Advanced Technical

Analysis in FX
Fibonacci Retracements, Elliot Wave
Theory, Gann Fan and
Andrew’s Pitchfork
 Paul Brittain
Alaron Trading
1-800-935-6492
Pbrittain@alaron.com
 Fibonacci

Fibonacci retracement percentages

correspond to natural ratios
discovered by the Greeks. They
referred to the phenomenon as the
Golden Ratio. The theory was then
rediscovered by Fibonacci; a
medieval, Italian Mathematician.
 Fibonacci

As displayed in the following slide,

these retracement levels are a common
occurrence in the ebb and flow of a
market trend.
 Fibonacci

Fibonacci proved that the Golden

Ratio is present in many aspects of
nature and science, and Elliott felt that
it had great significance on the
financial markets as well.
 Fibonacci

Elliot asserted that

these counter-trend
waves will usually
retrace against the
trending waves by
38.2, 50 and 61.8
percent.
 Fibonacci
Commodity prices will frequently
consist of an initial wave, a second
wave (often retracing 61.8% of the
initial move), the third wave
(usually the largest), then another
retracement, and finally the 5th
wave (the last gap), which would
exhaust the movement.
 Fibonacci

The Fibonocci Ruler is the most

commonly used retracement
measuring tool. Each level of the
ruler highlights the areas in which
the market may experience
support or resistance.
 Fibonacci

The market will

often reverse its
coarse at these
retracement
levels. Notice the
reversal points on
the next two
slides.
 Elliot Wave Theory

The Elliot Wave Theory was

developed by Ralph Nelson Elliot.
This theory is based on the premise
that market behavior is based on
waves rather than random timing.
 Elliot Wave Theory

Elliot believed that prices fluctuated

in a series of waves based on the
Golden Ratio, also referred to as the
Golden mean that was originally
proven by Fibonacci.
 Elliot Wave Theory

Elliot believed that the market rises in

a series of 5 waves and that a market
declines in a series of 3 waves.
 Elliot Wave Theory

According to the theory, on the first

wave a market rises, on wave two it
declines, begins to rise again on the
third wave. The third wave is
followed by a period of decline known
as the fourth wave, and finally
completes the rise on the fifth wave.
 Elliot Wave Theory
There is a correction period following
the five wave sequence. This declining
period is referred to as a three-wave
correction. During this time the
market theoretically declines for wave
A, begins to rise for wave B, and falls
again for wave C.
 Elliot Wave Theory Simplified

Wave one: Normally very short and easy

to miss.
Wave two: A retracement wave, usually
gives back all or most of what the first one
gained.
Elliot Wave Theory Simplified

Wave three: Usually very prominent, as

it follows a period of what appears as
consolidation, most people trade this
wave.
Elliot Wave Theory Simplified

Wave four: Noted to be very intricate yet

still a consolidation. One of Elliot’s main
rules is that in a 5-wave advance cycle,
wave 4 can’t overlap wave 1.
Wave five: Often very active, yet at some
point declines and leads to the 3 wave
corrective cycle.
 Elliot Wave Theory Simplified
Three Wave Decline:
Wave A: Normally seen as a minor pullback, of
wave 5 of the advance cycle.
Wave B: Follows Wave A of the downtrend, and
is often hard to spot but should result in a third
wave continuing down.
Wave C: Usually quite significant and many
traders see this selling opportunity.
Elliot Wave Example
 Elliot Wave Theory
Drawbacks to the wave counting strategy:
• One man’s wave one, is another’s wave
three. In other words the starting point is
somewhat ambiguous.
•It is easy to count the waves after they
occur, but difficult to identify them as they
are occurring.
 Andrew’s Pitchfork

Dr. Alan Andrews developed a

channel technique to identify
areas of support and resistance
from a common baseline. The
premise of the theory is to trade
the channel depicted by the “tines
of the pitchfork.
 Andrew’s Pitchfork

The center tine begins at the most

recent contract high or low. The
top tine is determined by looking
at the highest move from the
contract high or low. The next
point is located based on the
retracement of that move.
Resistance tine based on most
recent move from baseline.

Support tine identified by

retracement of the original
move
 Gann Fan

W.D. Gann designed several

techniques for studying price charts.
He believed that specific geometric
patterns and angles contained
reoccurrences that could be used to
predict price action.
 Gann Fan

Gann believed that the ideal balance

between price and time exists within a
45 degree angle of the axis. The Gann
fan is made up of 9 angles and is based
on this concept.
 Gann Fan
The corresponding lines represent
support and resistance, once one line is
broken by the entire day’s price range
the next line becomes new support or
resistance. The drawing of these lines
should begin at a relative top or bottom
of a market.
 Gann Fan

It is also imperative that when

drawing the Gann Fan, the 45
degree angles are kept in tact. In
other words the center line should
keep a 1 to 1 slope.
 Gann Fan

During an uptrend, the penetration of

one line suggests that the market will
rally to the next, in a downtrend a
broken support line anticipates a drop
to the next line.
 Paul Brittain
Alaron Trading
1-800-935-6492
Pbrittain@alaron.com