longer period) Exponential Percentage Moving Averages:

A weighted moving average calculated by taking a percentage of today’s price and applying it to the previous period’s moving average. The percentage is determined by the investor:

EMA = (Today’s close × Exp %) + [(Previous period EMA) × (1 – Exp %)]

Where: Exp % = The chosen exponential percentage

Signal Line:

SL = Previous period MACD + Exp % (MACD – Previous period MACD)

Where:

Exp % = The chosen exponential percentage for the signal line.

When the indicator is plotted on a chart, including the MACD line and the signal line, the most important aspect is the interaction between the two lines, as well as their positions relative to the equilibrium, or zero, line. When the MACD is above the zero line, it indicates that the shorter-period moving average is above the longerperiod moving average, which in turn indicates that the market is bullish on this security or index. More accurately, current expectations are more bullish than they were previously—demand is increasing. When the MACD falls below the zero line, the shorter period moving average is less than the longer-period moving average, indicating that demand is more bearish than it was in the past.

There are three ways for trade with MACD: Crossovers, OVERBOUGHT/ OVERSOLD , Divergence.

Trading with Crossovers MACD

Crossovers are probably the most popular use of MACDs: a sell signal is generated when the MACD crosses below the signal line, and a buy signal is generated when the MACD crosses above the signal line. In addition, the locations of these crossovers in relation to the zero line are helpful in determining buy and sell points. Bullish signals are more significant when the crossing of the MACD line over the signal line takes place below the zero line. Confirmation takes place when both lines cross above the zero line. Using the MACD in this way makes it a lagging indicator. Just like moving averages—which are also lagging indicators—the MACD works best in strong trending markets. Both the MACD and moving averages are intended to keep you on the “right” side of the market (on the long side during uptrends and on the short side or out of the market altogether during downtrends), meaning you buy and sell late. While you may enter a trade after the beginning of a trend and exit before the trend comes to an end, these indicators are intended to reduce your risk. Figure 1 shows the buy and sell signals generated for NZD/USD by the crossovers of the MACD line and the signal line. Over the period from June October 2008 to to November 2015, Figure 1 highlights the strengths and shortcomings of using MACD crossovers in a trading system. Note that the MACD works very well in strongly trending markets, because it is a trendfollowing indicator. When was in a period of “choppy” trading, the MACD generated trades in losses,

Trading with OVERBOUGHT/ OVERSOLD MACD

 Another use for the MACD is to determine when a given security or index is either overbought or oversold. An overbought condition may exist when the price has experienced a significant upward move. At some point you expect that the price might fall and return to some more “normal” level. Likewise, when the price has seen an extended downward movement, an oversold condition may exist. At some point the price may be expected to rise to some normal level. A security or index may be overbought when you see the MACD rise significantly. During this period, the shorter moving average used in the MACD calculation is rising faster than the longer moving average. This is an indication that the price is overextending itself and, at some point, may reverse its course. When using the MACD to identify periods when a security or index is overbought or oversold, the best buy signals come when the MACD line and the signal line are below the zero line—the security or index may be oversold. Sell signals are generated when the lines are above the zero, where they may indicate an overbought condition. Unlike other oscillating indicators such as the RSI (relative strength index), there is no pre-determined overbought or oversold condition. High and low MACD levels are relative, depending on the security or index you are examining. You may need to study the behavior of the MACD over time before you can determine when the price is overbought or oversold. Looking at the MACD behavior over an extended period of time, you may be able to discern patterns where the MACD may rise or fall to relatively similar levels, at which point the price will fall or rise, respectively— and with it the MACD lines. You should also be aware that over bought and oversold levels need not be symmetrical for a given security or index (in other words, oversold levels can be higher relative to overbought levels and vice versa). Although the MACD is a lagging indicator when trading on the crossovers, it is more of a leading indicator when it is used to highlight possible overbought or oversold conditions. A leading indicator is useful because it alerts you to what prices may do in the future. Leading indicators offer the potential of greater rewards—getting in on the ground floor—while exposing you to greater risk—the possibility of the expected move taking place farther off or never taking place at all. There is the assumption that when a security appears to be oversold, its price will rise; conversely, there is the expectation that a price that is overextended or overbought will fall. The setting of this trading method is discretionary but is have a good profitbility. In the first example 4H chart NZD/USD possible trades with OVERBOUGHT/ OVERSOLD MACD method. Level 0.0028 and -0.0028.

