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How to Use Fibonacci Retracements for CryptoHow to Use Fibonacci Retracements for Crypto Fibonacci retracements have long been used in traditional financial markets. However, with the advent of crypto trading, they’ve also found popularity amongst digital asset traders. In this article, we answer the question “What is Fibonacci in crypto?”, discuss how to trade retracements and offer some strategies you can get started with today. Understanding Fibonacci Retracements Fibonacci retracements are based on the Fibonacci sequence mathematical concept. This sequence was discovered by Leonardo Fibonacci, a 13th-century Italian mathematician, and consists of a series of digits where each number is the sum of the two preceding ones, starting from 0 and 1. The sequence is 0, 1, 1, 2, 3, 5, 8, and so on. The most interesting aspect of this sequence is the so-called Golden Ratio of 1.618. This ratio can be found throughout artificial and natural structures, including the Taj Mahal, tornadoes, and spiral galaxies. This ratio, and complementary ratios, also seem to significantly influence the financial markets. Fibonacci retracement levels are percentages derived from the Golden Ratio. The most widely used retracement levels are 38.2%, 50%, and 61.8%. These levels represent potential support and resistance areas where the price of an asset, like a cryptocurrency, might bounce back or reverse during a trend. Additional retracement levels, like 23.6% and 78.6%, are also sometimes used, although they are considered less significant. As traders, we can use the Fibonacci sequence in crypto trading to identify potential areas where a price may reverse or stall, allowing us to make informed decisions about when to enter and exit a position. The retracement levels can be applied to any timeframe, making them versatile tools for different trading styles, including day trading, swing trading, and position trading. What Does Fib Mean in Crypto? “Fib” is an abbreviated term describing Fibonacci retracements. While there are other types of Fibonacci tools, such as extensions, fans, and spirals, Fibs will almost always refer to retracements. How to Use Fibonacci Retracements for Crypto Trading Using Fibonacci levels in crypto has become increasingly popular in recent years, especially for the world’s largest and most popular digital asset, Bitcoin. The highly volatile nature of cryptocurrencies makes it crucial for traders to identify potential areas of support and resistance where prices may reverse. To find and use your own Bitcoin Fibonacci levels, follow these steps: Plot the Bitcoin Fibonacci retracement levels by selecting an extreme low and high in an uptrend and vice versa. This can be done using the Fibonacci retracement tool available in most charting software, including the TickTrader platform by FXOpen. Observe price action at the 38.2%, 50%, and 61.8% levels. Each level acts as an area that may prompt a reversal. If the price breaks through one level, it can be assumed the trend is continuing and that the asset will move to the next level. When drawing the Fibonacci retracement, it’s essential to follow these two rules: When looking to plot support levels, set the first point at a swing low and the second at a swing high. When looking to plot resistance levels, set the first point at a swing high and the second at a swing low. Optimising Entries and Exits While Fibonacci retracements can help traders pinpoint support and resistance levels, there are a few factors to consider to make the most out of Fibs for crypto trading. Trade with the Trend Like many technical tools, Fibonacci retracements are best applied in line with a broader trend. While you might be looking for a short-term reversal, the setup will have the highest probability of working as expected when it conforms to a higher timeframe trend. In other words, you would want to look for retracements in a larger uptrend and vice versa. Think of the Levels as Areas Like traditional support and resistance levels, Fibonacci retracement levels shouldn’t be treated as the exact point where the price will reverse. It happens occasionally, but the price will often move slightly beyond the level before reversing as expected. It may even stop just short of it. Instead, you can treat them as areas of interest and then wait for confirmation using other tools. Combine Fibs with Other Technical Tools When looking at a crypto Fibonacci chart, it can be tempting to simply set a limit order at one of the significant levels and call it a day. While this sometimes works, there’s no guarantee these areas will remain consistent. It’s better to evaluate the likelihood that the area will hold, or is holding, using other tools. For example, you could look for it to line up with a horizontal support/resistance level or a trendline. Momentum indicators, like the relative strength index (RSI), can also offer insights into whether the trend is weakening and is due for a reversal. Additionally, candlestick and chart patterns can provide extra confirmation. Strategies for Trading Bitcoin with Fibonacci Retracements Let’s take a look at some specific Fibonacci retracement strategies you can use to trade Bitcoin and other cryptocurrencies. Trend Trading with Support and Resistance This approach simply requires identifying a broader trend and waiting for a pullback to one of the key levels that lines up with the horizontal support and resistance level. Entry: Limit orders can be set at the level within the support/resistance area. Alternatively, you could wait for the area to show signs of reversal before entering with a market order. Stop Loss: Stop losses can be set just above (in an uptrend) or below (downtrend) the horizontal area. It should be somewhere that invalidates your idea without being unnecessarily wide. Take Profit: Traders often begin to take profits at the chosen high or low. In the example shown, we could start to take profit at the retracement’s swing low. Relative Strength Index (RSI) Divergences and Fibonacci This strategy combines the popular momentum indicator, the relative strength index (RSI), with the Fibonacci retracement tool. Specifically, we’re looking for divergences that indicate a potential reversal as the price moves to a Fib level. Entry: Wait for a regular divergence to appear at a significant Fibonacci level (right-hand trendline). When the price shows signs of reversal, validating both the retracement and the divergence, traders can enter with a market order. Stop Loss: A stop can be placed above or below the entry candle, depending on the direction of the trade. Take Profit: As with the previous strategy, a good place to consider taking profit is at the high or low of your plotted retracement. As a bonus here, we also have a hidden divergence (the left-hand trendline) that indicates that bullish momentum is likely to happen. Fibonacci and Chart Patterns In this strategy, we use chart patterns to confirm the level is holding. In the Bitcoin Fibonacci chart shown, we’ve used a bullish wedge (a common reversal pattern), but you can use any pattern you prefer. Entry: After observing a chart pattern at a retracement level, you could wait for the pattern to be confirmed with a breakout. Then, you may enter on the retest of the pattern’s trendline. In this example, we could wait for the upper trendline to be broken before waiting for a pullback and entering. Stop Loss: Stops can be placed above or below the pattern’s opposing trendline. Here, we’d place it below the wedge’s bottom trendline. Take Profit: You could take profit at the retracement tool's extreme points. This setup also had extra confirmation with the double bottom before the wedge broke out, providing a high-probability trade. Confirming Fibonacci with Other Technical Indicators Of course, RSI isn’t the only indicator you can combine with Fibonacci retracements. Here are some other popular indicators to use: Moving Averages: Moving averages can offer dynamic support and resistance levels that add extra confluence to a Fib setup. Longer-term averages, like a 50 or 200-period moving average, are often respected. Meanwhile, pairing two faster moving averages can help confirm reversals when they cross over. Bollinger Bands: Bollinger Bands are often used to spot potential reversals. Touches to the band that move away sharply can be a sign of a reversal and, when combined with a retracement level, can make for a decent entry. MACD: MACD is another momentum indicator that can help traders find reversals. When the MACD and signal lines cross at a Fibonacci level, this can indicate a reversal is inbound. Risk Management Techniques As with all trading strategies, risk management is critical to a sustainable system. However, there are a few techniques that are specific to Fib retracements. Look For High-Quality Setups The first step in managing your risk is to only trade the best setups. This means looking for Fibonacci trades that have multiple confirmation factors and waiting patiently to see what you want to see. You might miss some moves this way, but it’ll also keep you