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TRADING FOREX
You can apply this technique to forex pairs to
confrm price direction and anticipate when price
will reach a certain point.
he golden ratio to chart analysis is use-
ful, and you should try to incorporate it
within your strategy wherever possible.
In this article I want to discuss one simple
way of doing this. I will not go into much detail
here about the origins of the ratio, except to say
it has been used throughout written history and
perhaps before, and that it has been found within
architectural designs and construction methods
of the ancient Egyptian pyramids and the Greek
Parthenon and can be seen in the growth and form of
many plants. So its been around a while.
The golden ratio is certainly a number that has sig-
nifcance in everyday life, even if we are not always
aware of it. And just like the early architects who took
the ratio from nature and applied it to their structures,
we as traders can take the natural occurrences of the
market and apply the same golden ratio to create our
own technical plan.
It is primarily the actions of the crowd that cre-
ate many of the well-known chart patterns, and as a
consequence of these patterns, there can be highly
emotional and distraught moments in the marketplace.
As a result, the response of these emotions can be
seen as refective of human nature, a response that is
heightened when faced with the prospect of a loss or
gain in the fnancial markets. The markets are refec-
tive of human nature, and where natural occurrences
happen, so can the golden ratio appear. There are many
ways to use the golden ratio in the market, and here
is one of the simpler applications.
APPLYING IT
For the purposes of this article I will frst demon-
strate the signifcance of this number by plotting the
ratios on a graph and then show how to use it in the
fnancial markets.
If you take the ratio of two successive numbers
in the Fibonacci series (1, 1, 2, 3, 5, 8, 13, ...) and
divide each by the number before it, you will fnd
the following series of numbers:
1/1 = 1. 2/1 = 2, 3/2 = 1.5, 5/3 =1.666, 8/5
= 1.6, 13/8 = 1.625, 21/13 = 1.61538
Plot these results on a graph and you can see the
ratios settle at a particular value, called the golden
ratio or the golden number (Figure 1). The value is
approximately phi, or 1.618034.
If you are familiar with Fibonacci ratios in market
analysis, you will know that 61.8% is seen as a key
level to determine whether the trend is corrective or
T
A Window Of Opportunity
Trading The Golden Ratio
by Gareth Burgess
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Y-Values
Y-values
0 1 2 3 4 5 6 7 8 9
2.5
2
1.5
1
0.5
0
FIGURE 1: FIBONACCI SERIES. If you plot this series on a chart, you can see the ratios
settle at a particular value referred to as the golden number. The value is approximately phi
or 1.618034.
Copyright Technical Analysis Inc.
Stocks & Commodities V. 29:9 (24-30): Trading The Golden Ratio by Gareth Burgess
a reversal. Surpassing 61.8% of the move usually signals a
change in the longer-term direction that is, it changes the
bigger picture (Figure 2).
This is just one use of the golden ratio in market analysis.
There are other methods, such as projecting up or down once
a breakout has occurred. That method of projection can help
determine potential targets and is available on many chart
software packages. It is also a useful tool
for maintaining confdence in a position
or positions that are showing a proft.
The signal, however, that I want to
discuss here not only projects a target
level but involves counting forward to
determine where the price action will
reach a key level. This technique also
involves fnding a distinct and volatile
pattern on the chart. In a sense, it is
projecting but only to a certain level in
time, one that will become signifcant
for either support or resistance and the
overall market direction.
This window of opportunity is applied
to the chart and incorporated within
your analysis like a pivot level used
to confrm continuation of the price
direction. But thats not all. The signal
I will demonstrate can also determine
the expected time that the price will be
seen. Though not necessarily the most
important aspect of this technique, it has
the advantage of knowing when to return
to the market if you want to initiate a
position or control a position based on the signal generated by
applying this technique.
Before the golden ratio can be applied, which in itself is a
very straightforward process, a certain pattern must be found
within the price action. Usually, the pattern has been created
by some volatility, is most often seen on the charts as a type of
V pattern, and is known in the industry as a bullish V top or
bearish V bottom. For the technical use
of this pattern, however, it does not have
to be seen at the top or bottom of a trend;
simply appearing on the chart sparked by
some market volatility or news-related
event will do.
What is striking about this pattern is
that the spike displays a very balanced
market. It is one that I describe in my
book Trading And Investing In The Forex
Markets Using Chart Techniques. If you
look at the candlestick chart in Figure 3,
you will see that the market falls sharply,
only to bottom and then turn back up. This
move in the market is well displayed by
standard candlesticks that lead down to a
hammer candlestick, signaling a base
hammering out a base and eventually,
standard positive candlesticks lead the way
back up! This market condition is suitable
for entering positions without having to
worry about wild market swings.
This type of pattern is also seen on dif-
ferent time frames, however, and this is
FIGURE 2: SIGNIFICANCE OF PHI. On this 240-minute chart of the EUR/USD, you can see how the market continues
straight through the 61.8% retracement level and changes the picture of the market direction. The market never looked
back once it passed this level.