In second example chart level 0.0018 and -0.0018.  

Trading with divergence MACD 

Divergence is one of the best-known types of non confirmation. A divergence is a separation between price and indicator that warns of a possible short- to intermediate-term change of trend. A bullish divergence arises during a down move when price makes either a lower low or a double bottom but the indicator makes a higher low or a double bottom. A bearish divergence occurs during an up move when price makes either a higher high or a double top and the indicator makes a lower high or a double top. divergences can occur at price tops or bottoms and also at price corrections.

corrections. The chart of NZD/USD in Figure shows both a bearish and a bullish divergence. We have add also two moving averages for to confirm the divergence and to entry in the market.

*Moving Average linear Weighted 7 period open.

*Moving Average linear Weighted 7 period close.

Buy

Bullish Divergence confirmed by MA close > MA open.

Sell

Bearish Divergence confirmed by MA close < MA open.

  

Using moving averages to analyze the market

Using moving averages to analyze the market

Tutorials for forex beginners

Generally moving averages can be used to analyze the market in order to identify the following features:
Identify a trending market (up or down);
Locate a lateral phase of the market (ranging market);
Understanding the levels of support and resistance static or dynamic;
Identify the levels of breakout.
Moving averages identify a trending market when:
The moving average is rising
- The price line tend to be above the moving average
- A shorter moving average crossed the longer moving average

To identify a trend long occor look at daily or weekly charts.
To identify the longer term trend you can draw 200 SMA and 144 EMA onto the chart.
Simply When the 144 EMA is above the 200 SMA and at the same time the price is above the 200 SMA while Both moving averages are diverging.

Now, we have the big picture of the market and we at least know that a LONG trade is not as risky as a SHORT trade. However, a short term trader needs a short term signal to enter the market. A short term LONG signal would identify when:

- The 144 EMA crossed the 200 SMA on 4H chart;

- The price must be above the 200 SMA;

- The MAs is diverging;

Velocity of market with moving averages 

When a market is in an uptrend the shorter moving average tends to diverge quickly from the longer moving average and this makes the distance between two moving averages looks wider. This phenomenon indicates that the momentum (velocity of the price) of the price is rising. 

Otherwise, when two moving averages are converging after they diverged once earlier (Where we took the LONG trade), the price tends to pull back and this means the momentum of the market is slowing, so the LONG trade is about to be invalid and we must exit the market. 

Furthermore, two moving averages are on their way to cross over again but this time shorter moving average cross the longer moving average in opposite direction (Downward). The downward cross over of two moving averages gives us very valuable information in which  the momentum has slowed into levels that the price can not rely on it anymore. A very weak momentum would means that the market is going to be lazy (Consolidation) so we must avoid this situation and wait till a new clear signal tell us what to do next.

Pratical setting of moving averages:

short term scale:

fast: (6, 13) periods, close (EMA and SMA),

triple moving averages  9, 10, 13, 18, 20 and 21 (periods),

40, 55 and 89 periods for medium term scale,

100, 144, 200 for long term scale.

EMA=Exponetial moving averages.

SMA=Simple moving averages.

How to determine the trend

How to determine the trend

Tutorials for forex beginners

Why Trade With The Trend?

Now Putting the Odds in Your Favor

High Probability Trades

Less Risk

In Synch with the Market

The Problem With Trend

Determining if a trend is in place is one of the most difficult things to conclude.

One man’s uptrend is another man’s downtrend.

My Favorite Tools For determining Trend:

ADX (Average Directional Index),

STOCHASTIC OSCILLATOR,

DONCHIAN CHANNELS/BOLLINGER BANDS.

ADX

Average Directional Index

Settings = Standard 14-period default

Benchmark threshold level = 30

Determining Trend With The ADX

Readings above 30 indicate a strong trend

This tool is best used with any time frame on Stocks, Indices, and Futures

Trend with ADX

Trend with ADX

STOCHASTIC OSCILLATOR

Format = Slow stochastic

Settings = Standard 14-period default

Overbought level = 80

Oversold level = 20

Determining Trend With The Stochastic Oscillator

A strong trend is indicated when the Slow K reading is above the 80 level for 6 or more consecutive bars

A strong trend is indicated when the Slow K reading is below the 20 level for 6 or more consecutive bars