out of many losing trades. Set Logical Stop Losses When using Fibonacci retracements in crypto, it can be tricky knowing where to place your stop loss. It’s good practice to consider the wider context of your trade idea and how your stop-loss placement fits into it. If you’re confident that the retracement level will hold or are trading short-term price movements, setting a stop loss beyond the entry level is suitable. Likewise, if you’re less confident that the area will prompt a reversal or are taking a longer-term view of the market, then you may prefer to set your stop loss at the high or low of the Fibonacci retracement. Establish Take Profit Targets in Advance By knowing where you want to exit a profitable trade, you prevent yourself from giving up too much profit by holding on too long. Using the take-profit levels discussed is a good place to start, as are Fibonacci extensions. Develop a Rule-Based System Having clearly defined rules for Fibonacci entries will remove a lot of the guesswork that comes with discretionary trading. It helps you find the best quality setups, avoid impulsive decision-making, and means you can easily adjust your strategy as you progress. Common Mistakes to Avoid When using Fibonacci in crypto trading, traders can sometimes fall into pitfalls. Let’s examine some of the most common errors. Confusing Highs and Lows: As mentioned, selecting a high or low as your first point when plotting the retracement depends on whether you’re looking for support or resistance. Be sure to follow the rules described earlier to avoid any confusion. Confusing Fibonacci Retracements for Extensions: Retracements identify potential support and resistance levels during a price pullback, while extensions project potential target levels beyond the original high or low. Double-check the name of the tool you’re using to avoid getting the two mixed up. Ignoring the Bigger Picture: Always consider the overall market context and trend before making a trade. If the market is strongly trending in one direction, a reversal at a Fibonacci level might be less likely. Misidentifying Significant Price Points: Selecting the correct high and low points is essential for accurate retracement levels. This usually means selecting the most extreme swing highs and lows that are easily visible. Take your time to identify the most significant price points, and be prepared to adjust your points as the market progresses. Closing Thoughts In summary, Fibonacci retracements can make for an excellent addition to your crypto trading arsenal. While they shouldn’t be used in isolation, combining Fibs with other technical tools and indicators can make for an effective strategy. However, the tips, techniques, and strategies described here aren’t exclusive to crypto: they can be applied to whichever market you prefer to trade, like forex, stocks, and commodities. Want to see for yourself? You can open an FXOpen account to gain access to these markets and the advanced TickTrader platform, where you’ll find the Fibonacci retracement tool and the indicators discussed waiting for you. Good luck! *At FXOpen UK and FXOpen AU, Cryptocurrency CFDs are only available for trading by those clients categorised as Professional clients under FCA Rules and Professional clients under ASIC Rules, respectively. They are not available for trading by Retail clients. This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.
BITSTAMP:BTCUSDEducation
by FXOpen
6
MFI INDICATOR - STRATEGY FOR TRADINGIndicator MFI — model Incorporating technical indicators into your trading system requires a clear understanding of their fundamental principles. An innovative solution developed by Gene Cuong and Avrum Sudak allows the use of volumetric data in metric analysis. The Cash Flow Index serves as a graphical representation of the "cash ratio", requiring a preliminary derivation of the "cash ratio" and subsequent calculations, including the determination of typical price and cash flow. Similar to the relative strength index, the cash flow index is based on the concept of a “typical price,” calculated as the average of the high, low, and closing prices over a specified period of time. For example, if the daily time frame has a high of 70,000, a low of 65,000, and a closing price of 68,000, the typical daily price is calculated as follows: Typical daily price = (70000 + 65000 + 68000)/3 = 67666 Cash flow is then determined by multiplying typical price by volume: Cash Flow = Typical Daily Price * Volume. Comparing the resulting cash flow with the previous day's cash flow makes it easier to identify positive or negative trends. Positive cash flow indicates an increase, while a negative cash flow indicates a decrease. Cases of equivalent cash flow values are not taken into account. When positive and negative cash flows can be distinguished, the cash ratio is calculated by dividing the former by the latter: Cash Ratio = (Positive Cash Flow / Negative Cash Flow). Using this data, the cash flow index (MFI) can be calculated using the formula: MFI = 100 - (100/(1 + Money Factor)). Gene Cuong and Avrum Sudak have delineated three primary signals employed by the Cash Flow Index: Overbought or Oversold Levels: Traders strategically monitor for overbought or oversold conditions as indicators of unsustainable price extremes, signaling potential market corrections. Bullish and Bearish Divergences: Analysis of bullish and bearish divergences serves as a predictive tool for identifying potential trend reversals. Discrepancies between the direction of price movements and corresponding Cash Flow Index trends can offer valuable insights into shifting market dynamics. Fluctuations at 80 or 20 Levels: Observing fluctuations in the indicator readings around the 80 or 20 thresholds enables traders to discern potential market reversals. These pivotal levels serve as crucial points of reference, guiding traders in assessing market sentiment and making informed trading decisions. Determining overbought and oversold zones using the cash flow index While the relative strength index (RSI) and other oscillator-type technical indicators are capable of identifying overbought and oversold market conditions, the money flow index (MFI) stands out for its effectiveness in this area. Including additional volume information allows the MFI indicator to filter out false signals from overbought and oversold conditions, increasing its reliability, especially for traders looking to counter prevailing trends. Like most momentum indicators, the Money Flow Index ranges from 0 to 100. A Money Flow Index reading below 20 indicates an oversold signal. Conversely, a Cash Flow Index reading greater than 80 suggests an overbought scenario. One limitation of trading based solely on overbought and oversold signals is the inability to counter the current trend merely due to signals generated by the Money Flow Index (MFI). Optimal trading strategy involves exercising patience and waiting for a price action pattern to validate a shift in the prevailing trend before taking a position. By employing this approach, traders can make more informed decisions and reduce the risk of entering positions prematurely based solely on MFI signals. The MFI Indicator and Divergence Beyond its function in pinpointing overbought and oversold conditions, the Money Flow Index (MFI) indicator serves as a valuable tool for detecting divergence within the market. In essence, divergence manifests when the price moves in one direction while the indicator readings depict a contrary trend. Traders regard this occurrence as a strong indication that the price is poised to reverse in alignment with the technical indicator's trajectory. Utilizing the MFI indicator enables traders to readily recognize such signals, whether they manifest as bullish or bearish divergence. Bullish Divergence: Bearish divergence: What Should You Consider? By integrating volume into its mathematical framework, the Money Flow Index is adept at generating highly precise trading signals concerning overbought and oversold market conditions. Additionally, it demonstrates a notable ability to pinpoint emerging divergences within the market. However, like any technical indicator, it possesses inherent limitations. A primary constraint of the Money Flow Index is its propensity to persist in overbought or oversold states for extended durations, potentially leading to false signals. Yet, by crafting a trading strategy that incorporates price action signals, traders can harness the MFI indicator to identify potential reversal zones. Armed with this insight, traders can anticipate shifts in directional price movement with ease and strategize their trades accordingly. Summing It Up: The Money Flow Index stands out as a unique indicator amalgamating momentum and volume within the RSI formula. Its strength lies in its adeptness at identifying potential reversals through overbought or oversold levels, as well as bullish or bearish divergences. Nonetheless, prudent utilization of the Cash Flow Index entails supplementing its readings with additional technical indicators rather than relying solely on its signals.
