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Trade Forex Online Fibonacci Downtrend Price Swings

My last post focused on trading forex price swings in a forex uptrend. The Fibonacci ratios work in the same way when you trade forex online downtrends.  Learning these fibonacci ratios will help you trade forex online with more success.

In a downtrend, the fibonacci ratios are hidden levels of resistance that can give important entry and exit signals.  In a downtrend, the Fibonacci ratios represent the down swing retracement as a percentage of the down price swing.

Imagine that the top of the up price swing (the high is 100% and the bottom of the down price swing (the low) is 0%.  The retracement (the market’s upward reaction to the down price swing) will cover some percentage of the original swing, from 0 to 100%.

If the retracement covers 38% of the down price swing and then bounces (turns downward, potentially leading to sideways movement or an extension), then it is said to have bounced at the .382 Fibonacci ratio.  If the retracing market bounces at 50%, 62%, or 79% then it is said to have bounced at the .500, .618, or .786 Fibonacci ratios, respectively.

If the downtrend is going to continue, the market will, after bouncing at one of the four Fibonacci ratios, turn downward again and form an extension (remember that to qualify as an extension the market must make a new low). This helps you understand how to trade the forex online.

If the downtrend is not going to continue, the market may hit one of the four Fibonacci ratios and take it out, continuing upward in a reversal.  If the downtrend is not going to immediately continue, the market may hit one of the four Fibonacci ratios, bounce there, and then continue a sideways movement before extending the trend or reversing.

If the market will continue in the downtrend, the extension of the down price swing will likely either extend to 162% of the original price swing or 127% of the original price swing, and then bounce there.

Specifically, if the market bounces at the .382, .500, or .618 lines then the extension will cover 162% of the original down price swing (that is, the market will extend from the .382, .500, or .618 line to the 1.618 line).  If the market bounces at the .786 line, then the extension will cover 127% of the original price swing (that is, the market will extend from the .786 line to the 1.27 line).

To visualize the extension, imagine that the beginning of the price swing (the first high) is at 0 and the end of the original down price swing (the first low) is at 1.  The extension will go to either 1.27 or 1.618 (depending on where the retracement bounced).

It is in this sense that in a downtrend, Fibonacci ratios are hidden levels of resistance.  As the market swings within the overall trend, it bounces (making lower highs) at the Fibonacci ratio numbers.

Like uptrends, downtrends move at different speeds.  The speed of the trend is defined by how sharply it is falling.  Just as in an uptrend, the smaller the Fibonacci ratio, the faster the market moves; the higher the Fibonacci ratio, the slower the market moves.

Be careful that if the market is slowing down when it bounces at .318, .500, or .618 it may not immediately go into an extension (it may not immediately go to 1.618).  It is possible that, if the market is slowing down, after bouncing at .318, .500, or .618, it may first extend to 1.27, bounce there, and then fully extend to 1.618.

Now you should see the connection between the fibonacci sequence and price swings down in online forex trading. In my next post, I’ll discuss some more things you can do with fibonacci numbers to trade forex online!

Posted in Fibonacci

Price Swings Down in Online Forex Trading

Understanding price swings is a great skill to have for online forex trading.

The downtrend price swing, retracement, and potential extension are the exact opposite of the uptrend price swing, retracement, and potential extension explained in my last post.

We all benefit from multiple examples, so if you want to succeed in online forex trading, it’ll crystalize your understanding.

A downtrend price swing is a wave (swing) that starts at the high and stops at the low.  Remember that to qualify as a downtrend the market must be making lower lows and lower highs.  Following the down price swing is a reaction, also called a retracement of the down swing.

This reaction becomes an up price swing, which is also followed by another reaction (also called a retracement of the up swing). This happens in forex trading online frequently (just look at practically any forex price chart).

The retracement of the up swing becomes a down price swing that can either lead to a sideways movement or an extension (of the overall trend).  The retracement of the up swing often moves sideways before it makes a new low (that is, before it becomes an extension of the overall downtrend).

As it is important to not lose sight of the original price swing in an uptrend swing, it is also important to not lose sight of the original price swing in a downtrend swing. 

The market does not make an extension (extending the overall downtrend within which the swing exists) unless it passes through the last level of support and makes a new low.

The market can move sideways within the original swing before breaking or continuing the downtrend.  Always keep in mind that there are swings inside of swings and trends inside of trends. You’ll be much better at online forex trading when you can fully understand this concept.

Don’t lose sight of your long-term outer and outer trend lines as well as your inner trend lines.

In the next rapid forex blog post I’m going to explain how the fibonacci sequence can be applied to online forex trading

Posted in Fibonacci

Trading Currencies when the Downtrend Breaks

How do you notice when the downtrend breaks when you’re trading currencies online?  You take what you know about currency trading buy and sell zones and apply them to a breaking downtrend.

Before you can start trading currencies, you need to know when the downtrend breaks.

A downtrend is considered broken if the following conditions are met:
1.The market makes a new low.
2.The market first penetrates the trendline.
3.The market then retraces to the last level of resistance.

When the downtrend is broken, the market enters the buy zone, which is the area above the trendline.

When trading currencies that the trendline is only considered broken if all three of the conditions are met.  That is, the market must have made a new low prior to piercing the trendline or it is not considered a trendline break.

Trading Currencies in the Buy Zone

Trading currencies in the buy zone is one way to take advantage of a downtrend break.  To trade currencies in the forex online when prices enter the buy zone, wait until a complete bullish candle forms above the trendline (it must completely clear the trendline, wick and body).

Take care to wait until the candle has closed to call a trendline break; otherwise you may fall victim to a false spike.  When the bullish candle appears in the buy zone according to the conditions stated above, place a market order to buy at the opening of the next candle (if equity management allows).

Set your stop loss order at the last level of support.

Rules for trading currencies in the Buy and Sell Zones

As with every indicator, there are several important rules to follow when trading currencies in the buy and sell zones:
1. Draw all trendlines (inner, outer, and long-term outer).  This will help you determine if the market is trending up or down, or if a trendline has been broken.
2. Locate the downtrend (uptrend) break and the bullish (bearish) candle in the buy (sell) zone that confirms the break.
3. Find the last level of support or resistance to determine where to place your stop loss order.
4. Practice sound equity management.  If you can’t afford the potential loss (the loss you would incur should the market reach your stop loss order), don’t make the trade.
5. Create a plan for trading currencies.  Trade the plan.

In addition to those important rules, it is also important to decide before every trade whether you will be a day trader or an overnight trader.

A day trader will stay in the market (on that trade) for a short amount of time (a couple of pips, perhaps) whereas an overnight currency trader will remain in the market for three or four days, canceling and replacing to lock in profits.

Remember that when the inner trendline is broken the market predominately (most often) moves to the outer trendline and bounces there.  One way to estimate the potential profit to be made if you are trading an inner trendline break is to calculate the difference between the inner and the outer trendlines.  If there is not much price difference between the two lines, you will likely not make much profit trading the inner trendline break.

When both the inner and the outer trendlines are broken, that is a sign of a major reversal.  That the inner and the outer trendlines broke indicates that the market is not in a price swing within a larger continuing trend, but that the larger trend itself is breaking.

Posted in Technical Analysis