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A question that I hear the most from aspiring traders is “Which market should I trade? – Stocks, Futures, commodities…?” Well, with the right attitude and dedication there is money to be made in every market. However, there is one market that is still largely neglected by smaller traders even though it offers great profit potential and numerous trading opportunities. It is Forex or Foreign Exchange market.
Simply said, no other trading instrument comes even closely to forex market when it comes to liquidity, 24hr market environment and last but not the least, profit potential. Forex (currency) market is the largest (most liquid) financial market in the world, with an average daily volume of more than US$ 1.5 trillion, which is more than all of the global equity markets combined.
The ICWR Forex phenomenon
Regardless of how strong a long-term market trend is, the market never moves only in the direction of the long-term trend – there are always minor movements against the longterm market trend. These deviations usually don’t last very long and after them the market moves again in the direction of the long-term trend. The major market movements in the direction of the long-term market trend are called impulsive waves and the minor market movements against the long-term market trend are called corrective waves.
The picture below (Figure 1.1) shows a snapshot of a EUR/USD candlestick chart. Although the market shows both upward and downward market movements it can be easily recognized that the long-term market trend is clearly bearish as between 07:00 AM and 11:00 AM the price failed around 140 pips (from 1.3500 at 07:00 AM to 1.3360 at 11:00 AM, that is 1.3500 – 1.3360 = 0.0140 = 140 pips). The waves (1), (3) and (5) are the impulsive waves; the waves (2) and (4) are the corrective ones.
Our main observation, until now disregarded by all traders in their trading strategies, is that when putting into relationship the height of a corrective wave and the height of the prior impulsive wave, the corrective wave tends to retrace the prior impulsive wave in Fibonacci ratios. Frequent relationships are 25%, 38%, 50%, 61% and 75%. Up to now we will refer to this effect as the Impulsive/Corrective Wave Retracement (ICWR) phenomenon. For example in the picture below (Figure 1.2) the corrective wave (2) retraces the impulsive wave (1) in the Fibonacci ratio of 0.382.
The ICWR forex phenomenon is a typical self-similarity effect of a complex system. For all kind of complex systems in nature as social, chemical or physical systems such selfsimilarity effects can be found. Self-similarity is a fundamental property of self-organized complex systems and is a matter of recent intense investigation by physicists and mathematicians.
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