Education
by truepersonal
8
A Trader's Tapestry of Strategy, The Importance of DCAIn the grand Cosmic Ballet of Finance, where Celestial bodies of opportunity align in the vast expanse of the market universe, we navigate the Ethereum Vortex with a seasoned Trader’s Poise. Our chart, a Navigator's star map, is a chronicle of strategy, a testament to the art of Dollar-Cost Averaging (DCA), and an epic etched in the annals of digital commerce. Behold the Ethereum chart, now more complex with additional celestial markers, the Red and Green circles, constellations guiding our buying and selling strategies. Each circle, a planet on its orbit, represents a moment in time where we either fuel our rocket’s reserves or initiate a burn to propel profits into the void of realized gains. A deviation of 9%+ becomes our gravitational slingshot, harnessing the market's natural ebb and flow to catapult our portfolio through Space and Time. We acknowledge the cosmic law: Every action has an Equal and Opposite reaction. Thus, we place our DCA markers with precision, ensuring that each purchase, each sale, balances the forces of Risk and Reward. Ethereum, the Grand Monolith in the Cryptoverse, requires a Larger offering for its bounties compared to the more nimble Dogecoin. It demands a higher degree of commitment, yet the potential Edifice we construct with each DCA block could pierce the heavens, promising structures of wealth that stand the Test of Time. With the addition of new Buy and Sell points, our chart becomes a Saga of decision points, a series of If, Then propositions governed by the logic of Financial Prudence and the allure of Potential Prosperity. It is a bridge between the realms of patience and action. In this odyssey, we are reminded of the Alchemists of Yore, turning leaden patience into golden opportunity. We are not just Traders, we are Philosophers pondering the paradox of wealth, its transient nature, yet its potential to bestow lasting impact. Let us then cast our eyes upon this chart, our guide through the Ethereum Vortex, our compass through the storms of volatility. In DCA we trust, and with a 9%+ deviation our Steed, we ride through the valleys and peaks of price action, our course charted, our resolve Unwavering, our Spirits High. "Per Aspera Ad Astra" - Through Hardships to the Stars. May our journey be as Fortuitous as the Ancients who first charted the Constellations by which we now navigate. Happy Trading. T.
Education
by Tyler-Turczak015
Options Blueprint Series: Leveraging Diagonals with Corn FuturesIntroduction to Corn Futures (CBOT) Corn Futures, central to the commodities market, are traded on the Chicago Board of Trade (CBOT). These futures contracts are standardized agreements to buy or sell 5,000 bushels of corn, providing traders with a mechanism to hedge against price changes or to be exposed to future price movements in the agricultural sector. Contract Specifications: Contract Size: 5,000 bushels Quotation: Cents per bushel Minimum Tick Size: ¼ cent per bushel, equivalent to $12.50 per contract Trading Hours: Sunday to Friday, electronic trading from 7:00 PM to 7:45 AM CT, and Monday to Friday, daytime trading from 8:30 AM to 1:20 PM CT Contract Months: March, May, July, September, December, with additional serial months providing year-round trading opportunities Margin Requirements: Margins are set by the exchange and can vary, with initial margins typically being a fraction of the contract value to secure a position ($1,300 at the time of this publication) The liquidity and volume in Corn Futures make them an attractive market for traders. Factors influencing corn prices include weather patterns affecting crop yields, global supply and demand dynamics, and changes in energy prices due to corn's role in ethanol production. Understanding Diagonal Spreads Diagonal Spreads are a sophisticated options strategy that involves simultaneously buying and selling options of the same type (either calls or puts) with different strike prices and expiration dates. This approach is designed to leverage the time decay (theta) and volatility differences between contracts, making it particularly suitable for markets with expected directional moves and distinct volatility characteristics, like Corn Futures. Key Components: Long Leg: Involves buying an option with a longer expiration date. This option acts as the foundational position, typically chosen to be in-the-money (ITM) to capitalize on intrinsic value while also benefiting from time decay at a slower rate due to its longer duration. Short Leg: Consists of selling an option with a shorter expiration date and a different strike price, usually out-of-the-money (OTM). This leg generates immediate income from the premium received, which helps offset the cost of the long leg. Strategic Advantages: Directional Flexibility: Diagonal spreads can be tailored to bullish or bearish outlooks depending on the selection of calls or puts, strikes and expirations. Time Decay Harnessing: By selling a shorter-term option, the strategy aims to benefit from the rapid acceleration of time decay on the sold option, improving the position's overall theta. Given the cyclical nature of the agricultural sector and the specific factors influencing corn prices, diagonal spreads offer a strategic method to trade Corn Futures options. They provide a balance between long-term market views and short-term income generation through premium collection on the short leg. Application of Diagonal Spreads to Corn Futures In applying Diagonal Spreads to Corn Futures, we focus on a bearish strategy to capitalize on an anticipated gap fill below the current price level. This strategic choice is driven by the analysis of Corn Futures' price action, indicating potential downward movement. A bearish diagonal spread can be particularly effective in such scenarios, offering the flexibility to benefit from both time decay and directional movement. Bearish Diagonal Spread Setup: Long Leg (Buy Put): Select a put option with a longer expiration date to serve as the foundation of your bearish position. Choose a strike price that is at-the-money or in-the-money (ATM/ITM) to ensure intrinsic value. Short Leg (Sell Put): Sell a put option with a shorter expiration date at a lower strike price that is out-of-the-money (OTM). Trade Example: Assumption: Corn Futures are trading at 434 cents per bushel. Long Put: Buy a 47-day put option with a strike price of 435 cents, paying a premium of 7.49 cents per bushel ($374.5 – point value =$50). Short Put: Sell a 19-day put option with a strike price of 415 cents, receiving a premium of 1.01 cents per bushel ($50.5 – point value =$50). As seen on the below screenshot, we are using the CME Options Calculator in order to generate fair value prices and Greeks for any options on futures contracts. The goal is for Corn Futures to decline towards the 415-cent level (origin of the gap). Risk Considerations: While diagonal spreads can offer controlled risk (premium paid = 6.48 = 7.49 – 1.01 = $324 – point value =$50) and strategic flexibility, it's crucial to be mindful of the potential for loss, particularly if the market moves sharply in an unintended direction. Employing risk management techniques can help mitigate these risks: Adjustments and Rolls: Proactively manage the position by adjusting or rolling the short leg to a different strike price or expiration date in response to market movements or changes in volatility. This can help collect additional premium and potentially offset losses on the long leg. Use of Stop Losses: Implement stop-loss orders based on predefined risk tolerance levels. This could be set as a percentage of the initial investment or based on the technical levels in Corn Futures prices. Diversification: While not specific to the strategy, diversifying your portfolio beyond just Corn Futures options can help manage overall market risk. Different markets may react differently to the same economic indicators or geopolitical events, spreading your risk exposure. Regular Monitoring: Given the dynamic nature of Corn Futures and the options market, regular monitoring is crucial. Stay informed about market conditions, news impacting agricultural commodities, and changes in volatility that could affect your position. Diagonal spreads in Corn Futures offer a strategic avenue for traders looking to exploit market conditions and time decay with a defined risk profile. However, the key to successful implementation lies in diligent risk management, including making informed adjustments, employing diversification, and maintaining a disciplined approach to monitoring and exiting positions. Conclusion In this edition of the Options Blueprint Series, we explored the strategic application of Diagonal Spreads to Corn Futures traded on the Chicago Board of Trade (CBOT). This advanced options strategy offers traders a nuanced approach to potentially capitalize on market movements, leveraging the inherent time decay of options to enhance potential returns. Employing Diagonal Spreads allows traders to express a directional bias—bearish, in our case study—while managing the investment's risk profile through a combination of long-term and short-term options. By buying a longer-dated, in-the-money put and selling a shorter-dated, out-of-the-money put, traders can set up a position that benefits from both the expected downward movement towards a gap fill and the accelerated time decay of the sold option. However, as with any sophisticated trading strategy, understanding and managing the associated risks is paramount. Directional risks, volatility changes, and the potential for early assignment on the short leg require vigilant management and a readiness to adjust the position as market conditions evolve. By adhering to disciplined risk management practices—such as making timely adjustments, employing stop losses, and maintaining portfolio diversification—traders can seek to navigate the complexities of the options market and aim for consistent, strategic gains. The Corn Futures market, with its dynamic price movements influenced by a range of factors from weather to global supply and demand dynamics, provides a fertile ground for applying Diagonal Spreads. Traders who invest the time to understand both the underlying market and the intricacies of this options strategy may find themselves well-positioned to exploit opportunities that arise from market volatility. In summary, Diagonal Spreads present a strategic option for traders looking to leverage market insights and options mechanics in pursuit of their trading objectives. As always, education and practice are key to mastering these techniques, with paper trading offering a risk-free way to hone one's skills before venturing into live markets. When charting futures, the data provided could be delayed. Traders working with the ticker symbols discussed in this idea may prefer to use CME Group real-time data plan on TradingView: www.tradingview.com This consideration is particularly important for shorter-term traders, whereas it may be less critical for those focused on longer-term trading strategies. General Disclaimer: The trade ideas presented herein are solely for illustrative purposes forming a part of a case study intended to demonstrate key principles in risk management within the context of the specific market scenarios discussed. These ideas are not to be interpreted as investment recommendations or financial advice. They do not endorse or promote any specific trading strategies, financial products, or services. The information provided is based on data believed to be reliable; however, its accuracy or completeness cannot be guaranteed. Trading in financial markets involves risks, including the potential loss of principal. Each individual should conduct their own research and consult with professional financial advisors before making any investment decisions. The author or publisher of this content bears no responsibility for any actions taken based on the information provided or for any resultant financial or other losses.
