Glossary And Foreign Exchange Terms part one

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A

Accumulation swing index (ASI) An oscillator based on the swing index

(SI.) A buying signal is generated when the daily high exceeds the

previous SI significant high, and a selling signal occurs when the

daily low dips under the significant SI low.

American style currency option An option that may be exercised at any

valid business date throughout the life of the option.

Arbitrage A risk-free type of trading in which the same instrument is

bought and sold simultaneously in two different markets in order to

cash in on the divergence between the two markets.

Ascending triangle A triangle continuation formation with a flat upper

trendline and a bottom sloping upward trendline. (See Triangle.)

Ascending triple top A bullish point-and-figure chart formation that

suggests that the currency is likely to break a resistance line the

third time it reaches it. Each new top is higher than the previous

one.

Atekubi A bearish two-day candlestick combination. It consists of a

blank bar that closes at the daily high; the current closing price

equals the previous day's low. The original day's range is a long

black bar.

At par forward spread Forward price is zero; therefore, the spot price is

similar to the forward price. It reflects the fact that the foreign

interest rate is similar to the U.S. interest rate for that particular

period.

At-the-money (ATM) option An option whose present currency price is

approximately equal to the strike price.

At the price stop-loss order A stop-loss order that must be executed at

the precise requested level, regardless of market conditions.

Average options Options that refer to the average rate of the

underlying currency that existed during the life of the option. This

rate becomes the strike in the case of the average strike options; or

it becomes the underlying, determining the intrinsic value when

compared to a predetermined fixed strike in the case of average rate

options. Average options can be based on the spot rate (spot style)

or on the forward underlying the option (forward style.) The average

can be calculated arithmetically or geometrically, and the rates can

be tabulated with a variety of frequencies.

B

Balance-of-payments All the international commercial and financial

transactions of the residents of one country.

Bank of Canada (BOC) The central bank of Canada.

Bank of England (BOE) The central bank of the United Kingdom. It is a

less independent central bank. The government may overwrite its

decision.

Bank of France (BOF) The central bank of France.

Bank of Italy (BOI) The central bank of Italy.

Bank of Japan (BOJ) The Japanese central bank. Although its Policy Board

is still fully in charge of the monetary policy, changes are still subject

to the approval of the Ministry of Finance (MOF). The BOJ targets

the M2 aggregate.

Bar chart A type of chart that consists of four significant points: the

high and the low prices, which form the vertical bar; the opening

price, which is marked with a little horizontal line to the left of the

bar; and the closing price, which is marked with a little horizontal line

to the right of the bar.

Barrier options (trigger options, cutoff options, cutout options, stop options,

down/up-and-outs/ins, knockups) Options very similar to

European style vanilla options, except that a second strike price (the

trigger) is specified that, when reached in the market, automatically

causes the option to be expired (knockout options) or "inspired"

(knockin options).

Bearish tasuki A bearish two-day candlestick combination. It consists

of a long blank bar that has a low above 50 percent of the previous

day's long black body, and closes marginally above the previous

day's high. The second day's rally is temporary, as it is caused only

by profit-taking. The sell-off is likely to continue the next day.

Bearish tsutsumi (the engulfing pattern) A bearish two-day candlestick

combination. It consists of a second-day bearish candlestick whose

body "engulfs" the previous day's small bullish body.

Bilateral grid An exchange rate system that links all the central

rates of the EMS currencies in terms of the ECU.

Black closing bozu A bearish candlestick formation that consists of a

long black bar (upper shadow).

Black marubozu (shaven head) A bearish candlestick formation that

consists of a long black bar (no shadow).

Black opening bozu A bearish candlestick formation that consists of a

long black bar (lower shadow).

Black-Scholes fair value model The original option pricing model, which

holds that a stock and the call option on the stock are comparable

investments and thus a risk less portfolio may be created by buying

the stock and selling the option on the stock, as a hedge. The

movement of the price of the stock is reflected by the movement of

the price of the option, but not necessarily by the same amplitude.

Therefore, it is necessary to hold only the amount of the stock

necessary to duplicate the movement of the price of the option.

Blank closing bozu A bullish candlestick formation that consists of a

long blank bar (lower shadow).

Blank marubozu (shaven head) A bullish candlestick formation that

consists of a long blank bar (no shadows).

