I have been using Fibonacci-based moving averages on my charts almost as long as I have used the Wave (Raghee’s Cycle Indicator) on my charts and on all my time frames.

The initial testing that I did before deciding upon the 34 EMA H/L/C had me experimenting with the Fibonacci series up to 144 and beyond.  The number beyond 144 were ruled out as they were to slow to be nimble enough market cycle indicators however I did keep the research on the 233, 377, 610, 987, 1597…all the way to the 6765 because of the dynamic support and resistance they consistently identified, especially on the daily chart.

Throughout my trading I have always incorporated Fibonacci in my trading mainly with the Wave and the Fibonacci retracements and extensions.  Fibonacci is a mathematical rule of nature, and it is that belief that has fueled my pursuit of these numbers.  But that certainly is not enough to stick with them.  The reason I do is because I see the levels these numbers help me project act as effective support and resistance levels time and time again.  It’s that confirmation that created my confidence.

Since seeing is believing here are a few examples to take a look at.  Hopefully they will pique your curiosity and you will begin experimenting with these moving averages in your own trading.

Just as my Wave is made up of exponential moving averages, so are the other Fibonacci based moving averages on my charts.

Remember just like every trading indicator, these moving averages identify support and resistance.  It will be your strategy and the market trend that will dictate what you do with these "decision levels".

- Raghee

 I’ve been scanning the cross-rates today which is something that I don’t do daily as most of my active forex trading are dollar-correlated pairs.

Since the dollar is range-bound and even moving with the crude oil market due to independent, major news in each I thought the timing was right.  You can read more about the current state of my dollar-correlated trading here and also learn about when I look to stop trading and what the clues are right now.

In the meanwhile, let’s keep an eye on the 15 minute EUR/JPY as we close in on the Asian session open.

The trend is up and the play I am interested in is the short.  Why?  Because the EUR/JPY has a double top at 161.52.  Ofcourse a breakout/continuation is certainly a valid entry but a reversal short with the ceiling overhead and the "50" pip psychological level would be moving with the larger trend.

Remember though that a trending pattern has three possible entries:  reversal, trend follow, and breakout.  Don’t ignore that the trend continuation also can be played with a swing off the top lines of the Wave at 161.20.

- Raghee

I’m not sure why questions seem to come in waves, but it seems many of you have aussie on the brain…the AUD/USD.

I first posted the daily aussie’s Dow 1-2-3 short set up and Fibo extension update back on July 17th in this post. 

There has certainly been a lot that has happened since then!

And it always seems that during extremes there is this sudden shift to how and when a reversal will take place.  For every entry there’s got to a be a set up before we shift to a buying mentality after a dramatic and/or extended downtrend.

Ok, first psychological trap:  Bottom (and top picking) is for losers.  It’s the glory trade, the ego trade, the "look how brilliant I am to pick a top/bottom" trade.  Don’t do it.

Seriously, think about it this way.  Realize that anyone short (I am still hanging on to a single lot as I have scaled out of my original Dow 1-2-3 set up) is still looking for lower lows and navigating through each support level. I’m conscious of the fact that one of the support levels will finally being a bounce or stall BUT I’m not looking for a reversal buy on the daily chart quite yet.

A key low at 0.8513 was broken but that’s not the significant low that is being watched…that low is 0.8500.

Today’s session low of 0.8495 is a sign that the "00" buyers are still hanging in there.  But each push by sellers is chipping away at this "00" support.  This psychological level is where the battle between buyers and sellers is being fought.  With the slight bounce I’m seeing there is indeed reason to think that in the near term 0.8500 will hold. 

There is 30 minute and 60 minute RCI resistance between 0.8546 and 0.8599.

On to the weather…As many of you may know, then "Tropical Storm" Gustav was upgraded to a hurricane.  I set this trade up when I read the NOAA report (I live in South Florida so it’s a part of life…).  For forex traders, this means that the crude oil market is in play with the storm path decidedly Gulf-bounce and that has in turn effected the dollar…which ofcourse has effected the dollar-correlated majors.  You can check out my "weather report" here.