FIGURE 3: HERES YOUR WINDOW OF OPPORTUNITY. GBP/USD brings new opportunity as investors with a longer-
term horizon see the lower levels as an opportunity to enter the market.
TRADING FOREX
1.35500
1.35000
1.34500
1.34000
1.35000
1.33000
1.32500
1.32000
1.31500
1.31000
1.30500
1.30000
1.29500
1.29000
1.28500
1.28000
1,3439/100.0%
EUR/USD Spot
1,32194/61.8%
1,30869/38.2%
1,28742/0.0%
=61.8%
1,31502/50.0%
1.6000
1.5900
1.5800
1.5700
1.5600
1.5500
1.5400
1.5300
1.5200
1.5100
1.5000
1.4900
1.4800
1.4700
1.4600
1.4500
1.4400
1.4300
1.4200
1.4100
Big move brings new opportunity
GBP/USD Spot
Daily
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Copyright Technical Analysis Inc.
Stocks & Commodities V. 29:9 (24-30): Trading The Golden Ratio by Gareth Burgess
TRADING FOREX
the point you have to consider when applying the technique
the larger the time frame, the more signifcant the pat-
tern. A 15-minute chart showing this V pattern will see many
short-term traders get stopped out and many traders jumping
in on the opportunity, especially as the price action bases out,
forcing the price back up again. The longer-term time frame
such as the daily chart, however, has much more than just the
short-term market participants, and that is where the technique
of calculating forward using the golden ratio works best.
When a large V pattern is seen on the daily
chart, it is a sign the locals that is, the
short-term participants have not been able
to get control of the market. This is because
traders and investors with longer-term views
take control and the longer-term investors
on the sidelines will be forced into making a
decision. They will see the move as a poten-
tial opportunity to add to positions or enter
new positions. The more the market moves,
the more the participants will be attracted
to the market as well as the local short-term
participants, such as proprietary traders and
speculators.
YOUR WINDOW OF OPPORTUNITY
The big move seen on the British pound/US
dollar (GBP/USD) chart in Figure 3 sent many
traders running for the exit, while many other
traders would have viewed the lower levels
as an opportunity not to be missed. After
the market recovered to the point where it
originally sold off, the burning question every
trader and investor would have been asking is,
Does this continue to move upward?
With the application of the golden ratio, it is
possible to fnd a key level on the daily chart
and use that day as a directional aid to help confrm a continu-
ation in the market price action or help you develop a market
entry strategy based on the daily chart support and resistance
levels. The calculation is as follows:

n Take the frst candlestick or bar seen as the start of the
move and the fnal candlestick or bar of the move. The
V pattern will only become clear after the move has
taken place, but this is acceptable because there will
be enough time to make the calculations and project
forward.
n Then count the amount of days. For example, in Figure
4, there are 21 days.
Take this number and multiply it by the golden ratio (1.618).
Then add this number to the original number of days to reach
a projection day.
The Fibonacci retracement is one well-known technique,
and with good reason. This technique is more often than not
very accurate at fnding the level where the market price action
will encounter important levels of supply or demand. It is these
levels that often cause the market to turn about in the face of
bearish or bullish news. Simply put, these are levels where the
risk/reward ratio changes and the market yields a window of
opportunity.
This is precisely what happens when you apply the golden
ratio and fnd key days on the daily charts or key hours on the
shorter time frame (Figure 5). Each signal is a signal in its own
FIGURE 4: CONFIRMATION OF PRICE CONTINUATION. Here, GBP/USD nds perfect support at the previous
high of the key day projected out using the golden number, 1.618. The window pivot levels should be applied with
overall market direction in mind.
1.5800
1.5700
1.5600
1.5500
1.5400
1.5300
1.5200
1.5100
1.5000
1.4900
1.4800
1.4700
1.4600
1.4500
1.4400
1.4300
1.4200
1.4100
1.4000
1.3900
1.3800
Start
21 days
movs (10, 0)
54 days
Key day support
Final day of selling = Tweezer candlestick pattern
21 days from start of selling to candlestick base
21 x 1.618 = 33 + 21 = 54
GBP/USD Spot
Daily
Copyright Technical Analysis Inc.
Stocks & Commodities V. 29:9 (24-30): Trading The Golden Ratio by Gareth Burgess
right because it is the result of
previous buying and selling
that is, the readjustment of
the market and should only
be used once, though the high
or low from these key price
regions may continue to be
support or resistance for much
longer. Chances are there will be
another event where the number
can be applied.
DIFFERENT
TIME FRAMES
Tying the signal in with different
time frames will help you avoid
paralysis and should give you
a great advantage on market
direction, but keep in mind that the directional
bias you get from this signal will have a greater
effect in a trending market.