Blank opening bozu A bullish candlestick formation that consists of a

long blank bar (upper shadow).

Bollinger bands A quantitative method that combines a moving

average with the instrument's volatility. The bands were designed to

gauge whether the prices are high or low on a relative basis. They

are plotted two standard deviations above and below a simple

moving average. The bands look like an expanding and contracting

envelope model. When the band contracts drastically, the signal is

that volatility will expand sharply in the near future. An additional

signal is a succession of two top formations, one outside the band

followed by one inside. If it occurs above the band, it is a selling

signal. When it occurs below the band, it is a buying signal.

Book method Point-and-figure chart's original name.

Box spread A compound option strategy that consists of four options with a

common expiration date: a long call and a short put at one strike

price, and a long put and a short call at a different strike price.

Breakaway gap A price gap that occurs in the beginning of a new

trend, many times at the end of a long consolidation period. It may

also appear after the completion of major chart formations.

Breakout of a spread triple bottom A bearish point-and-figure chart

formation that suggests that the currency is likely to break a support

line the third time it reaches it. The currency failed to reach the

support line once.

Breakout of a spread triple top A bullish point-and-figure chart

formation that suggests that the currency is likely to break a

resistance line the third time it reaches it. The currency failed to

reach the resistance line once.

Breakout of a triple bottom A bearish point-and-figure chart formation

that suggests that the currency is likely to break a support line the

third time it reaches it.

Breakout of a triple top A bullish point-and-figure chart formation that

suggests that the currency is likely to break a resistance line the third

time it reaches it.

Bullish tasuki A bullish two-day candlestick combination. It consists

of a long black bar that has a high above 50 percent of the previous

day's long blank body, and closes marginally below the previous

day's low.

Bullish tsutsumi (the engulfing bar) A bullish two-day candlestick

combination. It consists of a second bullish candlestick whose body

"engulfs" the previous day's small bearish body.

Bundesbank The German central bank. In addition to its domestic

obligations, the Bundesbank has had international obligations since

1979 as the front player of the European Monetary System. The

Bundesbank is a very independent central bank.

Business firms (establishment) survey Survey of the payroll, workweek,

hourly earnings, and total hours of employment in the non farm

sector.

Business Inventories An economic indicator that consists of the items

produced and held for future sale.

Butterfly spread A compound option strategy that consists of a combination

of a bull spread and a bear spread, using either calls or puts.

C

Calendar combination A compound option strategy that consists of the

simultaneous call calendar spread and put calendar spread, in which

the strike price of the calls is higher than the strike price of the puts.

Calendar spread A combination option of two similar types of options,

either calls or puts, with the same strike price but different expiration

dates. The dissimilarity between the expiration dates allows this type

of spread to capitalize on both the impact of the time decay and the

interest rate differentials.

Calendar straddle A compound option strategy that consists of

simultaneous buying of a longer-term straddle and a near-term

straddle with a common strike price.

Call ratio backspread A compound option strategy that consists of

short calls with a lower strike price and more long calls with a higher

strike price. The profit is twofold. The maximum upside profit

potential is unlimited. The downside profit potential consists of the

total premium received. The maximum loss potential occurs when

the currency price reaches the higher strike price at expiration.

Candlestick chart A type of chart that consists of four major prices: high,

low, open, and close. The body (jittai) of the candlestick bar is

formed by the opening and closing prices. To indicate that the

opening was lower than the closing, the body of the bar is left blank.

If the currency closes below its opening, the body is filled. The rest

of the range is marked by two "shadows": the upper shadow

(uwakage) and the lower shadow (shitakage).

Capacity utilization An economic indicator that consists of total industrial

output divided by total production capability. The term refers to the

maximum level of output a plant can generate under normal

business conditions.

Cardinal square A Gann technique for forecasting future significant

chart points by counting from the all-time low price of the currency.

It consists of a square divided by a cross into four quadrants. The

all-time low price is housed in the center of the cross. All of the

following higher prices are entered in clockwise order. The numbers

positioned in the cardinal cross are the most significant chart points.

Channel line A parallel line that can be traced against the trendline,

connecting the significant peaks in an uptrend, and the significant

troughs in a downtrend.