Finally a big thanks to those of you who joined me this morning for the my weekly Chart Pattern Trading webinar.  We had a few new traders in the room who had questions about the RCI (Raghee’s Cycle Indicator" aka the "Wave"). 

About the name change:  My "Wave" was all too often confused or associated with Elliot Wave (it’s not).  And frankly, had I known when I put this tool together and started testing it all those years ago that I would be writing books, traveling, teaching, and posting charts all over the web, well, I would have given it a better name!

The RCI (aka Wave) is three individual 34 period exponential moving averages.  One is set on the high, one is set on the close, and one is set on the low.

- Raghee

I received some really good emails regarding the prior post regarding the swing trade and I thought I would share the gist of them here since a couple thoughtful points were brought up.  Thanks for your feedback.

The first and I think most important point was that the trade, when it did finally trigger during the Asian session, represented a 21 pips risk at entry.  The point of validity (stop loss) on swing trades is the opposite side of the RCI (aka Wave) plus five.  In this case that price at entry was 109.61.  Remember since the RCI is dynamic resistance in a downtrend, that price level can change.

I also liked many of the emails I received mentioned the fact that there was a second chance short entry at between 8:00 and 8:30am EST that morning.  And that is correct!

The RCI/CCI short did not follow through immediately and offered a chance for selling that morning long before the swing short set up.  While that has no direct bearing on the swing short getting stopped out, it does have a bearing on being able to capitalize on the initial set up and playing during a more reasonable hour of the day.

- Raghee

The 30 minute dollar-yen has turning over and begun trending lower.  The initial set up was a Raghee’s Cycle Indicator/Commodity Channel Index (20) short.

The trigger came at 2:30am to 3:00am EST.

Now, if you’re anything like me…you’re probably sleeping.  My active trading hours are roughly 7am to Noon. So as with any 24 hour market, you have to have ways to set up another trade.  In this situation the early morning turn over led to a down trending market and a four to six o’clock angle on the RCI.

Now I’m looking at a swing short if prices can bounce to the bottom line of the RCI (the 34 period EMA on the low).

A couple things are going for this entry.  First there’s a good chance it will trigger during the Asian session, and second, I love the "50" psych number as resistance as the current number we’re looking at is the 109.49 level.

- Raghee

I’m posting this partly for a comment left in the previous post ("Trade Management on the EUR/JPY 240").

While I am going to walk through them step by step, keep in mind that these are two separate trades.

Playing a trend reversal trade is especially challenging when the previous trade was a trend following swing entry that was stopped out, however, entering RCI reversal trades are quite often done after a swing trade stops out.

I posted a 240 minute EUR/USD swing short which — with the weakness in the U.S. Dollar today — broke through the point of validity.

If you want to see the details of the U.S. Dollar and crude oil moves, click here to read the post.

I’m going to walk you through what is essentially a stopped out swing trade that triggers a RCI/CCI reversal entry.

1)  This is the entry for the short.  Yes, the clock angle of the cycle was not the best for a swing as the downtrend was weakening, but none-the-less it was basically an aggro swing short at 1.4771.

2)  Prices did follow through the "00" and this did allow for an exit in front of the "00" at 1.4705.  The low was 1.4669.  This price action did set in motion the process for two keys orders: the exit and ratcheting the stop from a risk based to a break even

3)  Prices hit the break even stop (five pips above the entry = 1.4476)  You’re out of the short trade.

4)  Price continue to rally up through the top line of the RCI with CCI (20) confirmation, this is the buy trigger for the RCI/CCI (aka Wave /CCI) entry

5)  The initial profit target.  Just like the profit target in the short was based on stepping in front of size at the "00" same on the upside.  Step out in front of the 1.4900 at 1.4895. 

- Raghee

Questions? Join me each Tuesday at my weekly webinar here at at FXStreet.

