Forex strategies revealed | FSR Forum

Hello all,
I would like to discuss a strategy that i came across recently on forexfactory. It is a strategy that uses ratios and harmonics to trade (started by mr pip, a trader whos occupation is trading). I was really quite excited upon discovering it. It is a very very interesting way of viewing the forex market, and I do believe i have found the one technique that I will dedicate myself to mastering. No more system hopping! So far I'm breaking even, but its only been < 1 month, and I am so much better! I would like to share it in this forum because this website is one of the first I came across when searching for forex strategies, back in the past.

Currency Pair: Any (im practicing EURUSD)
Time frame: Any (I do 100 tick)
Preferred time to trade: 6:00- 10:00 CST.

Harmonic trading consists of 4 major concepts that need to be mastered:
1) Supply/Demand Zones
2) Price Action
3) Fibonacci Confluence and Impulse Waves
4) Discipline

Supply/Demand Zones
This method of drawing supply/demand zones came from this thread:http://www.forexfactory.com/showthread.php?t=311095


Forex markets consists of demand (people who would like to buy a currency pair) and supply (people who would like to sell a currency pair). When price hits a zone of demand that is larger than the current supply, price will bounce off of this zone. When price hits a zone of supply that is larger than current demand, all demand will be filled, there will be an excess of supply, and price will drop.

So these zones are areas where people are willing to buy (demand zones) and where people are willing to sell (supply zones). We determine the zones in the following manner, see picture.

Notice that the faster price moves away from the zone, the stronger the zone is. Also, the longer price stays from the zone, the more likely it is that price will bounce when it hits the zone. A zone can be fresh (price hasn't hit the zone, so none of the demand or supply in that zone has been depleted) or the zone can be already hit once or twice. Not that this makes it invalid, its just something to keep in mind.

Once these zones are broken, they create swap zones. If the zone is a supply zone, it becomes a demand zone and vice versa.

This is a unique way of thinking about support/resistance.

Drawing supply/demand:


Swap zones:

Fibonacci Confluence and Impulse Waves

Impulse Wave Introduction
The market moves in waves of demand and supply. These waves produce visible line segments, I will call them impulse waves, waves, or simply swings.
See diagram below.



Main/Dominant Swings/Impulse Waves
This concept helps us identify important impulse waves that we can currently trade. There is no need to look at higher timeframes.

A main swing is simply an impulse wave, and a dominant swing is an impulse wave which is contained in the main swing. A main swing must have a retracement of at least 38.2% to be considered a main swing.

See diagram to learn how to identify main/dominant swings. Each swing is labelled with the type of swing it is and a number. For example, if it is labelled dominant (2) it is the dominant swing of the main(2) swing. A swing can be labelled with multiple labels.



See diagram to see how a 38.2% retracement verifies that we can use the swing as a main swing.

Fibonacci Confluence and Impulse Waves

First, some definitions:
Fibonacci Extension:
A fibonacci extension is a measurement taken in 3 points. The first point is a low point, the second point is a high point, and the third point is the price level where 0% will start. Lines will be drawn which are a certain percentage of the distance between the first 2 points: a 0% line will be drawn at the first poin, a 100% line will be drawn at the second point, and a 200% line can be drawn at double the distance.

Vice versa if you want a fibonacci extension of a swing from a high to a low - the first point is a high point, the second point a low point, etc....

Fibonacci Retracement:
A fibonacci retracement consists of 2 points: the first point a swing low and the second a swing high. Lines are drawn at a certain percentage of the distance between the low and high. 0% will be drawn at the second point, 100% at the first point, 50% at the midway point, etc....

See diagram below for examples of both.



Second, some observations:

Observation 1: In many instances, you will find a nearby wave that is equal in length. This will form an abcd or ab = cd structure (dont worry about it for now).
See diagram below for examples.


Observation 2: Alot of the time, price forms a new impulse wave that ends at the fibonacci extension of the current impulse.



Observation 3: When the appropriate fibonacci retracements and/or fibonacci extensions of significant waves converge, it forms confluence. 2 + impulse waves end here. This is a PRZ - a potential reversal zone. Price has a potential to reverse here! It has a potential to reverse because price typically moves in fibonacci ratios, and if multiple fibonacci ratios converge, the probability that that current wave of demand/supply is over increases! This is what we trade. And no, we don't trade all confluences.

Fibonacci Confluence and Impulse Waves

Potential Reversal Zones (PRZs)
Potential reversal zones are areas where price has potential to reverse. They are formed from the combination, or 'confluence', of fibonacci extensions, fibonacci retracements, equal length impulse waves, and supply/demand zones (structure). Why use fibonacci extensions? Price tends to form new impulse waves that end at the fibonacci extension of the previous impulse wave. In addition, price tends to retrace to areas around the fibonacci retracements. Equal length impulse waves are used in confluence because nearby impulse waves, a lot of the times, tend to form in equal lengths. Supply/demand zones are used because these are areas where a lot of people are willing to buy/sell.

Below is an example of some PRZs, i like to draw them in black.
Not all potential reversal zones are traded, only the strongest. Price action will help in filtering out weak PRZs. Dont worry about how to form them, all will be explained soon! I actually didnt draw the fib retracement that was involved in the first PRZ. In general, we utilize the fib retracement of the current main swing, if there is any.

A Break from Fibonacci: How to access tick charts and a platform that allows one to draw line segments

You cannot use metatrader for this, you cannot draw equal length impulse waves. You need to use free ninjatrader, and then place trades on metatrader or whatever using the analysis you did in ninjatrader. Dont worry, data feeds are basically the same, and you can get a free live data feed from MBTrading!