Chaos theory A theory that holds that statistically noisy behavior may

occur randomly, even in simple environments. This seemingly

random behavior may be predicted with decreasing accuracy if the

source is known.

CHIPS (Clearing House Interbank Payments System) A computerized

system used for foreign exchange dollar settlements.

Christmas tree spread A compound option strategy that consists of

several short options at two or more strike prices.

Classes of options The types of options: calls and puts.

Combination spread (synthetic future) A compound option strategy

that consists of a long call and a short put, or a long put and a short

call, with a common expiration date.

Commodity Channel Index (CCI) An oscillator that consists of the

difference between the mean price of the currency and the average

of the mean price over a predetermined period of time. A buying

signal is generated when the price exceeds the upper (+100) line,

and a selling signal occurs when the price dips under the lower (-

100) line.

Commodity Futures Trading Commission (CFTC) An independent agency

created by Congress in 1974 with a mandate to regulate commodity

futures and options markets in the United States. The CFTC's

responsibilities are to ensure the economic utility of futures markets,

via competitiveness and efficiency; ensure the integrity of these

markets; and protect the participants against manipulation, fraud,

and abusive practices. The Commission, based in Washington, D.C.,

regulates the activities of 285 commodity brokerage firms; 48,211

salespeople; 8017 floor brokers; 1325 commodity pool operators

(CPOs); 2733 commodity trading advisers (CTAs); and 1486

introducing brokers (IBs).

Commodity Research Bureau's (CRB) Futures Index Index formed from

the equally weighted futures prices of 21 commodities. The

preponderance of food commodities makes the CRB Index less

reliable in terms of general inflation.

Common gap A price gap that occurs in relatively quiet periods or in

illiquid markets. It has limited technical significance.

Condor spread A compound option strategy that consists of either

four same-type options with a common expiration date—two long

options with consecutive strike prices, one short option with an

immediately lower strike price, and one short option with an

immediately higher strike price; or four same-type options with a

common expiration date—two short options with consecutive strike

prices, one long option with an immediately lower strike price, and

one long option with an immediately higher strike price.

Consumer Price Index (CPI) An economic indicator that gauges the

average change in retail prices for a fixed market basket of goods

and services.

Consumer sentiment A survey of households designed to gauge the

individual propensity for spending. There are two studies conducted

in this area, one survey by the University of Michigan, and the other

by the National Family Opinion for the Conference Board. The

confidence index measured by the Conference Board is sensitive to

the job market, whereas the index generated by the University of

Michigan is not.

Continuation patterns Technical signals that reinforce the current trends.

Cost of carry The interest rate parity, whereby the forward price is

determined by the cost of borrowing money in order to hold the

position.

Council of Ministers The legislative body of the European Economic

Community in charge of making the major policy decisions. It is composed of ministers from all the 12 member nations. The
presidency rotates every six months by all the 12 members, in
alphabetical order. The meetings take place in Brussels or in the
capital of the nation holding the presidency.
Country (sovereign) risk A trading risk emerging from a
government's interference in the foreign exchange markets.
Covered interest rate arbitrage An arbitrage approach that consists of
borrowing currency A, exchanging it for currency B, investing
currency B for the duration of the loan, and, after taking off the
forward cover on maturity, showing a profit on the entire set of
deals.
Covered long A compound option strategy that consists of selling a
call against a long currency position. A covered long is synonymous
with a short put.
Covered short A compound option strategy that consists of shorting a
put against a short currency position. A covered short is synonymous
with a short call.
Cox, Ross, and Rubinstein pricing model An option pricing model that
takes into consideration the early exercise provision of the American
style options. As it assumes that early exercise will occur only if the
advantage of holding the currency exceeds the time value of the
option, their binomial method evaluated the call premium by
estimating the probability of early exercise for each successive day.
The theoretical premium is compared to the holding cost of the cash
hedge position, until the option's time value is worth less than the
forward points of the currency hedge and the option should be
exercised.
Credit risk The possibility that an outstanding currency position may
not be repaid as agreed, due to a voluntary or involuntary action by
a counterparty.
Cross rates Currencies traded against currencies other than the U.S.
dollar. A cross rate is a non-dollar currency.
Currency call A contract between the buyer and seller that holds that the
buyer has the right, but not the obligation, to buy a specific quantity
of a currency at a predetermined price and within a predetermined
period of time, regardless of the market price of the currency. The
writer assumes the obligation of delivering the specific quantity of a
currency at a predetermined price and within a predetermined period
of time, regardless of the market price of the currency, if the buyer
wants to exercise the call option.
Currency fixings An open auction executed in Europe on a daily basis in
which all players, regardless of size, are welcome to participate with
any amount.
Currency futures A specific type of forward outright deal with
standardized expiration date and size of the amount.
Currency option A contract between a buyer and a seller, also known
as writer, that gives the buyer the right, but not the obligation, to