This tool is best used with daily bars on Stocks, Indices, and Futures

Determining Trend With The Stochastic Oscillator

Determining Trend With The Donchian Channels and Bollinger Bands

When all 3 Donchian Channels are moving in the same direction, a trend is indicated

When all 3 Bollinger Bands are moving in the same direction, a trend is indicated

This tool is best used in any time frame on Stocks, Futures, and Forex

Determining Trend With The Donchian Channels and Bollinger Bands

Determining Trend With The Donchian Channels and Bollinger Bands

Intraday Trading tips

Intraday Trading tips

Tutorials for forex beginners

Trade with the trend, and look at the M15 and higher charts for trend direction. Know what the trends are doing on the H1 and H4. Never trade against the trend of the M15. The exception is to scalp quickly with the retracement s of the M15 using the M1 and M5.

1. If you prefer to trade using the smaller time frames (M1, M5), trade with the overall trend. These are micro trends. If you are a scalper, grab a few pips and close trades fast.

2. Use the human eye to detect trend changes in the smaller time frames before taking trades on the longer time frames. For example, if you trade the 15 minute chart, look at the 5 minute chart to see if the trend is strong or changing. If you trade the H1 or H4 charts, for example, look at the M5 or M15 prior to entering the trade to see any possible trend changes.

3. Repeat to yourself about the trend: “The winner keeps winning and the loser keeps losing.” Trade with the trend.

4. Look at the time prior to entering a trade. For example, if it is 9:25 p.m., it may be wise to wait until 9:30 or 9:35 to see if the trend changes. If you trade during the day, retracements usually occur a few minutes after 10 a.m., 1 p.m., 2 p.m., 3:00 p.m. The ‘7’ rule. Notice at 1:07 p.m., 2:07 p.m. what we are referring to. This ‘7’ is our observation and not a fact. And retracements/reversals often occur around the :45, :00, :30 and :15.

5. The market is quiet from 4 p.m. until around 7 p.m. This quiet time is not a good time to trade since the market is choppy. Wait until 7 p.m. The trend usually retraces a few minutes after 7 p.m. Be careful...the market usually turns back into the day’s main direction after the retracement. The trend then usually reverses in the opposite direction, which means the day’s ‘winner’ becomes th ‘loser.’

6. Do not be greedy. Take profits and be grateful. Do not overtrade.

7. Always use a stop loss. If you are a quick scalper after a few pips, it is too fast to input a stop loss, so keep your hand on your mouse and close your trades fast.

8. Trade using only 3%-5% of your equity.

9. Do not trade if you are emotional or have any drama since these issues may interfere with your decision making. Do not trade when you are tired, sleepy, hungry, upset, angry, or not feeling well. Pay attention while trading. Phone calls, texting, children, dogs barking, and other distractions interfere with thinking.

10. Not every day is a trading day. If you trade the Asian session in the evenings sometimes it is volatile and choppy. In this case, it may be best to trade the longer time frames using Forex Trend Dominator alerts option. Enjoy your dinner, spend time with your family, and relax.

11. Be patient and focus. Sometimes you must wait for a safe entry.

12. Trade during the session(s) that suits your personality or lifestyle. For example, if trading during the early New York session does not suit your personality, you may prefer to trade the Asian Session (8 p.m. EST) or London Session (3 a.m EST).

13. Know the times of news releases. http://www.forexfactory.com/calendar.php

14. Print the news calendar or jot down the times on a writing pad or notebook. Set the alarm on your cell phone as a reminder.

Intraday Trading Tips

Exiting a trade

Exiting a trade

Tutorials for forex beginners

Exiting Strategies: Targets

Support and Resistance levels

1 Short trades look for recent levels of support. Place your pips a few pips above these areas.

2 long trades look for recent levels of resistance. Place your pips a few pips below these areas.

Exiting Strategies: Dynamic

Trendlines

Short trades, use a trendlines across the top of the price. Draw it as tough you were looking for a long trade. Close short when price closes across trendline.

Long trades, use a trendlines across the bottom of the price. Draw it as tough you were looking for a short trade. Close long when price closes across trendline.

Moving Averages

Short trades, close trades when you get a bullish cross of 2EMA over 5 EMA.

Long trades, close trades when you get a bearish cross of 2EMA under 5 EMA.

Divergence

Short trades, when bullish divergence shows up, close the trade when you get a bullish Stochastic crossover.

Long trades, when bearish divergence shows down, close the trade when you get a bearish Stochastic crossover.

