CHART PATTERNS
Fanlines And Fibonacci
Retracement Analysis Beyond The Horizontal
by Cornelius Luca
If you are a currency trader, then you need to know your
trends. Here's 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.
FIGURE 1: CLASSIC DOWNTREND. A dollar/Norwegian krone
downtrend is formed during the last quarter of 2004.
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 there's 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 it's 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.
FIBONACCI'S BACKGROUND
The Fibonacci ratios are named after the 13th-century Italian mathematician
Leonardo of Pisa, better known by his nickname, Fibonacci (an abbreviation
of filius Bonacci; filius is Latin for "son of"). Little
is known of him except for his famously having introduced Hindu-Arabic
numerals to western Europe in his work titled Liber Abacci ("Book
of Calculations"), and the number sequence that is named after him.
As many of you may remember from your studies, Fibonacci, through the
process of solving a mathematical riddle, discovered a unique sequence
of ascending numbers in which every new term consists of the sum between
the previous number and itself, starting with zero. The beginning of the
series is as follows:
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597,
2584, 4181...
...Continued in the June issue of Technical Analysis of STOCKS
& COMMODITIES
Excerpted from an article originally published in the June 2005 issue
of Technical Analysis of STOCKS & COMMODITIES magazine. All rights
reserved. © Copyright 2005, Technical Analysis, Inc.
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