trade a specific quantity of a currency at a predetermined price and

within a predetermined period of time, regardless of the market price

of the currency; and gives the seller the obligation to deliver or buy

the currency under the predetermined terms, if and when the buyer

wants to exercise the option.

Currency put A contract between the buyer and the seller that holds

that the buyer has the right, but not the obligation, to sell a specific

quantity of a currency at a predetermined price and within a

predetermined period of time, regardless of the market price of the

currency. The writer assumes the obligation to buy the specific

quantity of a currency at a predetermined price and within a

predetermined period of time, regardless of the market price of the

currency, if the buyer wants to exercise the call option.

Current account balance The broadest current dollar measure of U.S.

trade, which incorporates services and unilateral transfers into the

merchandise trade data.

 

D

Daylight position limit The maximum amount of a certain currency a

trader is allowed to carry at any single time, between the regular

trading hours.

Dead cross An intersection of two consecutive moving averages that

move in opposite directions and should technically be disregarded.

Dealing systems On-line computers that link the contributing banks

around the world on a one-on-one basis.

Delta (A) (1) The change of the currency option price relative to a change

in the currency price; (2) the hedge ratio between the option

contracts and the currency futures contracts necessary to establish a

neutral hedge; (3) the theoretical or equivalent share position. In the

third case, delta is the number of currency futures contracts a call

buyer is long or a put buyer is short. Delta ranges between 0 and 1.

Descending triangle A triangle continuation formation with a flat

lower trendline and a downward-sloping upper trendline. (See

Triangle.)

Descending triple bottom Bearish point-and-figure chart formation

that suggests that the currency is likely to break a support line the

third time it reaches it. Each new bottom is lower than the previous

one.

Diagonal spread A compound option strategy that consists of several

same-type options, in which the long side and the short side have

different strike prices and different expirations.

Diamond A minor reversal pattern that resembles a diamond shape.

Direct dealing An aggressive approach in which banks contact each

other outside the brokers' market.

Directional Movement Index A signal of trend presence in the market.

The line simply rates the price directional movement on a scale of 0

to 100. The higher the number, the better the trend potential of a

movement, and vice versa.

Discount forward spread A forward price that is deducted from a

spot price to calculate a forward price. It reflects the fact that the

foreign interest rate is lower than the U.S. interest rate for that

particular period.

Discount rate The interest rate at which eligible depository

institutions may borrow funds directly from the Federal Reserve

Banks. The rate is controlled by the Federal Reserve and is not

subject to trading.

Discretion for range to trader stop-loss order A stop-loss order that

gives the trader a number of discretionary pips within which the

order has to be filled.

Double bottoms A bullish reversal pattern that consists of two bottoms

of approximately equal heights. A parallel (resistance) line is drawn

against a line that connects the two bottoms. The break of the

resistance line generates a move equal in size to the price difference

between the average height of the bottoms and the resistance line.

Double tops A bearish reversal pattern that consists of two tops of

approximately equal heights. A parallel (support) line is drawn

against a resistance line that connects the two tops. The break of the

support line generates a move equal in size to the price difference

between the average height of the tops and the support line.

Downside tasuki gap A bearish two-day candlestick combination. It

consists of a second-day blank bar that closes an overnight gap

opened on the previous day by a black bar.

Downward breakout of a bearish support line A bearish point-andfigure

chart formation that confirms the currency's breakout of a

support line the third time it reaches it.

Downward breakout of a bullish support line A bearish point-andfigure

chart formation that confirms the currency's breakout of a

support line the third time it reaches it. The support line is sloped

upward.

Downward breakout from a consolidation formation A bearish pointand-

figure chart formation that resembles the inverse flag formation.