CBOT:ZC1!Education
by traddictiv
4
Relative Strength vs Relative Strength IndexRelative Strength vs Relative Strength Index: What Are the Differences? While the Relative Strength and Relative Strength Index indicators might share similar names, it’s important to know the difference between the two. In this article, we’ll discuss their unique characteristics, offer insights into their differences, and help determine which one is best for you. Understanding Relative Strength Relative Strength (RS) is a method that helps traders assess the performance of a particular security compared to a benchmark or another security. For example, a trader may use Relative Strength to compare the performance of Microsoft’s MSFT stock to the S&P 500 and determine whether the stock is outperforming its benchmark. Relative Strength is expressed as a ratio. It’s calculated by dividing the price of the chosen security by another. In this example, we would divide Microsoft’s current share price of approximately $280 by the market value of the S&P 500, around $3,980. This results in a Relative Strength of ~0.07. In isolation, this figure doesn’t mean much. But plotted over time, it can show the trend of a security’s relative strength against a comparative security or benchmark. If this 0.07 value were to rise, it would mean that MSFT is outperforming the S&P 500, and vice versa if it were to decrease. Relative Strength can be used as a tool to help highlight market leaders and laggards, as well as identify overvalued or undervalued assets. For instance, if an asset’s Relative Strength is well below its historical average, it could be undervalued and ready for a reversal. Understanding the Relative Strength Index While they share similar names, Relative Strength and the Relative Strength Index (RSI) shouldn’t be confused. The RSI is a popular technical analysis tool and momentum oscillator that indicates overbought and oversold conditions in the market. RSI measures the speed and change of price movements, oscillating between 0 and 100. To calculate RSI, the average gain and average loss of the security over a specific period, usually 14, are determined. The ratio of these averages is then used to calculate the RSI value. Formally, RSI can be expressed as: RSI = 100 - (100 / (1 + (Average Gain Over Period / Average Loss Over Period))) An RSI value above 70 indicates overbought conditions, suggesting the security may be due for a pullback. Conversely, an RSI value below 30 indicates oversold conditions, hinting that the price may see a bullish reversal. Furthermore, moves above the midpoint, 50, can confirm bullishness, while action below can show bearishness. Traders predominantly use RSI to find potential entry and exit points in the market. For example, when the RSI moves above 70, traders might consider selling or shorting the security. Divergences, where the price forms a new high or low, but RSI fails to do the same, can offer additional opportunities to find reversal or continuation setups. Want to see how RSI works firsthand? Hop on to our free TickTrader terminal at FXOpen to get started with RSI and dozens of other tools ready to help you navigate the markets. Key Differences Between Relative Strength vs Relative Strength Index So what exactly are the most significant differences between RS vs the RSI indicator? Purpose RS aims to compare the performance of a security to a benchmark or another security. Meanwhile, RSI measures the speed and change of price movements to identify overbought and oversold conditions in a single asset. Calculation This difference can be seen when comparing their calculations. Relative Strength is a simple ratio of two securities’ prices, whereas RSI is calculated using a more complex formula that accounts for average gains and losses over a specified period. In this sense, Relative Strength provides a broad picture of a security’s performance, while RSI is concerned with recent price action. Use Case When putting both into practice, traders will use Relative Strength and RSI in vastly different ways. Relative Strength can show which sectors, industries, or individual assets are outperforming their peers. This might help a trader formulate a hypothesis supporting a decision to invest in a particular market, like a stock or an Exchange Traded Fund (ETF). Meanwhile, RSI focuses on a single asset’s momentum and is used to gauge potential trend reversals or the strength of the overall trend. This makes it better suited for entering and exiting positions rather than conducting top-down analysis. Relative Strength vs RSI: Which Is Better? Determining whether Relative Strength or RSI is better ultimately depends on the individual trader. Both indicators have unique strengths and different utilities. Relative Strength may be better for helping longer-term traders and investors to identify trending markets. Throughout a day’s trading, Relative Strength might not indicate much; MSFT’s comparative performance to the S&P 500 can easily change each day. But, over weeks or months, a strong RS reading can demonstrate that MSFT is likely to continue outperforming the benchmark, making it a potential candidate for swing or position trading. Likewise, traders looking to capitalise on trending sectors can use Relative Strength to determine attractive markets. For example, a trader may consider consumer staples a strong industry that could outperform the S&P 500 and then compare the S&P 500 Consumer Staples Sector ETF’s (ICSU) Relative Strength readings to the S&P 500 to confirm their prediction. In contrast, while RSI can be applied across all timeframes, its focus on short-term price action may make it a better option for those interested in trading recent movements. As a versatile indicator, traders can use RSI to highlight potential reversals and trends through both its absolute value and divergences. This makes it ideal for someone looking to find specific entry and exit points rather than general market trends or long-term outperformance. Relative Strength Index vs True Strength Indicator: What Is the Difference? The True Strength Index (TSI) indicator is another momentum oscillator commonly confused with RSI. It’s calculated by smoothing price differences over a specific period and dividing the result by a double-smoothed average of the absolute price differences. The resulting TSI value oscillates around a zero line, with positive values indicating bullish momentum and vice versa. It also features a signal line, which is an average of the TSI line. While their plots are relatively similar, there are differences between RSI and TSI. The primary difference is in their interpretation. RSI mainly identifies overbought and oversold levels, while TSI indicates the overall trend direction using its value relative to the zero line. Their calculations also differ, resulting in a smoother TSI compared to the more erratic RSI. Test Your Skills Now that you have a solid overview of the differences between Relative Strength and RSI, it’s time to put your knowledge into action. You can open an FXOpen account to gain access to dozens of tradeable instruments and advanced technical analysis tools, including the RSI indicator. Good luck! This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.