After the swing short entry off the bottom line of the RCI (Raghee’s Cycle Indicator aka The Wave) we’re now in the enviable position of trade management, no longer risk management.  In other words, we’ve ratcheted the stops up to a trailing stop.

Now you have a few choices.  One would be to use the "50" and "00" levels as profit targets, basic but easy and effective.

I don’t see a good "last major move" for a Fibo to be pulled so that’s not an option.

Finally, you can use the bottom line of the RCI (the 34 period EMA on the low) as a trailing stop.  You can do this once the level would represent at worst a break even level for the trade.

I have highlighted the two "00" levels.  One thing to keep in mind is that unless you are using the bottom line of the RCI, you are probably out on the bounce back up through 161.00 or 161.50.

- Raghee

It’s a perfect storm and please don’t read into that statement "fool-proof, perfect trade", there’s no such thing.

The prefect storm here starts with the support on the U.S. Dollar Index.

The current pullback to the cycle indicator (aka The Wave) is the trigger I look for when setting up a swing buy.

Next up, the EUR/USD.

The fiber is setting up a swing short of the bottom line.

The EUR/JPY set up we took a look at in the prior Chartology post is setting up my preferred trend follow trade with the bounce.

It’s this same touch on the bottom line of the cycle indicator with the channel down pattern still intact that I am looking to capitalize on.  All three entries are valid and triggered and that’s what makes it a "perfect storm" for me.

The Dollar Index and the EUR/USD make for secondary confirmation for the EUR/JPY trigger.

- Raghee

Trending markets has three possible entries:  trend follow, reversal, breakout.  The down channel below is no exception.

The current chart shows that the downward market cycle is starting to lose it’s steepness.  But it’s still in a four to six o’clock angle none-the-less according to the cycle indicator.

 
There is a low that already created a short term bottom at 161.33.  I’m looking for a bounce to the bottom line of the cycle indicator at 162.64 for a short or a hit on the resistance downtrend of the channel pattern.

A reversal of the pattern would be either a break of the resistance downtrend line and/or the top line of the cycle indicator.

- Raghee

The dollar-yen is heading higher on the 240 as the market cycle is still in an uptrend.  With 111.00 ahead there is an opportunity to play a breakout but since this is a trending market, I’d much rather get long on a correction than a breakout.  A pullback to 110.20 or 110.05 would make a good pullback in order to buy support and follow the trend.  Keep in mind that any trending pattern like the rising wedge does also have the reversal trade waiting on the back burner so a break down through 109.00 would trigger a short on the break on uptrend line support.

I’ve have a key support on the aussie on the daily and 240 minute waiting just above the .8600 level.  Now I have been peeling out of my short position from the 1-2-3 short we talked about here at the Chartology blog and in the Chart Pattern Trading webinars here at FXStreet and if there will be a area of support from which the aussie will base and rally, it the area between 0.8600 and 0.8380.

And just so no one gets the impression that I have some unusual obsession with the 240 time frame…The 60 minute aussie is trading in the narrows of of the triangle pattern that has formed.  The MACD Histogram is currently well above the zero line so I will be looking for the break higher for a trigger to buy.

Finally the swissy on the 240 is playing a lot like the dollar-yen.  A pullback to initially the 1.0900 would be a great corrective entry long.  If you’re looking for a little deeper pullback, the 1.0883 level — which is also the top line the my Cycle Indicator (RCI) — would be a great place to trigger a buy.

As far as "U.S. Dollar harmony" realize the we need a quick pullback on the dollar to initiate the dollar-yen and swissy buys.  As far as  dollar support, which the dollar at the 77.18 closing level on Friday, there will be support at the 77.00 and then again between 76.50 to 76.33.

As I have said often this week, if the dollar rally is to continue it NEEDS to correct (pullback) along the uptrend to attract the next wave of buyers.

- Raghee

If you want to get chart pattern alerts like the ones above, check out Autochartist.  You can get a free 21-day demo here.