A valid downside breakout from the consolidation formation has a

price target equal in size to the length of the previous downtrend.

Durable Goods Orders An economic indicator that measures the

changes in sales of products with a life span in excess of three years.

 to check out  the second  part of  Glossary And Foreign Exchange Terms  click  here and for third  part  click here  and for fourth part click here

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Credit Risk and Interest Rate Risk are kinds of foreign exchange market

tags:Interest rate risk,,Credit Risk, forms of credit risk,Settlement risk ,Replacement riskmaturity dates,transactions,currency swaps,foreign exchange book

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 Interest Rate Risk

Interest rate risk is pertinent to currency swaps, forward out rights, futures, and options. It refers to the profit and loss generated by both the fluctuations in the forward spreads and by forward amount mismatches and maturity gaps among transactions in the foreign exchange book. An amount mismatch is the difference between the spot and the forward amounts. For an active forward desk the complete elimination of maturity gaps is virtually impossible. However, this may not be a serious problem if the amounts involved in these mismatches are small. On a daily basis, traders balance the net payments and receipts for each currency through a special type of swap, called tomorrow/next or rollover.

To minimize interest rate risk, management sets limits on the total size of mismatches. The policies differ among banks, but a common approach is to separate the mismatches, based on their maturity dates, into up to six months and past six months. All the transactions are entered in computerized systems in order to calculate the positions for all the delivery dates and the profit and loss. Continuous analysis of the interest rate environment is necessary to forecast any changes that may impact on the outstanding gaps.

Credit Risk

Credit risk is connected with the possibility that an outstanding currency position may not be repaid as agreed, due to a voluntary or involuntary action by a counter party. In these cases, trading occurs on regulated exchanges, where all trades are settled by the learing house. On such exchanges, traders of all sizes can deal without any credit concern.

The following forms of credit risk are known:

1. Replacement risk which occurs when counter parties of the failed bank find their books unbalanced to the extent of their exposure to the insolvent party. To rebalance their books, these banks enter new transactions.

2. Settlement risk which occurs because of different time zones on different continents. Such a way, currencies may be credited at different times during the day. Australian and New Zealand dollars are credited first, then Japanese yen, followed by the European currencies and ending with the U.S. dollar. Therefore, payment may be made to a party that will declare insolvency (or be declared insolvent) immediately after, but prior to executing its own payments.

The credit risk for instruments traded off regulated exchanges is to be minimized through the customers' creditworthiness. Commercial and investment banks, trading companies, and banks' customers must have credit lines with each other to be able to trade. Even after the credit lines are extended, the counter parties financial soundness should be continuously monitored. Along with the market value of their currency portfolios, end users, in assessing the credit risk, must consider also the potential portfolios exposure. The latter may be determined through probability analysis over the time to maturity of the outstanding position. For the same purposes netting is used. Netting is a process that enables institutions to settle only their net positions with one another not trade by trade but at the end of the day, in a single transaction. If signs of payment difficulty of a bank are shown, a group of large banks may provide short-term backing from a common reserve pool.

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exchange rate risk kind of foreign exchange market

tags:exchange rate risk;foreign exchange market,forex risk kinds, kinds of risk,daylight position,overnight position limit,Country Risk,traders,manageable situatio

Don't forget to check out  Credit Risk and Interest Rate Risk  its related to this article from here

On the foreign exchange market one discerns the following kinds of the
risks:

 • exchange rate risk;
• interest rate risk;
• credit risk;
• country risk.

Exchange Rate Risk :-

Exchange rate risk is a consequence of the continuous shift in the worldwide market supply and demand balance on an outstanding foreign exchange position. A position will be a subject to all the price changes as long as it is outstanding. In order to cut losses short and ride profitable positions that losses should be kept within manageable limits. The most popular steps are the position limit and the loss limit. The limits are a function of the policy of the banks along with the skills of the traders and their specific areas of expertise. There are two types of position limits: daylight and overnight.

1. The daylight position limit establishes the maximum amount of a certain currency which a trader is allowed to carry at any single time during. The limit should reflect both the trader's level of trading skills and the amount at which a trader peaks.

2. The overnight position limit which should be smaller than daylight limits refers to any outstanding position kept overnight by traders. Really, the majority of foreign exchange traders do not hold overnight positions.