Countertrend trading

Countertrend trading

Tutorials for forex beginners

Constricted ranges dictate countertrend trading plays. This classic swing strategy uses clearly marked boundaries to buy weakness and sell strength. When S/R draws strong congestion, sell short as price tests resistance and go long when it falls into support. Use the charting landscape to guide low-risk execution levels. Keep in mind that the first thrust into S/R usually offers the best fade position and that odds will deteriorate on repeated tests. And remember that swing entry is always very price sensitive.

FIGURE 1

Short-term volatility shakes out intraday traders during these six hours of choppy Nextel action. Meaningless price swings of 2 to 2 1/2 points masks the underlying downtrend, squeezes shorts and relieves weak hands of their stock positions. Many intraday trends respond to conflicting intermarket cycles that ensure a bumpy rise for the momentum crowd. Look for convergence between indices, futures, and equities when trading short-term momentum.

Countertrend trading

Focus the intended execution near a single price level and stick to it. Never chase entry and always maintain a tight stop loss. Countertrend trades must execute with minimum slippage right at or close to known S/R. The swing trader should stand aside if conditions don’t allow for this narrowentry. These setups manage risk through small losses taken when positions violate specific S/Rzones. A series of larger losses due to poor execution will eliminate a very good profit.

Target reward through examination of the local features. If possible, carry the position until price approaches the other extreme of the range. Broad congestion likely mirrors intermediate S/R that inhibits a quick price thrust across the pattern. Many swing traders find that single direct price moves without retracement provide the best conditions for a profitable exit. Consider getting out as price jumps into that first boundary. If this is the chosen style, the original reward:risk evaluationshould confirm that this price target carries enough profit to make the trade worthwhile.

Buying bottoms and selling tops carefully applies countertrend strategies. Major highs and lows attract interest more than any other charting landscape feature. This ensures a large supply of participants but also invites more whipsaws and unexpected outcomes. Apply this primary rule at tests of prior highs and lows: fade the first test after a significant pullback but trade in the direction

of the extreme on subsequent tests. Price tends to break out of ranges on the third try (second test of a high or low).

Use small reversal patterns in the chart below the holding period to fade entry near S/R extremes.

Adam and Eve patterns and double tops/bottoms present simple formations that apply this 3D

technique. Short sales depend on price violating the bottom of the smaller top pattern, while long

positions signal when price surges through the top of the smaller bottom pattern. This original

method allows low-risk execution close to the larger high or low in anticipation of a favorable price

move.

Victor Sperandeo’s 2B trade in Methods of a Wall Street Master and Raschke and Connor’s Turtle

Soup in Street Smarts both trap the crowd as it leans the wrong way right after price violates a high

or low but reverses immediately. As smart traders adopt these contrary tactics, many price extremes

face increased danger of a swift reversal after the initial breakout or breakdown. The safest 2B fade

strategy lags the crowd before position entry. Let the price action break through key levels but don’t

execute in the opposite direction until it pops back across support or resistance.

Trade 2B setups defensively. The market may still want to break through the barrier. Ride the

subsequent pullback to the first natural swing level and then exit. After a good reaction the trend

can reassert itself quickly and take out the old extreme. This follows the wisdom to fade the first

test of an old high or low but follow the trend on the second test. Apparent triple bottoms and tops

often yield to significant breakouts or breakdowns.

Watch out when a new high or low retraces and forms congestion close to the price extreme. Simple

continuation patterns can quickly ignite into new trend thrusts. Stay away from small pennants and

short pullbacks when planning 2B entry. The best reversals for this pattern come when a sharp

retracement occurs after the first high or low. The subsequent test should then print more price bars

than the decline that precedes it. Also pay close attention to lower-pane indicators as the event

approaches. The trade cross-verifies when oscillators diverge from price direction just as the old

high or low breaks.

Pullback entry into a strongly trending market represents a major category of swing tactics. This classic setup buys the first sharp decline into support or sells the first bear rally into resistance. Exit depends on many factors, including personal trading style, holding period, and available capital.Subsequent swings also offer safe entry, but risk increases as trends evolve and reach overbought-oversold conditions. In other words, each pullback after the first one has higher odds of being areversal rather than a continuation pattern. Chapter 8 examines this bread-and-butter swing trade in greater detail.

