Trading for Beginners: 3. ATR, Fibonacci, Elliott Wave Theory

Trading for Beginners: 3. ATR, Fibonacci, Elliott Wave Theory

By Crypto Army | Mastering The Market | 3 Dec 2020


In this article we are going to continue the previous article of the most common indicators and strategies used by traders, to be able to master the market, achieve profit and to trade with the least risk available. In this article we will talk about the Average True Range indicator, Fibonacci Retracement and Elliott Wave Theory. Please check our previous article in the link below.

Most Common Indicators

1. Average True Range

Setting a proper stoploss on any trade is very important, most traders that loose their trades are able to figure the general trend of the market and go with it, but the stoploss set will be most commonly hit before the price continues as they thought. The ATR indicator is used to set the perfect stoploss. This indicator measures the volatility of the market in a specific timeframe. Most commonly used on 1hr timeframe and 4 hours. It is typically derived from 14 days moving average. 

The image shown below represents the chart of OMGUSDT on 4h timeframe. In this chart you can observe the average true range is indicating 0.1485. The proper way to use the ATR indicator is to deduct 0.1485 from our entry price, by this way we will have our stoploss around 3.6570. The same method is used if entering a short position, but the ATR value must be added to the entry price. We recommend to use the ATR indicator on 4hrs timeframe.

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2. Fibonacci Retracement

Fibonacci Retracement levels are horizontal lines that indicate on the chart a possible area of support or resistance. The most commonly used levels are 23.6%, 38.2%, 61.8% and 78.6%. The percentage levels are areas you should check whether the price will drop below or stay above. It is not recommended to rely on without analysing previous support and resistance levels. Fib levels can be drawn easily using the tool on trading view between 2 specific point a trader thinks that are important.

In the image below you can observe the latest pump on OMGUSDT. In which level 1 acts as a support line if the price drops back to, and the beginning of the trend. Level 0 represents the maximum level reached, and will eventually become a resistance later on. Dropping below 0.618 levels is an indicator that there is a trend reversal. If the 0.618 levels stay intact, price should move as the trend and test levels 0.382 and 0.236 as resistance levels. Fib Retracement tool can also be used on downtrends, but in this case the 1 level should be the beginning of the downtrend.

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3. Elliott Wave Theory

EWT is used to identify market cycles and trends, this trading strategy suggests that the market moves in a specific pattern mainly affected by investor's psychology. Wave Principle is a book about this specific pattern, publish in 1938 explaining how the method is used.  This theory is divided into 2 basic principles: Five Wave Pattern (1-5) also known as the dominant trend, and Three Wave Pattern ( ABC) known as the corrective trend.

In the Image below you can observe how EWT should most commonly act. We will summarise each wave below

Wave 1: The first impulsive wave that starts the trend.

Wave 2: Corrects wave 1, Fibonacci retracement tool is used, wave 2 should pullback the price to 61.8%.

Wave 3: The largest and most powerful wave as a continuation of the trend, exceeds wave one by a ratio of 161.8%

Wave 4 : The second corrective wave, corrects wave 3 to approximately 38.2%.

Wave 5: The last wave of the trend, volume is often lower in this wave before reaching the top of the trend.

Waves A, B and C are corrective waves of the trend seen previously.

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In this article we discussed important tools and methods to be used in technical analysis, in our next article we will discuss the most common price action patterns observed on a chart.

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Thanks for your attention,

Crypto Army

 


Crypto Army
Crypto Army

Technical Analysis Lessons, Signal Provider


Mastering The Market
Mastering The Market

In this blog we teach basic principles of trading.

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