The three unchanging laws of market movement

[James]

For the benefit of those who do not read my Team Forex thread (this was posted there)...

There are three things which are certainties in trading:

1. The market moves in waves.

2. Wave tops and bottoms are governed by the universal laws of the Golden Ratio, Phi. It is therefore possible to identify where the peaks and troughs will form.

3. The absolute wave frequency and amplitude will vary, but the golden ratio(s) do not.

That is why it is possible to profit from trading from peak to trough or vice versa in any market volatility and direction, whereas following moving averages (for example) will let you down in low volatility markets.

The chart shows yet another "golden" moment at 1.7985, when cable hit Phi.

[amarnath]

Hi James,

can you please further explain / point out a free link to learn more about Golden ratio , phi and how to apply to charts. Also i tks for good informative threads along charts

[James]

The golden ratio is 0.618

SQRT 0.618 = 0.786

SQR 0.618 = 0.382

0.618/0.382 = 1.618

0.618*0.382 = 0.236


There is more but I will have to look it up. In fact there is lots more - a whole universe full of it.

Try looking up some books at Amazon - search Fibonacci - there are a few good ones.

Free links? sorry but I don't know any. I prefer to pay for and own hard copies of everything for my dusty ole library

[TrendlineBreak]

Hi James,

Have looked at these numbers in the past with interest but could never work out where to draw the high and low, and when you approach a level, do you say - its going to push through, or its going to bounce off.

Couldn't you equally have started the high at the peak before which would have changed the levels.

Whats your guide to how far to go back for the 100% and 0% base lines.

[James]

A lot comes from an experienced eye. However, it is soon learned. Try drawing them from different places and try not to focus on the small moves, look for daily and 4 hourly significant moves to draw from.

Then once you have the fibs, determine a general direction (this is probably least important) and then look for evidence of reversal into your preferred direction off the fibs. The key is to find evidence of reversal such as spikes, doji's, tweezers and engulfing candles.

Fibs are especially important when they coincide with other fibs, SR lines, Bollingers, T/L's etc.

[James]

To briefly add:

Exiting a profitable trade is more difficult than entering one. I try to trail my stops under or above the nearest signnificant fractal. Once stopped out for a profit, look to re-enter in the same direction(assuming your view has not changed) on a significant counter trend move using the same principles as my previous post. If you can get oversold/bought hourly conditions again before entering, even better.

This is my trading strategy in a nutshell, and I have used it for 5 years. I only came unstuck when I tried to change my thinking and become smarter than the market.

This is very important: using averaging tools such as MA's, stochastics, RSI etc etc will work fairly well in times of high volatility and large swings, but in a low volatility, incrementally trending market, you will get wiped out. My systems work in all market conditions. The only thing I have added recently is the observation of reversal type candles to signal an entry, rather than blindly entering on important levels.

[forex1]

Originally posted by James
The only thing I have added recently is the observation of reversal type candles to signal an entry, rather than blindly entering on important levels.

James
On which charts do you look for and find the reversal type candles to be most reliable - 1hour, 4hour, daily or a combination?

And then once the reversal pattern is formed - where do you enter the trade and where do you put the initial stop loss?

Maybe you can use the GBPUSD example mentioned above to illustrate the reversal pattern that made up your mind, entry point and initial stop loss, and maybe profit target.

Many thanks!

[James]

I look for them on 4hr charts. Daily are reliable but too slow, and hourly can have a lot of false signals. Once formed against a technical level, I enter on the 4 hour rollover. Stops 10-15 pips under/above the reversal candle. I sold GBP at 3PM EST on October 8, at 1.7940, stops above the 618 fib at 1.8000.

Another example: Just bought EUR/JPY at 135.30, stop 135.00, target open. 135.20/30 is the confluence of two fibs and previous resistance