Central tendency presents high reward: high risk opportunities at the extremes of price action. These tactics work best in congested markets or in the extreme volatility near climax events. The strategy fades price when a long bar thrusts out of a Bollinger Band extreme more than 50% of its entire length. In rangebound markets, odds for success improve substantially when the top orbottom band aligns horizontally just before the violation and price thrusts into known resistance (other than the band itself).

FIGURE 2

The 2B reversal (1) traps participants that sell short into a violation of the last intermediate low. This classicscenario also appears at double tops right after new highs. Enter the reversal as soon as price jumps back within the prior S/R. This Broadvision example also illustrates a clear stop gunning exercise just before the market moves substantially higher. Note how both (2) and (3) offer logical long side entry for the subsequent rally.

Countertrend trading

Consider this trade at the end of parabolic rallies and selloffs. The bands will turn close to vertical as these events progress. Look for an intense burst of energy that forces the bar to break halfway or more through the band. This signals the possible climax and invites countertrend entry. Butsuccessful execution requires both a skilled hand and excellent timing. Some blowoffs can issue aseries of these bars before a violent reversal. Use cross-verification and tight stop loss to managerisk. And master other setups before attempting this dangerous trade.

Breakout entry, Pullback entry: swing setup examples.

Breakout entry, Pullback entry: swing setup examples.

Tutorials for forex beginners

Breakout and pullback conditions for setups.

Before a stock or currency pair makes our breakout “watchlist,” it must satisfy two key criteria:

Stock or currency pair must be in uptrend

Stock or currency pair must have a valid basing configuration pattern.

How define an up trend (for down trend reverse conditions).

20‐day EMA must be trading at or near the 50‐day MA when the stock is forming a base and clearly above the 50‐day MA when in trend mode.  For pullback trades, the 20‐day EMA must be above the 50‐day MA.

-20‐day EMA must be above the 200‐day MA

- 50‐day MA must be above the 200‐day MA

-Both the 50 and 200‐day MAs must be in a clear uptrend for at least a

few months. 

- The price action should be in an uptrend with a series of higher highs

and higher lows in place over the past 3 ‐ 6 months (at the very least).

- Current price should at least be 30 ‐ 40% above the 52‐week low

Trend qualifier – rules for breakout setups in the picures the examples.

rules for breakout setups

rules for breakout setups

rules for breakout setups

Valid basing pattern for breakout entry

- A base (or zone of congestion) is anywhere from 1 month to 1 year in length. For our style of trading, we prefer bases that form in a 1 - 3 month period that find and hold support of the 50-day

MA.

-We want to see “tight” price action in the base, especially during the last two weeks before the breakout.

-A valid base should pullback anywhere from 10 - 30% off the swing high. Once a stock retraces 40 - 50% or more, we begin to question the strength of the uptrend.

We must see a “higher low” form within the base. This is crucial to the pattern. Without a higher low forming, we have no way to set a stop and therefore can not define the risk.

- Volume should be declining during a base, or at the very least, not heavier than average. If there are too many days of heavy volume selling in a base, the base could be faulty.

Main characteristics of a valid base

Main characteristics of a valid base

The Breakout Entry examples.

    

Breakout Entry the trigger

Breakout Entry

A pullback setup occurs when a stock breaks out from a valid basing pattern and then pulls back for 3 – 7 days:

Pullback setup

Pullback Setup

Pullback setup step by step

Reference Deron Wagner

Fibonacci basic tutorial

Fibonacci basic tutorial

Tutorials for forex beginners

My experience makes me a believer in the adage that there is a natural order in the markets that has more geometric symmetry than most traders realize or want to believe. This is a fact, not subjective, because almost all market turning points adhere to a certain numerical sequence that you can prove to yourself by looking at historical charts. This sequence applies to both price and time. The primary tool used for this trade analysis is Fibonacci relationships. They include Fibonacci retracements and extensions, as well as time measurement, pivot dates by ratio and numerical sequence.

There is no need to go into the history of Fibonacci, other than to know it is the force that rules the movement of about anything you can imagine, including the financial markets.

The Fibonacci series is a numerical sequence that expands by adding the previous numbers together as shown here:

1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584, 4181, etc.

Fibonacci

The most interesting property of this numerical sequence is that as the series proceeds, any number is 1.618 times the preceding number, and 0.618 of the next number.

Example:

1.618 x 34 = 55 x 1.618 = 89 x 1.618 = 144.

.618 x 55 = 34, .618 x 89 = 55, .618 x 144 = 89.