Education
by FXOpen
2
📍Part 5: Corrective Waves - Simple - Triangle.Hello! ➡️In this lecture, we will cover one of the most common or popular correction options - triangles. I remind you that we are now considering various correction structures that are encountered both separately and can be part of more complex structures. ➡️Triangles are probably the most popular pattern for all beginners, yes, and not only beginners. It is quite often seen on the chart and most likely everyone tried to trade it according to classical recommendations, for example from books or a course, when essentially everything comes down to breaking dynamic resistance on one of the sides where you buy or sell. ➡️In history, everything looks pretty harmonious as usual, but in real-time, it turns out to be not that simple, and here maybe just the rules from wave analysis will help to avoid a certain number of errors. ➡️So let's take a look at the main rules and guiding norms for triangles! ✅ General Rules ✅ 📍A triangle always subdivides into five waves. 📍At least four waves among waves "a", "b", "c", "d" and "e" are subdivided into a single zigzag. 📍In a triangle, only one subwave can be a multiple zigzag or triangle. ✅ General guidelines ✅ 📍Usually, wave "c" or wave "d" subdivides into a "multiple zigzag" that is longer lasting and contains deeper percentage retracements than each of the other subwaves. 📍Alternating waves of a triangle may be in Fibonacci proportion to each other by a ratio of 0.618 for contracting triangles and 1.618 for expanding triangles. For example, in a contracting triangle, look for wave "c" to equal 0.618 of wave "a". 📍A triangle can be correction wave "4" in the impuls, wave "b" of a zigzag, wave "x" of a double or second wave of an "x" of a triple zigzag, sub-wave "c", "d" or "e" of a triangle and the last structure of a combination. ✅ Contracting Triangle ✅ Rules 📍Wave "c" never moves beyond the end of wave "a", wave "d" never moves beyond the end of wave "b", and wave "e" never moves beyond the end of wave "c". The result is that going forward in time, a line connecting the ends of waves "b" and "d" converges with a line connecting the ends of waves "a" and "c". 📍Waves "a" and "b" never subdivide into a triangle. 📍In a running contracting triangle, wave "b" should be no more than twice as long as wave "a". Guidelines 📍Sometimes one of the waves, usually wave "c", "d" or "e", subdivides into a contracting or barrier triangle. Often the effect is as if the entire triangle consisted of nine zigzags. 📍About 60% of the time, wave "b" goes beyond the beyond the start of wave "a". When this happens, the triangle is called a running contracting triangle. ✅ Barrier Triangle ✅ Rules 📍Wave "c" never moves beyond the end of wave "a", wave "d" never moves beyond the end of wave "b", and wave "e" never moves beyond the end of wave "c". The result is that going forward in time, a line connecting the ends of waves "b" and "d" converges with a line connecting the ends of waves "a" and "c". 📍Waves "b" and "d" end at essentially the same level. 📍In a running barrier triangle, wave "b" should be no more than twice as long as wave "a". Guidelines 📍About 60% of the time, wave "b" goes beyond the start of wave "a". When this happens, the triangle is called a running barrier triangle. 📍When wave "5" follows a barrier triangle, it is typically either a brief, rapid movement or an exceptionally long extension. ✅ Expanding Triangle ✅ Rules 📍Wave "c", "d" and "e" each moves beyond the end of the preceding same-directional subwave. (The result is that going forward in time, a line connecting the ends of waves "b" and "d" diverges from a line connecting the ends of waves "a" and "c.") 📍Subwaves "b", "c" and "d" each retrace at least 100 percent but no more than 150 percent of the preceding subwave. Guidelines 📍Subwaves "b", "c" and "d" usually retrace 105 to 125 percent of the preceding subwave.
Education
by Hellena_Trade
2
Fib Retracement - better/important than most believeFibonacci. introduced by Italian mathematician "father of the Fibonacci sequence" Leonardo Da Pasa (born around A.D. 1170) in 1202 in his book Liber Abaci "book of calculations" which he handwrote as the printing was not yet invented, which also became the first book to be introduced to the Hindu-Arabic numeral system as it was a new way to write numbers and do calculations. Fibonacci in trading. the most important/popular fib tool in the trading/investing community is the Fibonacci Retracement applied from the Fibonacci sequence which is a set of steadily increasing numbers where each number is the sum of the preceding 2 numbers. Fibonacci retracement, is derived based on high and low price/ valley and peak in supply and demand terms. The most important Fibonacci ratios/percentage of the retracement measure is - 23.6%, 38.2%, 50%, 61.8%, 100%, with the ratio/percentage being represented by horizontal lines on the price chart. calculated by : in bull market, high price - (high price-low price) x percentage in bear market, low price + (high price-low price) x percentage Significance of Fib Retracement. these are very important too traders as the indicate significant price levels/areas like : - support and resistance - liquidity pool - using rectangle drawing tool to connect two fib retracement levels together as a zone not a singular ratio level. based on current market conditions and trading criteria. - price targets, exit price (Take Profit) - Stop Loss - stop and limit orders (set and forget for supply and demand traders) Fibonacci retracement also compliments other trading tool and indicators well and can be used by all sorts of traders, from position traders to scalpers. it works best on trending market conditions to identify reversals, corrections, pullbacks continuation moves. important note : - Leonardo did not invent Fibonacci, it was actually used and known to Indian mathematicians since the 6th century. - the 50% is not really a Fibonacci number instead is taken from Dow theory that assets usually retrace half their prior move. put together by : Pako Phutietsile as @currencynerd
OANDA:XAUUSDEducation
by currencynerd
STOP LOSS more important than you think!Set STOP-LOSS and stop your loss! The Vital Role of Stop-Loss in Forex and Crypto Trading In the fast-paced realms of forex and cryptocurrency trading, where market volatility is the norm, the integration of a stop-loss strategy holds paramount importance. A stop-loss order acts as a critical risk management tool, shielding traders from excessive losses and preventing impulsive decision-making in turbulent market conditions. However, its significance goes beyond risk mitigation; stop-loss orders also play a pivotal role in guiding traders towards selecting optimal entry points. Let's delve into why incorporating stop-loss orders into your trading approach is essential for achieving long-term success. Fostering Discipline and Psychological Resilience One of the primary rationales for the necessity of stop-loss lies in its capacity to nurture discipline and psychological resilience among traders. By establishing predetermined exit points, traders not only manage risk effectively but also cultivate a disciplined mindset crucial for navigating the complexities of financial markets. Adhering to stop-loss levels compels traders to conduct thorough analyses of entry points, thereby refining their decision-making processes. This disciplined approach not only mitigates the influence of emotional trading but also fosters rationality and consistency, pivotal attributes for sustainable trading success. Empowering Effective Risk Management Practices Effective risk management forms the bedrock of successful trading endeavors. Without the implementation of stop-loss mechanisms, traders expose themselves to the peril of unchecked losses, which could potentially erode their entire trading capital. Stop-loss orders serve as a bulwark against such scenarios, capping losses at predetermined levels. By calculating appropriate position sizes relative to stop-loss distances, traders ensure that each trade aligns with their risk tolerance and overarching trading strategy. Moreover, the process of setting stop-loss levels inherently prompts traders to meticulously assess entry points, reinforcing the importance of selecting optimal trade setups. Optimizing Risk-Reward Dynamics An often-overlooked aspect by novice traders is the critical importance of maintaining favorable risk-to-reward ratios. Trading without stop-loss not only compromises risk management but also distorts the risk-reward dynamics of each trade. Well-placed stop-loss orders enable traders to define risk upfront, enabling them to seek out trades with favorable risk-reward profiles. By aligning potential losses with anticipated gains, traders can pursue asymmetric returns, where profit potential outweighs risk undertaken. This strategic alignment not only enhances profitability but also instills confidence in traders, empowering them to execute trades with conviction. Conclusion In conclusion, the integration of stop-loss orders into your forex and crypto trading endeavors is indispensable for cultivating discipline, managing risk effectively, and optimizing profitability. Beyond serving as a risk management tool, stop-loss orders nurture psychological resilience, refine decision-making processes, and uphold the principles of disciplined trading. Moreover, stop-loss implementation inherently encourages traders to scrutinize entry points meticulously, reinforcing the importance of selecting optimal trade setups. Therefore, traders must recognize the pivotal role of stop-loss in safeguarding capital and fostering long-term success in the dynamic world of financial markets.