First, you need to download ninjatrader.
http://www.ninjatrader.com/

Next, you need to get a free demo account from MBTrading. You can technically use other companies, like FXCM, but i wasnt able to get them to work on ninjatrader.

http://www.mbtrading.com/

Now follow the directions to connect to mbtrading.

http://www.ninjatrader.com/ConnectionGuides/MBTrading-Connection-Guide.php

Useful Ninjatrader Tips
Creating a Chart
Go to File->New->Chart. Type in the forex symbol you want to see, and press enter. On the right hand side, set the 'Type' to 'Tick' and 'Value' to 100.

Adjusting Scale of Chart
Just drag your mouse vertically across the price axis, or horizontally across the time axis to compress/expand the axis. You will now see an 'F' in the upper right hand corner. This means auto price fitting is off, and when new price forms it wont fit the screen to the current price, and when you scroll back in time, it wont fit price. To get back to fitting price, click the 'f' in the corner, and it will disappear. Auto fit will now be on. However, theres no need for auto fit, you can scroll the chart beyond the current price and price can fill the white screen, and then you can scroll using the tip below.

Scrolling the Chart
Press control and move your mouse across the price or time axis. This will scroll the graph. An 'F' will appear in the upper right hand corner.

Charting
You can copy and paste line segments, just play with all the options for drawing different lines, rectangles, fibonacci retracements, and fibonacci extensions. You can modify the property (color, percentage extensions/retracemetns, etc) and you can save these settings as defaults (for retracements and extensions) by right clicking the open properties dialog, clicking manage templates, typing in the name of the template ('Default' if you want it default), and clicking OK.

In addition, the keyboard shortcuts are very useful, for example f8 is fibonacci retracements, etc (they are shown in the popdown menu when you select what you want to draw, the menu pops down when you click the pencil icon at the top).


Thats all for now, tomorrow i will discuss PRZs in more detail, describing how you form them. I will start by describing the most basic PRZs that one can form, and then eventually I will move to PRZs which form from general confluence and how to trade them. I am actually still learning this part so bear with me.

Have a good night!

Starry

I really really wish i could go back and edit some mistakes, put in the wrong diagram. Oh well, they are in the attachment section and are titled accordingly, i was wondering why those attachments are showing when i had though i placed them inline. grrr! anyways, later

Oh yeah, and heres the thread from forexfactory that im learning this from . Its rather long, Im trying to condense it here for more convenience, but its a rather good read!

Ratios and Harmonics: A different way to trade
http://www.forexfactory.com/showthread.php?t=402253

Fibonacci Confluence and Impulse Waves

Drawing Impulse Line Segments Correctly
Bear with me here, ive created these rules via some experience and testing what works, i think it makes sense. I will cover some rules for offsetting impulse waves later on (where to copy and paste the line segment to create an equal length impulse wave?).

When there are lots of wicks at the start of an impulse wave, do we include the wicks in the line segment or what? See picture.



The 'norm' is to draw the line from the highest high at the start of the impulse wave to the lowest low at the end (and vice versa for upward impulse waves). However, there are plenty of cases where this is not done. The wick of the low side is always included. However, the wicks at the start of the impulse wave have some rules that you can utilize to choose where to start to draw.

Start of the impulse wave is in a range
Use the top of the candle which breaks out of the range
Many pin bars/doji at top
Use either the open, or the high of one of the candles forming the top. Choose the one which has more confluence (price bouncing off the price) in recent past.

Fibonacci Confluence and Impulse Waves

Trading

Trade Rule 1: Aggressive C Buy/Sell
We will start with the aggressive C buy/sell. Draw a fibonacci retracement of the main swing. Draw a red box from the 61.8 to 78.6 retracement zones. This zone is not a PRZ, because there is only one fibonacci retracement. However, it is still tradeable. When it closes in this zone, short (or buy if D is above C). Place a stop 2 pips above the high of A (if on 100 tick chart), or alternatively a fixed stop of 10 pips (i am using this on 100 tick chart, but i am not good yet, mr pips rules are above high of A). Take Profit a couple of pips before the D completion point. Form the D completion point by copying and pasting the impulse wave to the C point.

The points ABCD together form what is called an ABCD pattern. An ABCD pattern has the dominant leg retrace to the 61.8-78.6 zone. An AB = CD pattern has a dominant leg retracement to any other fibonacci retracement.



AB = CD/ABCD PRZs
Now, we will learn how to draw the PRZ of an AB = CD or ABCD. Copy the impulse wave to the C point. Draw a fibonacci extension from A to B. If the copied impulse wave is close to the 127 - 138 zone, draw a black rectangle including this zone and the end of the copied impulse wave. If it is closer to the 161 zone, draw a rectangle encompassing the end of the copied impulse wave and the 161 zone. If you wish, you can also include the 138 fibonacci extension.



Adding Probabilty: Structure (Supply/Demand Zones) + Dominant Wave PRZ + Aggressive C Zone of Main Wave
Now, we will combine what we have just learned and create three rectangles: a supply rectangle, a dominant wave PRZ, and a main wave aggressive c zone. The aggressive C zone will be in red, the supply in blue, and the PRZ in black. Confluence at its best!

What is important to note here is that we can use PRZs of smaller harmonics to lead us into zones/PRZs of larger harmonics!
Also, I think its very pretty, and the overlapping rectangles adds a sense of confidence psychologically to the trade (i need to work on this discipline, take the trades!)



Thats all for today

Oh yes, and I forgot. For an ABCD, in general, you should move to break even whenever price breaks the first significant supply/demand zone. The rules are technically move to BE when price reaches the 38.2% retracement of the BC leg, but i have found that often it retraces and then goes down, because price tends to not pierce significant demand/supply on the first test. I guess you could enter on this retrace instead of at the C point.