The .618 and 1.618 numbers are what they call the Golden Numbers. You will also see the sequence root of .618, which is .786, and 1.272, the square root of 1.618, occur frequently in your trading.

Suffice to say, the Golden Numbers are dominant in math, nature and science. Planets revolve around the Golden Number, as does your heartbeat on an EKG, and even the index finger on your hand. Each section of your index finger, from the tip to the base of the wrist, is larger than the preceding one by about the Fibonacci ratio of 1.618. And lastly, they tell us that the Egyptian pyramids are based on the Golden Ratio/Numbers.

Key Point:  My source for all of this trivia is goldennumber.net, but you can just go to Google.com and find any number of sites that give you this background in volume. If you believe it, I can teach you how to use it in a pragmatic way trading and investing in the markets.

Key Point:  In spite of all the financial, economic and geopolitical events that affect the markets, you will see beyond any doubt that the up and down price fluctuations in all major markets are governed by the Fibonacci Golden Ratio.

Fibonacci is a sequence tool that is excellent by itself and that becomes very powerful when combined with volatility bands and standard deviation, let alone any of the other tools.

Fibonacci Retracement

I use the following Fib retracement ratios:

• .236
• .382
• .50
• .618
• .786
• 1.00
  

The minor ratio that will come into play sometimes is the .707 Fib retracement (square root of .50).

Retracements depict the potential reversal levels, support and resistance.

To calculate a retracement in an uptrend, which is when a stock rallies and then pulls back to some percentage ratio of the previous swing point low, you would do the following:

• High - Low x Fib Ratio, then subtract it from the High.
  

• 
  

  Calculation of .618RT level    

  
  

      60 - 40 = 20 x .618RT = 12.36

      60 - 12.36 = 47.64 (.618RT level)
• Complete the other ratios for practice.
  
• To calculate a retracement in a downtrend, which is when a stock declines and then pulls back to some percentage ratio of the previous swing point high, you would do the following:
  
  • High - Low x Fib Ratio, then add it to the Low.
    
  • Calculation of .382 level
    
        50 - 30 = 20 x .382 = 7.64
        30 + 7.64 = 37.64 (.382RT level)
     mplete other ratios for practice
  • 
    
    
  • Fibonacci Extensions
    I use the following Fib extensions ratios:
    
    • 1.272
    • 1.618
    • 2.00
    • 2.24
    • 2.618
    • 3.14 (Pi -- Key ratio)
    • 4.236 
    These extensions occur after price exceeds the 1.00 level and makes new lows or new highs beyond the last leg.
    A minor extensions ratio that will come into play sometimes is the 1.414.
    To calculate a Fib extension after price exceeds the low or high of the last leg, you would:
    Extension down
    
    • High - Low x Ratio, then subtract from the High.
      
    Calculation of 1.272 extension down
    
        90 - 80 = 10 x 1.272 = 12.72
        90 - 12.72 = 77.28
    
     Extension Up
    
    • High - Low x Ratio, then add to Low.
      
    • Calculation of 1.618 extension up
      
          90 - 80 = 10 x 1.618 = 16.18
          80 + 16.18 = 96.18
      
      
       
      
    • We have given you some Fibonacci background, and the basics of calculating the retracements and extensions, in addition to the ratios that I suggest you use. Now we will build on that.
      Key Point:  When you look at retracements and extensions in terms of price, you should also look for symmetry of time using the same ratios. It is not mandatory that you have both, but it is much better symmetry when you do, which builds your case for higher probability.
      Key Point:  Once you have identified a high-probability zone, it is the price action at that zone that determines what you will do.
      The following SPX charts will demonstrate retracement, extension, time and price action at different zones.

      

      Fibonacci Tutorial 

  • This SPX weekly chart frames the Fibonacci retracement levels between the 1553 top and 769 bottom. You can see that the .236RT to 1553 of 954 was a major obstacle. The first rally from 776 reached 965, but didn't close above it.
    From 965, the SPX declined to the 769 bottom (A) and then rallied to 954, right at the .236RT level, but failed to close above 954. The next leg down (BC) made a 789 low, then reversed to the upside and approached the .236RT level for the third time.
    Key Point:  The more price trades at resistance or support, the weaker the line is and the probability of penetration increases.
    Price breaks above 954 and trades to the 1015 level. The 1.272 Fib extension of the BC leg is 999, and for 12 weeks, the SPX traded sideways with a high close of 998.
    Key Point:  If price breaks out of a range at a Fib level, the highest probability is that it will seek the next level.
    