OANDA:XAUUSDEducation
by traderstube
3 Triangle Patterns Every Trader Should Know Hello, friends!Some EDU today!💪 Triangle chart patterns, a discreet yet powerful tool in the world of technical analysis, hold the key to deciphering market trends. These geometric formations are not just lines and shapes on a chart; they are windows into the psychology of market participants, offering insights that can guide strategic decision-making. How to Trade Triangle Chart Patterns A triangle chart pattern is characterized by the price gradually narrowing within a specific range over time, visually representing a battle between bulls and bears. The triangle pattern typically falls under the category of a "continuation pattern." This means that once the pattern completes, it is generally assumed that the price will continue in the same direction as the trend before the pattern's emergence. To identify a triangle pattern, it usually requires at least five touches of both support and resistance lines. For instance, you might observe three touches on the support line and two on the resistance line, or vice versa. There are three primary types of triangle chart formations: symmetrical triangles, ascending triangles, and descending triangles. Symmetrical Triangle A symmetrical triangle is a chart pattern where the slopes of the price's highs and lows converge, forming a triangular shape. During this formation, the market experiences lower highs and higher lows, indicating a lack of clear trend direction. In a hypothetical battle between buyers and sellers, this would result in a draw. It's essentially a period of consolidation. As the two slopes get closer to each other, it signifies an impending breakout. The direction of the breakout is uncertain, but it's highly likely to occur. Eventually, one side of the market will give in. To capitalize on this situation, traders can place entry orders above the slope of the lower highs and below the slope of the higher lows within the symmetrical triangle. Since a breakout is expected, traders can ride the market in whichever direction it moves. Ascending Triangle An ascending triangle forms when there's a resistance level and a series of higher lows. During this period, there's a level that buyers struggle to surpass, but they gradually push the price up, as evidenced by the higher lows. This pattern indicates that buyers are gaining strength as they consistently create higher lows. They exert pressure on the resistance level, making a breakout likely. However, the direction of the breakout remains uncertain. Many sources suggest that buyers often win this battle, causing the price to break past the resistance. But it's not always the case; sometimes, the resistance is too strong, and buyers lack the power to breach it. Traders should be prepared for movement in either direction. Entry orders can be set above the resistance line and below the slope of the higher lows within the ascending triangle. Descending Triangle Descending triangles are the opposite of ascending triangles. In this pattern, a series of lower highs forms the upper line, while the lower line represents a strong support level. Typically, the price eventually breaks below the support line and continues to decline. However, in some instances, the support line proves to be formidable, causing the price to bounce off it and make a significant upward move. Regardless of the price's ultimate direction, what's important is recognizing that it's poised for movement. Traders can place entry orders above the upper line (the lower highs) and below the support line. In each of these scenarios, the subsequent price movement can present profitable trading opportunities, depending on the direction of the breakout. In conclusion, triangle chart patterns are more than just lines and shapes; they are a trader's roadmap to understanding market dynamics. By recognizing these patterns, traders gain an edge in predicting potential price movements and making informed decisions. Whether it's the symmetrical tug-of-war, the ascending climb, or the descending descent, triangles offer a glimpse of supply and demand on the market. Remember, while triangles provide valuable insights, they are not crystal balls. Risk management and ongoing analysis are crucial in trading. With the right strategies and discipline, you can navigate these patterns to seize profitable opportunities and master the art of trading. Happy trading! 🚀 Your Kateryna!
BITSTAMP:BTCUSDEducation
by RocketBomb
16
Keltner Channels vs Bollinger BandsKeltner Channels vs Bollinger Bands: Which Indicator Should You Use? If you’re a trader, you likely know that indicators are a valuable tool for identifying trends and finding entry and exit points. Two popular indicators are Keltner Channels and Bollinger Bands. Both help you measure volatility, but which one is better? In this article, we’ll dive into the differences between the two, explain their components, and discuss which one is best. Keltner Channels The Keltner Channel is an indicator that helps traders determine trends, momentum, and potential reversal areas in a given market. It’s named after Chester Keltner, who first introduced it in the 1960s. Keltner Channels are composed of three lines, forming an envelope. The middle of these three lines is an exponential moving average (EMA), usually set to 20 periods. The upper and lower lines are multiples of the Average True Range (ATR) added or subtracted from the EMA, often double. The ATR measures the volatility of an asset by taking the average of the true ranges of its price movements over a certain period. We can interpret Keltner Channels in several ways. The upper and lower bounds act as dynamic support and resistance levels, and traders use them to determine entry and exit points. Additionally, when price breaks through one of the bounds, it may signal a potential reversal or a continuation of the current trend, depending on price action and other technical factors. For instance, a market in a strong bullish trend will appear to stick close to the upper line, often retracing to the EMA before continuing higher. Meanwhile, closes far outside of the lines may sometimes signal a reversal, given how far price has moved beyond its expected true range. Following a ranging market, determined when the lines are effectively horizontal, these kinds of extreme moves may signal a breakout. Bollinger Bands The Bollinger Bands is a widely used technical indicator that helps us identify an asset's volatility and potential price movements. It was created by John Bollinger in the 1980s and has since become a popular tool among traders of all levels. Like Keltner Channels, the Bollinger Bands tool comprises three components: the middle line and two outer lines. The middle line is a simple moving average (SMA), typically 20 periods long. The upper and lower bands are calculated by adding and subtracting a multiple of the price’s standard deviation from the SMA, respectively. This multiple is set to two by default, but some will adjust it according to their preferences. Instead of using the true range, Bollinger Bands use standard deviation (STD) – the square root of the variance of a set of price movements over time. Because they utilise standard deviation, Bollinger Bands are slightly more responsive to volatility than Keltner Channels. When the range constricts, volatility is low; and when the range expands, volatility is increasing. Many traders prefer Bollinger Bands to gauge volatility in the market. As with Keltner Channels, the bands show dynamic support and resistance levels. They’re also quite effective when used to detect reversals – explained shortly. Additionally, we can apply Bollinger Bands to detect trends/breakouts when price hugs the bounds, though arguably not as well as Keltner Channels. Keltner Channels vs Bollinger Bands So, we know that using Keltner Channels and Bollinger Bands helps us to measure volatility while trading. But what exactly are their key differences? ATR vs STD The first and most fundamental difference is how each indicator measures volatility. ATR, used in Keltner Channels, takes the average of absolute changes in price, or an average of the true range. The standard deviation used by Bollinger Bands indicates how much price may deviate from its average. While the difference may seem subtle, it can be significant in certain market conditions. Standard deviation gives more weight to larger values over smaller ones, effectively making Bollinger Bands more responsive to volatility. EMA vs SMA The second is the moving average both indicators use. Keltner Channels employ an exponential moving average, which is more responsive to recent price action than other moving averages. Bollinger Bands implement the simple moving average, which reacts slower than the EMA. The impact isn’t as significant as ATR vs standard deviation, but the more responsive nature of the EMA may help traders get into positions more often if they’re trading pullbacks. Trading Trends To determine a trend with Bollinger Bands, we typically look for the bands to start widening, which indicates volatility (usually following a breakout). When the bands become tight, it’s expected that a new trend could be about to form. To identify a trend using Keltner Channels, we can examine whether it slopes up or down. Given that Keltner Channels are often slower moving, multiple closes outside the channel can show us that an asset has momentum and is looking to continue the trend. Trading Reversals Statistically, 95% of price action should be inside Bollinger Bands with two standard deviations. This is significant for identifying potential overbought and oversold areas; moves beyond the bounds indicate that the price action is extreme and has a strong likelihood of reversing. Keltner Channels can be used to find reversals, but it’s often much harder than with Bollinger Bands. A price will regularly breach or close outside of the channel in a strong trend while not crossing Bollinger Bands. It’s best to apply Keltner Channels to trend trading and identifying breakouts. Using Keltner Channels and Bollinger Bands in a Strategy Overall, Bollinger Bands are a more responsive indicator that may help us identify when volatility could be about to pick up (tightening) and when a new trend has likely started (widening). They’re well suited to trading reversals, thanks to the statistics of standard deviations. Keltner Channels tend to be less responsive to volatility, but they may be much better at identifying strong trends, especially when price hugs or continuously closes beyond the lines. When price ranges, Keltner Channels often show a new trend forming much faster than Bollinger Bands, thanks to the telltale sloping of the channel. So which one is best? Ultimately, it comes down to the individual trader and their style. Some may prefer to trade reversals with Bollinger Bands or jump on board breakouts with Keltner Channels. You could play around with both in the free TickTrader platform from us at FXOpen to get an idea of how to apply both indicators while trading. Closing Thoughts You should now have a solid overview of the differences between Keltner Channels and Bollinger Bands. While they may seem similar, taking the time to experiment with them will show you the qualities of each and how they could be applied to various scenarios. Once you settle on your favourite, why not combine it with other indicators, like RSI or Stochastic oscillator, to develop your own strategy? Then, when you’re ready, open an FXOpen account and start using your system for real trading! This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.