The loss limit is a measure to avoid unsustainable losses made by traders; which is enforced by the senior officers in the dealing center.

The position and loss limits can now be implemented more conveniently with the help of computerized systems which enable the treasurer and the chief trader to have continuous, instantaneous, and comprehensive access to accurate figures for all the positions and the profit and loss. This information may also be delivered from all the branches abroad into the headquarters terminals.

Country Risk

The failure to receive an expected payment due to government interference amounts to the insolvency of an individual bank or institution, a situation described under credit risk. Country risk refers to the government's interference in the foreign exchange markets and falls under the joint responsibility of the treasurer and the credit department. Outside the major economies, controls on foreign exchange activities are still present and actively implemented.

For the traders it is important to know or be able to anticipate any restrictive changes concerning the free flow of currencies. If this is possible, though trading in the affected currency will dry up considerably, it is still a manageable situation.

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The Elliott Waves

 tags:Wave extensions,basic Elliott Wave pattern,Basics of Wave Analysis,Impulse Wave Variations,complete market cycle,Elliott Waves,interpretation of Elliott Waves,Bear market failure,Failures,Truncated Fifths,bearish pattern,bullish pattern,Diagonal Triangles

Basics of Wave Analysis

The Elliott waves principle is a system of empirically derived rules for interpreting action in the markets. Elliott pointed out that the market unfolds according to a basic rhythm or pattern of five waves in the direction of the trend at one larger scale and three waves against that trend. In a rising market, this five wave/three-wave pattern forms one complete bull market/bear market cycle of eight waves. The five-wave upward movement as a whole is referred to as an impulse wave, and the three-wave countertrend movement is described as a corrective wave (See Figure 6.1). Within the five-wave bull move, waves 1, 3 and 5 are themselves impulse waves, subdividing into five waves of smaller scale; while waves 2 and 4 arecorrective waves, subdividing into three smaller waves each. As shown in Figure 6.1, subwaves of impulse sequences are labeled with numbers, while subwaves of corrections are labeled with letters.

Figure 6.1. The basic Elliott Wave pattern

Following the cycle shown in the illustration, a second five-wave upside movement begins, followed by another three-wave correction, followed by one more five-wave up move. This sequence of movements constitutes a fivewave impulse pattern at one larger degree of trend, and a three-wave corrective movement at the same scale must follow. Figure 6.2 shows this larger-scale pattern in detail.

As the illustration shows, waves of any degree in any series can be subdivided and resubdivided into waves of smaller degree or expanded into waves of larger degree.

Figure 6.2. The larger pattern in detail

The following rules are applicable to the interpretation of Elliott Waves:

1. A second wave may never retrace more than 100 percent of a first wave; for example, in a bull market, the low of the second wave may not go below the beginning of the first wave.
2. The third wave is never the shortest wave in an impulse sequence; often, it is the longest.
3. A fourth wave can never enter the price range of a first wave, except in one specific type of wave pattern, the form of market movements is essentially the same, irrespective of the size or duration of the movements.

Furthermore, smaller-scale movements link up to create larger-scale movements possessing the same basic form. Conversely, large-scale movements consist of smaller-scale subdivisions with which they share a geometric similarity. Because these movements link up in increments of five waves and three waves, they generate sequences of numbers that the analyst can use (along with the rules of wave formation) to help identify the current
state of pattern development, as shown in Figure 6.3.

Figure 6.3. A complete market cycle

As the market swings of any degree tend to move more easily with the trend of one larger degree than against it, corrective waves often are difficult to interpret precisely until they are finished. Thus, the terminations of corrective waves are less predictable than those of impulse waves, and the wave analyst must exercise greater caution when the market is in a meandering, corrective mood than when prices are in a clearly impulsive trend. Moreover, while only three main types of impulse wave exist, there much more basic corrective wave patterns, and they can link up to form extended corrections of great complexity. A most important thing to remember about corrections is that only impulse waves can be “fives”. Thus, an initial five-wave movement against the larger trend is never a complete correction, but only part of it.