  • The .382RT to 1553 is 1068, and that is exactly where the SPX traded and went sideways for four weeks (more detail on next chart) before breaking out and trading to the next Fib zone, which is the .50RT to 1553 of 1161. Notice also that there is a confluence with the 2.24 Fib extension of the BC leg at 1159. At the completion of this course on Jan. 29, 2004, 1155 is the rally high on Jan. 27, the SPX had traded down to 1122.38.
    This chart demonstrates the natural order that the SPX has traded just using Fib retracements, extensions and time, which you will see better on the next chart. You have anticipated the key zones in advance.
    
  • On this chart, we will start with the time symmetry that is present in this move.
  • The BC leg from 954 - 789 was 14 weeks to the low and 13 weeks (Fib number) to the low close. Any reversal bar setup right there had to be taken. The 789 low week was a reversal bar (Hammer) with a high of 841.39. Sequence traders took entry.
    Now it gets more interesting. Once price broke out above 954, you had anticipated the 1.272 zone, but on this chart, you also see that the last low in that zone was week 21 following the 789 low week. 21 is the 1.618 Fib extension of 13. Price then rallied, breaking out of the 1.272 zone range.
    Key Point:  When looking for time symmetry, you can use the low close or low, and measure it with a high close or high. That will all be considered symmetry.
    
  • After the 1.272 breakout, the SPX traded right up to the .382RT zone at 1088. The first weekly bar in that range was the 34th week, and price went sideways for four to five weeks with a high of 1064. Once again, there was price and time symmetry, as 34 (Fib number) is the 2.618 Fib extension of 13.
    The advance above the .782RT level means anticipation of the next Fib RT zone, which would be the .50RT to 1553 at 1160. There is also a .50RT to the 1530 secondary high of 1150, and then the 2.24 Fib extension of the BC leg at 1159. The 1530 high was the 1,2,3 lower top to the 1553 all-time high after the initial decline to below 1350 from 1553. That would make it a significant high to measure a retracement.
    From a time perspective, the 1155 high is Week 46 and the high close is Week 45. The 3.14 Fib extension of 14 is 44.
    Review these two charts several times so you gain a good idea of the structured way a market trades most of the time and enables you to anticipate high-probability zones where you will take some kind of action, either buy or sell, but it is never nothing.

Shooting Star candlestick pattern

Shooting Star candlestick pattern

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Shooting Star Candlestick patterncriteria

1. Found at the top of an uptrend.

2. It has a small body with an upper shadow. The upper shadow is at least twice as tall as the body.

3. The color of the body is not important (a red body is slightly more bearish than a blue body).

4. There should be no lower shadow or a very small lower shadow.

5. The following candle should be strongly bearish to confirm the reversal.

6. The longer the upper shadow the higher potential for a reversal to occur.

Shooting Star candlestick pattern

Shooting Star candlestick pattern

Evening Star candlestick pattern

Evening Star candlestick pattern

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Evening Star candlestick pattern- It is the opposite of the Morning Star. There are many variations of the Evening Star pattern.

Criteria

1. Usually consists of three candles at the top of an uptrend.

2. First candle is a blue candle.

3. Second candle is an indecision candle. There can be 1, 2, 3, or even 4 indecision candles.

4. Third candle is a red candle and should close at least half way down the first blue candle.

5. The longer the blue and red candles the more forceful the reversal.

6. The more indecision of the indecision candle the better probability that a reversal will occur.
7. The further the third red candle closes down into the first blue candle the stronger the reversal.

Here are some variations of the evening star pattern:

Evening Star candlestick pattern  

Morning Star candlestick pattern

Morning Star candlestick pattern

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Morning Star candlestick pattern there are many variations of the Morning Star pattern.

Criteria

1. Usually consists of three candles at the bottom of a downtrend.

2. First candle is a red candle.

3. Second candle is an indecision candle. There can be 1, 2, 3, or even 4 indecision candles.

4. Third candle is a blue candle and should close at least half way up the first red candle.

5. The longer the red and blue candles the more forceful the reversal.

6. The more indecision of the indecision candle the better probability that a reversal will occur.

7. The further the third blue candle closes into the first red candle the stronger the reversal.

Morning Star candlestick pattern

Here are some variations of the morning star pattern:

Morning Star candlestick pattern