Education
by FXOpen
8
Trade Entry and Management Techniques Using Swing High PivotsIn today's video idea, we will delve into a comprehensive strategy for trade entry and management, centered around utilizing swing high pivots as crucial reference points. We will also explore the effective integration of technical tools such as Outer Bands, ribbons, and Target View Trades (TV-Trades) to enhance precision in trading decisions. By the end of this tutorial, you will gain valuable insights into determining trade viability and optimizing trade execution. Understanding Swing High Pivots: Swing high pivots serve as pivotal landmarks in market analysis, offering valuable insights into potential trade setups. When identifying swing high pivots, focus on significant price peaks that indicate potential trend reversals or continuation points. These points will serve as key references for evaluating trade opportunities and managing risk effectively. Trade Entry Strategies: Utilizing swing high pivots as reference points, assess the market conditions to determine the viability of trade entry. Look for confluence with other technical indicators such as Outer Bands and ribbons to validate trade setups. Prioritize trades that align with the prevailing market trend and exhibit strong momentum, increasing the probability of success. Managing Trades: Once you enter a trade, it is essential to implement effective management techniques to optimize profitability and mitigate risks. Continuously monitor price action relative to swing high pivots and technical indicators to gauge trade performance. Implement trailing stop-loss orders to protect profits and minimize potential losses as the trade progresses. Integration of Technical Tools: Explore the functionalities of technical tools such as Outer Bands, ribbons, and Target View Trades (TV-Trades) to refine trade entry and exit points further. Outer Bands provide larger trend information, aiding in direction, trade confirmation and risk management. Ribbons offer visual cues for trend direction and momentum, enhancing trade precision. Target View Trades (TV-Trades) provide a systematic approach to identify optimal entry and exit points, facilitating disciplined trading execution. Conclusion: Mastering trade entry and management techniques is essential for navigating the dynamic landscape of financial markets successfully. By incorporating swing high pivots and leveraging technical tools effectively, traders can make informed decisions, capitalize on lucrative opportunities, and achieve consistent profitability in their trading endeavors. Continuously refine your skills through practice and experimentation, adapting to evolving market conditions for sustained success.
CME_MINI:NQM2024Education
by CFRN
3
Swing Mapping Part 2: Trade Entry TechniquesWelcome to part 2 of our 3-part series on swing mapping – a highly underestimated technique that can be applied to any market on any timeframe. In Swing Mapping Part 1 we outlined the key principles of swing mapping which involved identifying potential swings, monitoring them, and drawing conclusions about market structure as swings levels are held or broken. Today, we will take this a step further and look at how swing mapping can be used to identify trade entry setups without the need for any additional indicators. We will showcase four simple entry setups that have the potential to unlock a plethora of trading opportunities. Swing Mapping Entry Setups: Breakouts and Reversals Swing mapping entry setups fall into two broad categories: breakouts and reversals. Breakouts involve entering with momentum as the market breaks above a swing that you have identified. Reversals on the other hand, involve entering against the prevailing momentum on a certain type of reversal that occurs at a swing level. The breakout and reversal swing mapping entry techniques that we will outline below can be applied to any market on any timeframe. Breakout Entry Setups 1. Break & Retest The break & retest setup can occur in a trending market structure or in a range bound market structure. Entry Trigger: Break and close above (below) a key level of swing resistance (support). This should be followed by a retest of the broken resistance (support) level. The entry trigger occurs when the market forms a small swing low (high) at the broken resistance (support) level. Stop Placement: Below (above) nearest swing low. Example: S&P 500 5min Candle Chart In this example the market breaks above a key level of swing resistance. This is followed by a retest of the broken resistance level during which the market formed a cluster of small swing lows – indicating that broken resistance had become support. Past performance is not a reliable indicator of future results 2. Cluster Breakout The cluster breakout setup should only be taken when a clear trend has developed. During pullbacks in trends, a market tends to form clusters of small swings. The cluster breakout setup looks to enter on a breakout above (below) a cluster of swing highs (lows). The breakout should occur in the direction of the prevailing trend. Entry Trigger: Breakout above two or more small swing highs (lows) that have formed during a pullback in an established uptrend (downtrend). Stop Placement: Below (above) nearest swing low. Example: S&P 500 5min Candle Chart Sticking with the same example, shortly after the break & retest entry setup occurred a strong uptrend developed during which the market formed a cluster of swing highs as the trend consolidated. When the market broke through the small cluster of swing highs, our entry setup was triggered. Past performance is not a reliable indicator of future results Reversal Entry Setups 1. Fakeout A fakeout occurs when the market breaks above a swing level only to reverse within the same or following two candles – trapping those traders who had anticipated a breakout. Entry Trigger: Break above (below) swing resistance (support) level followed by a close back below (above) the swing resistance (support) level within the same or following two candles. Stop Placement: Below (above) fakeout low (high) Example: Tesla Daily Candle Chart This example from Tesla’s daily candle chart highlights the plethora of trading opportunities the fakeout entry setup can offer. We see multiple instances of long and short opportunities when the market threatens to break above (below) a swing level only to fakeout. Past performance is not a reliable indicator of future results 2. Hot Touch: Double Top/Bottom The ‘hot touch’ is a specific variation of the classic double top/bottom. The market must touch and reverse from a swing level within the same candle like a cat that’s just touched a hot tin roof! Entry Trigger: An exact double top/bottom forms from a single candle. Stop Placement: Below (above) the double bottom (top). Example: EUR/USD 5min Candle Chart In the below example a hot touch double top forms in a range bound market – causing prices to reverse sharply and retest the bottom of the range. It is also worth noting the two fakeout patterns that also occurred. Past performance is not a reliable indicator of future results Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents. Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 84.01% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
Education
by Capitalcom
Smart Money Concepts Detailed Learning Plan. 5 Essential Topics If you want to learn Smart Money concepts, but you don't know what to start with, this article with help. I will share with you 5-steps Smart Money Concepts learning plan . 5 important topics to study in SMC. Topic 1: Market Structure - the analysis of a behavior of a price on a chart. In the contest of Smart Money Concepts you should learn: -SMC structure mapping -Market trend identification -Trend change -Trend reversal -SMC important events: BoS, CHoCH Learn Trend Analysis Leach ChoCH Topic 2: Liquidity Zones - learn to identify the areas on a price chart where liquidity concentrates. Learn How to Identify Liquidity Zones Topic 3: Imbalance - one of the most accurate signals of the presence of big players / smart money on the market. Learn How to Identify Imbalance with Candlestick Topic 4: Order Block - the specific areas on a price chart where institutional traders / smart money are placing significant number of trading orders. Top 5: Top-Down Analysis - structured and consistent analysis of multiple time frames. After you study Topic 1, 2, 3, 4, you should learn to apply these knowledge and techniques on multiple time frames, to make informed decisions, following long-term, mid-term, short-term analysis. Learn Top - Down Analysis The 5 topics that we discussed are essential for your success as a smart money trader. Study these topics with care, and I guarantee you that you will achieve exceptional results. ❤️Please, support my work with like, thank you!❤️