Impulse Wave Variations

In any given five-wave sequence, a tendency exists for one of the three impulse subwaves (i.e., wave 1, wave 3, or wave 5) to be an extension—an elongated movement, usually with internal subdivisions. At times, these subdivisions are of nearly the same amplitude and duration as the larger degree waves of the main impulse sequence, giving a total count of nine waves of similar size rather than the normal count of five for the main sequence. In a nine-wave sequence, it is sometimes difficult to identify which wave is extended. However, this is usually irrelevant, because a count of nine and a count of five have the same technical significance. Figure 6.4. shows why this is so; examples of extensions in various wave positions make it clear that the overall significance is the same in each case. Extensions can also occur within extensions. Although extended fifth waves are not uncommon, extensions of extensions occur most often within third waves, as shown in
Figure 6.5.

Figure 6.4. Wave extensions

Figure 6.4. Wave extensions

Figure 6.5. Wave extensions

Extensions can provide a useful guide to the lengths of future waves. Most impulse sequences contain extensions in only one of their three impulsive subwaves. Thus, if the first and third waves are of about the same magnitude, the fifth wave probably will be extended, especially if volume during the fifth wave is greater than during the third.

The Diagonal Triangles

There are some patterns familiar from the Technical Analysis theory, particularly two types of triangles, which should be noticed in frame of Elliotts waves consideration.

The diagonal triangle type 1 occurs only in fifth waves and in С waves, and it signals that the preceding move has, in accordance to Elliott, "gone too far, too fast." All of the patterns' sub-waves, including waves 1, 3, and 5,consist of three-wave movements, and their fourth waves often enter the price range of their first waves, as shown in Figures 6.6. and 6.7. A rising diagonal triangle type 1 is bearish, because it is usually followed by a sharp decline, at least to the level where the formation began. In contrast, a falling diagonal type 1 is bullish, because an upward thrust usually follows.

Figure 6.6. A bullish pattern

Figure 6.7. A bearish pattern

The diagonal triangle type 2 occurs even more rarely than type 1. This pattern, found in first-wave or A-wave positions in very rare cases, resembles a diagonal type 1 in that it is defined by converging trendlines and its first wave and fourth wave overlap, as shown in Figure 6.8. However, it differs significantly from type 1 in that its impulsive subwaves (waves 1, 3, and 5) are normal, five-wave impulse waves, in contrast to the three-wave subwaves of type 1. This is consistent with the message of the type 2 diagonal triangle, which signals continuation of the underlying trend, in contrast to the type 1 's message of termination of the larger trend.

Figure 6.8.

Failures (Truncated Fifths)

Elliott described as a failure an impulse pattern in which the extreme of the fifth wave fails to exceed the extreme of the third wave. Figures 6.9 and 6.10 show examples of failures in bull and bear markets. As the illustrations show, the truncated fifth wave contains the necessary impulsive (i.e., fivewave) substructure to complete the larger movement. However, its failure to surpass the previous impulse wave's extreme signals weakness in the underlying trend, and a sharp reversal usually follows.

Figure 6.9. Bull market failure

Figure 6.10. Bear market failure

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Fibonacci Analysis

 tags: Fibonacci Analysis, important role, forecasting of market,Fibonacci sequence, financial markets

Fibonacci Analysis

The Fibonacci analysis gives ratios which play important role in the forecasting of market movements. This theory is named after Leonardo Fibonacci of Pisa, an Italian mathematician of the late twelfth and early thirteenth centuries He introduced an additive numerical series - Fibonacci sequence.

The Fibonacci sequence consists of the following series of numbers: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584, 4181, (etc.), which exhibit several remarkable relationships, in particular the ratio of any term in the series to the next higher term. This ratio tends asymptotically to 0.618 (the Fibonacci ratio). In addition, the ratio of any term to the next lower term in the sequence tends asymptotically to 1.618, which is the inverse of 0.618. Similarly constant ratios exist betweennumbers two terms.

Golden spirals appear in a variety of natural objects, from seashells to hurricanes to galaxies.

The financial markets exhibit Fibonacci proportions in a number of ways, particularly it constitute a tool for calculating price targets and placing stops. For example, if a correction is expected to retrace 61.8 percent of the preceding impulse wave, an investor might place a stop slightly below that level. This will ensure that if the correction is of a larger degree of trend than expected, the investor will not be exposed to excessive losses. On the other hand, if the correction ends near the target level, this outcome will increase the probability that the investor's preferred price move interpretation is accurate.