In Figure 6, there was a sharp decline in the
morning of March 31, 2011. The euro sold
off against the US dollar for 20 pips, which
is enough of a move on the fve-minute chart
to try applying the golden ratio and project-
ing out. Remember, the bigger the move, the
greater the number of positions in the market is
changing, and therefore, the better the reaction
will be further out when the key price level is
reached.
TRADING WITH THE TREND
Trading the direction of the market is important
when applying this technique. If the market is
strong enough and currently in an established
trend, the window should confrm the overall
market direction, either as support or as a
breakout in the direction of the market trend. See
examples of support in Figures 4, 7, and 8.
For example, if the market failed at those
levels marked out in these fgures, this could be a
warning that something is not right with the trend
and a neutral stance should be adopted until a
signal appears, confrming the market direction.
As with many other technical indicators and
techniques, the trend always dominates.
FIGURE 5: ADDING CONFIRMING INDICATORS. On this chart of GBP/USD, you can see that building on the chart by adding the
simple moving average improves the visual aspect of nding market direction.
FIGURE 6: APPLYING IT TO DIFFERENT TIME FRAMES. On this ve-minute chart of the EUR/USD, you see
a sharp decline in the euro. A distinct V pattern can be seen in the price history as the aftermath of selling
and buying. This type of market action can be used as a buying opportunity or a buy the dips strategy by
many traders.
Trading the
market direction
is important when
applying this
technique.
Key day projected out
movs (10, 0)
Key day later becomes
good support
Key day closes above the 10-day MA
GBP/USD Spot
Daily
1.6040
1.5900
1.5800
1.5700
1.5600
1.5500
1.5400
1.5300
1.5200
1.5100
1.5000
1.4900
1.4800
1.4700
1.4600
1.4500
1.4400
1.4300
V-type pattern
EUR/USD Spot
5 mins
1.41580
1.41560
1.41540
1.41520
1.41500
1.41480
1.41460
1.41440
1.41420
1.41400
1.41380
1.41360
1.41340
1.41320
1.41300
1.41280
1.41260
1.41240
1.41220
1.41200
1.41180
1.41160
Copyright Technical Analysis Inc.
Stocks & Commodities V. 29:9 (24-30): Trading The Golden Ratio by Gareth Burgess
TRADING PLAN
Entry strategy: The window in Figure 8
shows how the market fnds support. At
this point, you can determine a buy level
at the top of the hammer-type candlestick
that has confrmed support at the base
of the window.
Smart stops: Identifying the correct
stop-loss level can save you from falling
into the trap of letting losses run. Chart
analysis is all about fnding trade op-
portunities and levels to initiate trades.
If those trigger points are violated and
the market moves back through them,
that in itself is your stop-loss.
In Figure 8, the stop can be located
at the base of the window or just below
it. That allows a stop-loss of some 10
pips, which is fairly tight, and which
is then brought up to the trigger level,
once the market moves from that level.
The market should move away from the
support zone, or resistance zone in the
downtrend, quite quickly. If it does not,
that would be a cause for concern.
Gareth Burgess has more than 10 years
experience in applying chart techniques
to investment analysis, creating technical
views and strategies for corporate-level
clients, and is a dedicated private inves-
tor. He is founder of the Chart Workshop
(www.chart-workshop.de), a provider of
technical views for investors. He can be
contacted by info@chart-workshop.de.
SUGGESTED READING
Burgess, G.A. [2011]. Channels In The
Forex Markets, Technical Analysis
of STOCKS & COMMODITIES, Volume
29: March.
_____ [2010]. Forex Entry, Technical
Analysis of STOCKS & COMMODITIES,
Volume 28: October.
_____ [2009]. Utilising Confrmation
Techniques With Candlestick Chart-
ing, Currency Trader.
_____ [2009]. Trading And Investing
In The Forex Markets Using Chart
Techniques, John Wiley & Sons.
TeleTrader Professional
See Editorial Resource Index
FIGURE 7: TRADING WITH THE TREND. On this ve-minute chart of EUR/USD, there is a window of opportunity projected
out using the golden number. This is an opportunity to create a very decisive entry and exit strategy.
FIGURE 8: MARKET FINDS SUPPORT. On this ve-minute chart of EUR/USD, you see a clear entry strategy for a short-
term position.
Key price region
This selling has 11 five-minute candles
11 x 1.618 = 17; 17 + 11 = 28
Support at the window
28 candles later
EUR/USD Spot
5 mins
1.41810
1.41758
1.41700
1.41650
1.41600
1.41550
1.41500
1.41450
1.41400
1.41350
1.41300
1.41250
1.41200
Key price region
Support at the window
Entry point
Stop region
EUR/USD Spot
5 mins
1.41850
1.41795
1.41776
1.41750
1.41700
1.41650
1.41600
1.41550
1.41500
1.41450
1.41400
1.41350
1.41300
1.41250
1.41200
movs (10, 0)
S&C
TRADING FOREX
Copyright Technical Analysis Inc.
Stocks & Commodities V. 29:9 (24-30): Trading The Golden Ratio by Gareth Burgess