Stocks & Commodities V.

29:9 (24-30): Trading The Golden Ratio by Gareth Burgess

TRADING FOREX

A Window Of Opportunity

Trading The Golden Ratio

Y-Values

You can apply this technique to forex pairs to

confirm price direction and anticipate when price
will reach a certain point.

NIKKI Morr

2
Percentage

2.5

1.5

he golden ratio to chart analysis is use1

ful, and you should try to incorporate it
within your strategy wherever possible.
0.5
In this article I want to discuss one simple
0
way of doing this. I will not go into much detail
0
1
2
3
4
5
6
7
8
9
here about the origins of the ratio, except to say
Y-values
it has been used throughout written history and Figure 1: fibonacci series. If you plot this series on a chart, you can see the ratios
perhaps before, and that it has been found within settle at a particular value referred to as the golden number. The value is approximately phi
architectural designs and construction methods or 1.618034.
of the ancient Egyptian pyramids and the Greek
ways to use the golden ratio in the market, and here
Parthenon and can be seen in the growth and form of is one of the simpler applications.
many plants. So its been around a while.
The golden ratio is certainly a number that has sig- Applying it
nificance in everyday life, even if we are not always For the purposes of this article I will first demonaware of it. And just like the early architects who took strate the significance of this number by plotting the
the ratio from nature and applied it to their structures, ratios on a graph and then show how to use it in the
we as traders can take the natural occurrences of the financial markets.
market and apply the same golden ratio to create our If you take the ratio of two successive numbers
own technical plan.
in the Fibonacci series (1, 1, 2, 3, 5, 8, 13, ...) and
It is primarily the actions of the crowd that cre- divide each by the number before it, you will find
ate many of the well-known chart patterns, and as a the following series of numbers:
consequence of these patterns, there can be highly
emotional and distraught moments in the marketplace.
1/1 = 1. 2/1 = 2, 3/2 = 1.5, 5/3 =1.666, 8/5
As a result, the response of these emotions can be
= 1.6, 13/8 = 1.625, 21/13 = 1.61538
seen as reflective of human nature, a response that is
heightened when faced with the prospect of a loss or Plot these results on a graph and you can see the
gain in the financial markets. The markets are reflec- ratios settle at a particular value, called the golden
tive of human nature, and where natural occurrences ratio or the golden number (Figure 1). The value is
happen, so can the golden ratio appear. There are many 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
by Gareth Burgess
Copyright Technical Analysis Inc.

Stocks & Commodities V. 29:9 (24-30): Trading The Golden Ratio by Gareth Burgess

TRADING FOREX

software packages. It is also a useful tool

for maintaining confidence in a position
or positions that are showing a profit.
1.35500
The signal, however, that I want to
1.35000
discuss
here not only projects a target
1.34500
1,3439/100.0%
level but involves counting forward to
1.34000
determine where the price action will
1.35000
reach a key level. This technique also
1.33000
involves finding a distinct and volatile
pattern on the chart. In a sense, it is
1.32500
1,32194/61.8%
=61.8%
projecting but only to a certain level in
1.32000
time, one that will become significant
1,31502/50.0%
1.31500
for either support or resistance and the
1.31000
overall market direction.
1,30869/38.2%
1.30500
This window of opportunity is applied
1.30000
to the chart and incorporated within
your analysis like a pivot level used
1.29500
to confirm continuation of the price
1.29000
1,28742/0.0%
direction. But thats not all. The signal
1.28500
I will demonstrate can also determine
1.28000
the expected time that the price will be
seen. Though not necessarily the most
Figure 2: significance of phi. On this 240-minute chart of the EUR/USD, you can see how the market continues
important aspect of this technique, it has
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.
the advantage of knowing when to return
to the market if you want to initiate a
a reversal. Surpassing 61.8% of the move usually signals a position or control a position based on the signal generated by
change in the longer-term direction that is, it changes the applying this technique.
Before the golden ratio can be applied, which in itself is a
bigger picture (Figure 2).
This is just one use of the golden ratio in market analysis. very straightforward process, a certain pattern must be found
There are other methods, such as projecting up or down once within the price action. Usually, the pattern has been created
a breakout has occurred. That method of projection can help by some volatility, is most often seen on the charts as a type of
determine potential targets and is available on many chart 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
GBP/USD Spot
to be seen at the top or bottom of a trend;
Daily
1.6000
simply appearing on the chart sparked by
1.5900
some market volatility or news-related
1.5800
event will do.
1.5700
What is striking about this pattern is
Big move brings new opportunity
1.5600
that the spike displays a very balanced
1.5500
market. It is one that I describe in my
1.5400
book Trading And Investing In The Forex
1.5300
Markets Using Chart Techniques. If you
1.5200
look at the candlestick chart in Figure 3,
1.5100
you will see that the market falls sharply,
1.5000
1.4900
only to bottom and then turn back up. This
1.4800
move in the market is well displayed by
1.4700
standard candlesticks that lead down to a
1.4600
hammer candlestick, signaling a base
1.4500
hammering out a base and eventually,
1.4400
standard positive candlesticks lead the way
1.4300
back up! This market condition is suitable
1.4200
for entering positions without having to
1.4100
worry about wild market swings.
This type of pattern is also seen on difFIGURE 3: HERES YOUR WINDOW OF OPPORTUNITY. GBP/USD brings new opportunity as investors with a longerferent time frames, however, and this is
term horizon see the lower levels as an opportunity to enter the market.

