What is Fibonacci Retracement?

Fibonacci Retracement is considered a top technical analysis tool used to identify potential price reversal levels in every market (Stocks, Forex etc).

A Historic Analysis of Fibonacci Retracement

This tool is actually based on a particular sequence of numbers identified by the Italian mathematician Leonardo Fibonacci during the 13th century AD. The meaning of these numbers is wider than any trader can think. Actually, Ratio 1.618 is spread throughout the universe while it can be found in our nature too. The ancient Greeks have used this ratio in their architecture widely. The famous Parthenon was build based on 1.618. The architect of Parthenon was named Phidias (5th century BC) and that is why 1.618 is known also as the Phi Number:

Phi Number (φ) = 1.61803398875….. This is known also as the ‘Golden Ratio’.

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The Fibonacci Sequence of Numbers

The sequence is based on the fact that each number is the sum of the previous two numbers, and that continues infinitely. Here are the first numbers of the sequence:

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584, etc.

Here are some interesting facts about the Fibonacci sequence:

◘ Every number in the sequence is equal to the sum of the previous two numbers

◘ Every number in the sequence divided by the previous number approximates 1.618

◘ Every number in the sequence divided by the next number approximates .6180

◘ Every number in the sequence divided by another two places higher approximates .3820

◘ Every number in the sequence divided by another three places higher approximates .2360

  

 

The Fibonacci Retracement

Based on the above sequence some very important ratios are derived.

1) The 23.6% Ratio

2) The 38.2% Ratio

3) The 61.8% Ratio {It is called the ‘Golden Ratio"}

Additionally, some technicians are incorporating two more ratios

4) The 50% Ratio

5) The 78.6% Ratio

What is MACD?

MACD is the acronym of Moving Average Convergence / Divergence and it is a technical analysis tool originally created by Gerald Appel in 1979. MACD is one of the simplest trend-indicators and it can be applied everywhere. It is a powerful tool to indicate the reversal of a trend in short-periods but it is not a good tool to estimate the overall overbought and oversold market levels.

 

 

MACD Calculation

According to the most popular setting, MACD is measuring the difference between a 26-day EMA and a 12-day EMA (Exponential Moving Averages). Additionally a 9-day EMA may be used as a trigger line. When MACD moves above its 9-day EMA the market is considered bullish while if MACD moves below its 9-day EMA, the market is considered bearish.

◘ MACD Line = 12-day EMA - 26-day EMA

◘ MACD Signal Line = 9-day EMA of MACD Line

◘ MACD Histogram = MACD Line - MACD Signal Line

Other setting may also be used to make MACD more sensitive. Some analysts are using the setting (5,35,5) and that means a fast moving average of 5-days, a slow moving average of 35-days and a trigger line of 5-days.

The MACD Histogram

The histogram provides an easy framework to identify the trend. When the histogram is found on positive territories then the trend is bull, while when it is found on negative territories, the trend is bear.

What is the Relative Strength Index or RSI?

Relative Strength Index (RSI) is a very popular technical analysis indicator (oscillator) which aims to identify overbought and oversold market conditions of any traded asset. RSI is used in Forex, Stocks and in other forms of online trading. RSI is scaled from 0 to 100. Generally speaking, the RSI level of 70 or more indicates overbought market conditions, while the RSI level of 30 minus indicates oversold market conditions.

■ RSI 70+ Overbought

■ RSI 30- Oversold

Important note: If you are a day-trader then use the RSI indicator only in the 5M chart. If the market is ranging and you trade long at RSI=30 and trade short at RSI=70 you can make very good profits. Remember to use the RSI at 5M chart.


How can we calculate RSI?

Nowadays, RSI indicator is embedded to almost every trading platforms that provides technical analysis. RSI may be calculated using the following formula:

100

RSI = 100 - -------------

1 + RS*

*Where RS for the time period (t) can be calculated if we divide the Average of upward closings during the period (t) to the Average of downward closings during the same period (t)