Page 73 - Ultimate Guide to Currency Trading

More on the Technical Indicators

Fibonacci lines are taken from a theory that there are three levels of a currency pair's peaks and
valleys. Lines are drawn from the lowest to highest point in the time frame. The three levels are then
drawn at preset, statistically significant levels. Entry and exit points are then determined from these
numerically significant levels. Modern FX technical analysts use soft-ware to draw the line directly
onto trading platform charts. These levels are observed by currency traders all over the world: that is
precisely why some support and resistance levels have such significance. The world's traders know
that if a level is breached that the other traders will observe it and react strongly either positively or
negatively, depending upon the direction of their positions.

For a bit of background, the theory of Fibonacci lines and its three levels of resistance is
based upon the golden ratio and was first introduced by Fibonacci (also known as the
Leonardo of Pisa) in a book he wrote in 1202 called Liber Abaci (Book of Calculation).

Once one level is broken through, in theory there will soon be a breach of the second level,
and then after the second level is breached, there will be quick movement to the third level. These
quick movements through levels are true for support and resistance: It is the breaching of the level
that is important, not the direction, as there will be winners and losers to each upward or downward
movement of a currency pair. Once you understand and begin to use the support and resistance
indicators in your trading, you will be well on your way to using one of the strongest technical
indicators to supplement your fundamental research.

Draw and Interpret Your Own Charts

You can learn to take the main technical indicators and draw charts on your trading platform's
software. You can learn to use candlestick and bar charts to get a graphic visualization of where a
currency pair has been and is heading. You can use the chart to watch the FX pair move up and down
over time, and choose between long- and short-term time horizons. Longer-term time horizons such
as one-hour and one-day charts can be used for an overall picture of what is happening to a currency
pair. Shorter time frames such as fifteen-, five-, and one-minute charts can help you on the tactical,
immediate timing of when it is a good time for an entry point.

Once you have your basic chart drawn, you can then move on to using the moving averages.
Use your software to draw a 200-day and a 50-day moving average in different colors. Take note as to
where the moving average lines cross: these are where the direction of the FX pair is likely to change,
whether up or down. Take this information and cross-reference it with the information you have
gathered from your trading journal. Make note in your trading journal of when the 200-day and 50-
day moving average will cross again. Some Forex brokers allow you to plot a free-form line on your
chart. If this is the case with your broker's software, use the option to sketch lines to arrive at an
estimate where the 200-day and 50-day will again cross in the future. Draw a line across and down.