Stocks & Commodities V. 23:6 (38-43): Retracement Analysis Beyond The Horizonal by Cornelius Luca
If you are a currency trader, then
you need to know your trends. Hereís
how you can monitor the health of a
trend in the currency markets.
Currencies may be one of the best-trending financial
instruments, so monitoring the health of the trend is an extremely important responsibility for those who trade currencies. While at times you will enjoy surging trends, such as the downtrend experienced by the dollar/Norwegian krone in the last quarter of 2004 (Figure 1), this is the exception to the rule.
Trending currencies will typically be subject to several pullbacks or retracements due to short-term countermoves, profit-taking before and after the release of significant economic indicators, and bargain-hunting.
When it comes to analyzing retracements, traders generally use Fibonacci levels. And yet, this statement
is only partly accurate; the levels are only ratios, and thereís more to it than applying the standard group
of three horizontal lines at 38.2%, 50%, and 61.8%. (In fact, 50% is not even a Fibonacci retracement level
but itís bundled in, due to its high technical significance.)
In addition to these three ubiquitous horizontal lines, there are two other ways to apply the Fibonacci ratios
for retracement analysis: fanlines and arcs. This article will focus on fanlines and will also compare them to
the standard Fibonacci horizontal lines.