TELETRADER PROFESSIONAL

EUR/USD Spot

Copyright Technical Analysis Inc.

Stocks & Commodities V. 29:9 (24-30): Trading The Golden Ratio by Gareth Burgess

TRADING FOREX

GBP/USD Spot movs (10, 0)

Daily

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

Key day support

54 days

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 potential 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
FIGURE 4: CONFIRMATION OF PRICE CONTINUATION. Here, GBP/USD finds perfect support at the previous
trader and investor would have been asking is,
high of the key day projected out using the golden number, 1.618. The window pivot levels should be applied with
Does this continue to move upward?
overall market direction in mind.
With the application of the golden ratio, it is
possible to find a key level on the daily chart
the point you have to consider when applying the technique and use that day as a directional aid to help confirm a continu the larger the time frame, the more significant the pat- ation in the market price action or help you develop a market
tern. A 15-minute chart showing this V pattern will see many entry strategy based on the daily chart support and resistance
short-term traders get stopped out and many traders jumping levels. The calculation is as follows:
in on the opportunity, especially as the price action bases out,
forcing the price back up again. The longer-term time frame
n Take the first candlestick or bar seen as the start of the
such as the daily chart, however, has much more than just the
move and the final candlestick or bar of the move. The
short-term market participants, and that is where the technique
V pattern will only become clear after the move has
of calculating forward using the golden ratio works best.
taken place, but this is acceptable because there will
be enough time to make the calculations and project
forward.
Final day of selling = Tweezer candlestick pattern
21 days from start of selling to candlestick base
21 x 1.618 = 33 + 21 = 54

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 finding 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 find key days on the daily charts or key hours on the
shorter time frame (Figure 5). Each signal is a signal in its own
Copyright Technical Analysis Inc.

Stocks & Commodities V. 29:9 (24-30): Trading The Golden Ratio by Gareth Burgess

GBP/USD Spot movs (10, 0)

Daily

1.6040
1.5900
1.5800
1.5700
1.5600

Key day projected out

1.5500
1.5400
1.5300

Key day later becomes

good support

1.5200
1.5100
1.5000

Key day closes above the 10-day MA

1.4900
1.4800
1.4700
1.4600
1.4500
1.4400
1.4300

Trading the
market direction
is important when
applying this
technique.
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
FIGURE 5: ADDING CONFIRMING INDICATORS. On this chart of GBP/USD, you can see that building on the chart by adding the
time frames will help you avoid
simple moving average improves the visual aspect of finding market direction.
paralysis and should give you
a great advantage on market
direction, but keep in mind that the directional
EUR/USD Spot
5 mins
bias you get from this signal will have a greater
1.41580
effect in a trending market.
1.41560
In Figure 6, there was a sharp decline in the
1.41540
morning of March 31, 2011. The euro sold
1.41520
V-type pattern
off against the US dollar for 20 pips, which
1.41500
is enough of a move on the five-minute chart
1.41480
to try applying the golden ratio and project1.41460
ing out. Remember, the bigger the move, the
1.41440
greater the number of positions in the market is
1.41420
changing, and therefore, the better the reaction
1.41400
will be further out when the key price level is
1.41380
reached.
1.41360
1.41340
1.41320
1.41300
1.41280
1.41260
1.41240
1.41220
1.41200
1.41180
1.41160

FIGURE 6: APPLYING IT TO DIFFERENT TIME FRAMES. On this five-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 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 confirm 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 figures, this could be a
warning that something is not right with the trend
and a neutral stance should be adopted until a
signal appears, confirming the market direction.
As with many other technical indicators and
techniques, the trend always dominates.

Copyright Technical Analysis Inc.

Stocks & Commodities V. 29:9 (24-30): Trading The Golden Ratio by Gareth Burgess

TRADING FOREX

EUR/USD Spot

5 mins

Trading plan
1.41810
1.41758
1.41700

Key price region

1.41650
1.41600

This selling has 11 five-minute candles

11 x 1.618 = 17; 17 + 11 = 28

1.41550
1.41500
Support at the window

1.41450
1.41400
1.41350
1.41300

28 candles later

1.41250
1.41200

FIGURE 7: TRADING WITH THE TREND. On this five-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.

EUR/USD Spot movs (10, 0)

5 mins

1.41850
1.41795
1.41776
1.41750

Key price region

1.41700
1.41650
Entry point

1.41600
1.41550

Stop region

1.41500
1.41450

Support at the window

1.41400
1.41350
1.41300
1.41250
1.41200

FIGURE 8: MARKET FINDS SUPPORT. On this five-minute chart of EUR/USD, you see a clear entry strategy for a shortterm position.

Copyright Technical Analysis Inc.

Entry strategy: The window in Figure 8

shows how the market finds support. At
this point, you can determine a buy level
at the top of the hammer-type candlestick
that has confirmed 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 finding trade opportunities 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 investor. 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 Confirmation
Techniques With Candlestick Charting, Currency Trader.
_____ [2009]. Trading And Investing
In The Forex Markets Using Chart
Techniques, John Wiley & Sons.
TeleTrader Professional

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