OANDA:XAUUSDEducation
by VasilyTrader
4
How to Trade the Cypher Harmonic PatternHow to Trade the Cypher Harmonic Pattern If you’re an avid trader, you’re probably familiar with harmonic patterns. One of the rarer and more advanced patterns is the Cypher, which can be an effective tool for identifying potential trend reversals and entry points. However, successfully trading the Cypher pattern requires a thorough understanding of its structure and rules. In this article, we’ll delve into the specifics of the Cypher pattern, how you can spot it, and offer some practical tips on how to trade it. What Is the Cypher Chart Pattern? The Cypher is a type of harmonic pattern used by traders to identify potential buying and selling opportunities in the markets. Specifically, it’s used to help find areas where a reversal may occur. The pattern is made up of five swing points (X, A, B, C, D) and four legs (XA, AB, BC, CD). It’s characterised by an “M” shape when bullish and a “W” shape if bearish. Traders typically place orders at D to catch the potential reversal. Like other harmonic patterns, the Cypher requires that specific Fibonacci ratios be met before it is traded. However, the ratios used for the Cypher are relatively unique, which makes the formation one of the less common harmonic patterns. The Cypher is also more advanced than other patterns, like the Gartley, Bat, or Butterfly, so you may need to spend some extra time learning how to recognise and trade it effectively. Once you master the skill, however, you’ll find that the Cypher can be a valuable addition to your trading arsenal. Identifying the Cypher Pattern At its simplest, the Cypher pattern comprises an impulse leg, XA, that retraces to form AB. Another impulse beyond the swing point A creates the BC leg, and a final retracement to D generates the CD leg. Here are the Cypher harmonic pattern rules that must also be met: AB retraces XA by 38.2% to 61.8%. BC extends XA by 127.2% to 141.4%. CD retraces XC by 78.6%. It’s acceptable if the ratios don’t line up exactly. For example, if AB retraces XA by 63% and the rest of the pattern looks correct, you can still consider trading. This is especially true for the final rule. Generally speaking, CD often moves slightly beyond the 78.6% area before reversing but can sometimes stop just short of the actual point, so don’t be discouraged if the ratios aren’t perfect. Drawing the Cypher Pattern Now that we know how to identify the Cypher, we can begin plotting it on live charts. To help develop your Cypher drawing skills, try using the TickTrader platform offered by us at FXOpen. You’ll be able to use the built-in XABCD drawing tool, as seen in the chart above. To draw the Cypher pattern: Choose the XABCD tool from the sidebar in “Patterns.” Click to place X at your first swing point. Add the following A, B, and C points at the corresponding swing highs and lows. Place D at 78.6%. To be notified as soon the price reaches the area, open an FXOpen account to gain access to customisable alerts. You may notice that the ratios on the chart are expressed as numbers instead of percentages. Just multiply the number by 100 to get the percentage, such as 1.272 = 127.2%. Using the Cypher Pattern While Trading So, now we know how to identify and draw the Cypher pattern, but how do you trade it? Follow these steps to get an idea of how you can apply the Cypher pattern to forex and other markets. Entry Traders have two options when it comes to entering a Cypher pattern. They can either set a limit order at the 78.6% level or use a market order after confirming that the price is beginning to reverse. Setting a limit order runs the risk of missing an entry if the price just goes beyond the level, but it can also make life easier since you don’t need to actively watch for confirmation. Meanwhile, looking for validation, like if D begins to reverse at a support/resistance level or with a candlestick pattern (such as a pin bar or tweezer tops/bottoms), and entering with a market order may potentially offer you a worse risk/reward ratio, but can get you into trades with more certainty. Stop Loss Since X should always be the most extreme point out of X, B, and D, stop losses can be placed just above (bearish Cypher) or below X (bullish Cypher). Beyond X, the setup becomes invalid, so this is a suitable area to set a stop. If entering with a market order, you could set a stop loss above (bearish Cypher) or below (bullish Cypher) the candle you entered on for potentially greater risk/reward, but be aware that the price could still hit your stop loss and take off without you. Take Profit Many traders begin to partially close their position at A, although you could choose C if you want to take a more aggressive approach. Beyond the structure, you could set targets based on Fibonacci extension levels, like 1.272 or 1.618. This is done by applying the Trend-Based Fibonacci Extension tool to X, A, and B, which will project levels outside the formation. Bullish Cypher Pattern Example Here, we have an almost perfect AB retracement of 61.4%, followed by a pinpoint CD retracement to the 78.6% level. Note that the tool shows the pullback as 73.7%, but we know by applying the Fibonacci retracement tool to X and C that it actually hit the expected level. Even if you weren’t using the Fibonacci retracement tool, you could still consider the hammer and following bullish engulfing candle signs of a reversal and enter with a market order. The stop loss was placed suitably, just below X. Given how well this example aligns with the ratios, you could decide to be more aggressive and set a profit target at C. You might also use the Trend-Based Fibonacci Extension tool, as we’ve used here, to find further targets, such as 127.2%. Bearish Cypher Pattern Example In this example, we can see a bearish Cypher forming as part of a larger downtrend. The AB retracement of 62.9% and BC extension of 129.6% are very close to the ratios of 61.8% and 127.2%, so we can be confident that the price is likely to reverse at 0.786 before breaking down further. As such, a limit order at 78.6% would have been ideal, as the price retraced to 79% before plummeting. The risk/reward ratio here is also attractive with a stop loss just above X. A conservative profit-taking approach would be to partially close the position at A, although C would have also been suitable in this scenario. Using the Fibonacci extension tool applied as described above showed us an optimal second target at 161.8%. Your Next Moves Now that you have an overview of what the Cypher pattern is, how to identify it, and how to trade it, you can put your knowledge to the test. You can follow these steps: Head over to TickTrader and hunt for the hallmark “W” and “M” shapes the Cypher creates to get used to spotting them. Once you’ve identified a few, try using the guide and examples above to determine how you would have traded the pattern and note the results. Take a look at the Cypher pattern indicator to help you identify formations you might have missed. Draw up some rules around how you’d like to incorporate Cyphers into your own system. You could also explore how other technical factors, like trendlines, support/resistance levels, and chart patterns, can add confluence to your Cypher trades. Open an FXOpen account and have a go at trading Cyphers in live markets, continuing to refine your strategy. Broaden your horizons by learning more about harmonic patterns. If you’ve mastered the Cypher, you’re probably ready for other advanced patterns, like the Shark, 5-0, and Three Drives. This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.
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