Forex Technical Analysis: Application of Fibonacci Retracement Levels

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In this post I don’t want to spend a lot of time on how the Fibonacci ratios are derived. With a little internet research you can find a multitude of websites that can give you that information. Instead I want to focus on basic application of the common levels that Forex trader’s use.
There are 3 basic steps to applying the Fibonacci retracement levels to the charts. So this article will discuss the what, where and how to applying these levels.
First, for the purpose of technical trading, the Fib levels that we will focus on are the 0.236, 0.382, .50, 0.618,  0.786 and the 0.886. Also, there are a few Fibonacci extensions that will come in handy. Those are the 1.27, 1.382 and 1.618. With the exception of the .50, all of these levels can be derived from the Golden Ratios found within the Fibonacci sequence or the converse of one of the ratios. The .50 is not a Fib ratio but a common retracement level widely recognized by traders as a half way point of retracement.
Next, let me define what a retracement level is: a retracement level is the point in which you expect the market to draw back against the trend, stop, and return back in the direction of the trend. This of course would require a definition of the trend. The trend is the general direction the market is moving viewed in short, medium and long term outlooks. All that said, the trend and subsequently the retracement levels will require some subjectivity and artistry in their interpretation by the trader. But I would suggest that the wider view point that you take of the trend the closer to the “general direction” you will be viewing. For example look at the image on Fig. 1, here we can see an

Forex Technical Analysis: Potential Reversal vs. Actual Reversal

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Potential Reversal vs. Actual Reversal

There is a difference! Potential reversal only tells us that there are indications that a trend change has a higher likelihood of happening than it did before. Actual reversal tells us that there are indications that the trend has already changed and so our directional focus should change with it.

So, what are the differences?

There are numerous indicators to inform us of potential reversal. We can use momentum indicators, volume indicators, charting patterns or candlestick formations, actually too many to discuss in this post, so I want to focus in on the chart pattern that is forming on the weekly AUDUSD.

The AUD has been in an uptrend for, well, a few years. The current leg began in May of 2010. That being knows there is an obvious tendency to focus on the upside and

Forex Technical Analysis – NZDUSD

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The NZDUSD has been in a long term uptrend quite frankly since bottoming out in early 2009 recently capping at multi-year highs at .8300. There has been a turn down from those highs and is now showing signs of potential reversal on multiple compressions.

Begining on the Daily chart below there has been an open/close below the daily trend line that originates from March of this year. This O/C candle also forms below the previous resistance back in April and before the highest high. Looking forward, a few weeks, if the pattern persists we could set up a Head and Shoulders on the Daily….only potential at this time.

On the 4hr chart we can see an intraday climb back under the