Retracements versus Extensions Market Technicians Association Cornelius Luca FX Concepts, Inc. Fibonacci versus Gann Retracements versus Extensions Market Technicians Association September 10, 2007 FX CONCEPTS, INC. • 225 West 34th Street • Suite 710 • New York NY 10122 • tel: (212) 554-6800 • fax: (212) 554-6905 • www.fx-concepts.com

Presentation based on these books

The Business of Currency Management Currency Research Provider since 1981 Systematic approach to trading Unique focus on market cycles Technical Analysis Awarded 1st Mandate to manage money in 1987 Traditional currency overlay Alpha currency overlay Leveraged absolute return programs One of the World’s leading independent Currency Managers Approximately $12.5 billion in assets under management FX Concepts was founded nearly 25 years ago by JRT who has been in the currency advisory and management business since 1971. The firm was one of the first independent currency advisors and was a pioneer in the field of quantitative analysis, model-building and technical forecasting. We provided, and still provide, daily and weekly currency and interest rate advisory services to institutional money managers and investors on a subscription basis. In 1987 we received our first mandate from a major US pension plan to actively manage the currency risk in their int’l equity portfolio. That same pension fund was quick to realize the inherent return potential in currency and they awarded us our 1st alpha mandate 2 years later – this was one of the first-ever currency alpha overlays and the client is still with us over 15 years later. Since then our investment management activity has grown and today we manage over $12 billion in currency assets for a variety of institutional clients around the world In addition to our investment management business we continue to provide research advisory services to over 200 institutions – although this is no longer a significant part of our revenue it is a major part of who we are as a firm – more on this later. FX Concepts is based in NYC with client support available worldwide from offices in Paris, Singapore and Sydney. We are also represented in Japan and we have a portfolio management and disaster recovery site in Rochester, NY. FXC remains an independent firm owned by its employees – over half of our 55 staff are shareholders. One of the unique things about FXC is the degree of employee fidelity and low turnover – the average tenure of our investment professionals is about 10 years and the core team have been working together for close to 20. We offer a level of a organizational stability and commitment to our investment sector which most large asset management firms cannot match

Beta: How Currencies Generate a Return FX Beta is the return provided by simple strategies that work over time in the currency markets The main betas are: Trend (Direction) Carry (Yield) Volatility (Options)

Percentage retracements All trends are subject to price retracements and reversals. Trend analysis should help you identify trend

What Clients Need Levels Timing “Objective” view of the markets

Retracement Analysis Obvious Not obvious

Retracement Analysis

Percentage retracements All trends are subject to price retracements. There are two key sets of percentage retracements: 1. The Fibonacci ratios (Popular) 2. The Gann ratios (Very useful)

Percentage retracements Gann ratios Fibonacci ratios .125 .146 = (-3√5 + 7)/2 .25 .236 = .6183 (or .618*.382) .375 .382 .5 (really) .5 (not really) .625 .618 .75 .786 = √.618 .875 .854

Ratio Analysis Retracement methods: 1. Horizontal Lines 2. Fan Lines 3. Arcs 4. Free Angle Extension methods: 1. Horizontal Lines (Price) 2. Vertical Lines (Time)

Fibonacci Sequence and Ratio 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584, 4181, (etc.) 55

Golden ratios of multiple moves The retracements of an initial trend remain in effect for as long as the original high and low remain in effect.

Fibonacci retracements (monthly)

Fibonacci retracements (weekly)

Fibonacci retracements (daily)

Fibonacci retracements (hourly)

Multiple Fibonacci retracements

William Delbert Gann Gann developed a complex set of mathematical Methods based on time and price analysis, which helped him make 264 successful trades out of 286 transactions in various stocks in only 25 market days in October, 1909.

Trading strategies He had different strategies for four situations: Bull market Bull market top (reversal from bull to bear market phase) Bear market Reversal phase from bear to bull market                                 

Importance of number 3 Majority of moves will generally occur in time period of three - days, weeks or months. Never trade in the direction of the trend on its third day.                              

Nine mathematical proofs of any point of resistance Angles from top and bottoms, Angles running horizontally (previous tops and bottoms) Time cycles (vertical angles) Crossing of important angles originating at zero Crossing or coming together of angles from double or triple tops or bottoms Crossing of double or triple tops or bottoms Past resistance/support Volume of sales Squaring of time and price

Important features of Gann analysis 1. Geometric forms 2. Geometric angles 3. Ratios 4. The squaring of price and time 5. The cardinal square

Gann percentage retracements Gann attached importance to the 1/8 breakdowns along with the 1/3 and 2/3 retracements. Advantage? Smaller steady steps, more signals. 123

Gann percentage retracements

Gann percentage retracements

Fan Lines While most retracements focus on horizontal lines drawn at specific percentages, the retracement analysis can be enhanced by using fans based on the same percentages. Therefore, you can draw fans based on the Dow, Fibonacci and Gann percentage retracements.

Fan Lines B The fan lines are based on retracements. C A 50

Fan Lines Measure the range of a trend. Divide it into the ratios that you like (Fibos?) To plot the first fan line, connect the origin and the .382 of the range. To plot the second fan line, connect the origin and the price at the .618 level. 51

Fan Lines

Fan Lines

Fan Lines

Gann geometric angles The core line, (anchor line), which connects the extremes of the trend is represented as 1X1. Steeper lines are determined by a ratio of 1X8, 1X4, 1X3 and 1X2. Flatter lines are determined by price and time ratios of 2X1, 3X1, 4X1 and 8X1.

Time cycles on a geometric square The 45o angle in the most important 52 39 26 13 13 26 39 52 www.LucaFXTA.com

The steeper (1X8, 1X4, 1X3 and 1X2) lines are not really useful. Focus on the flatter lines: 2X1, 3X1, 4X1 and 8X1.

Gann fan lines

Gann fan lines

Gann fan lines

Arcs Those looking for a time target in addition to the price target might consider arcs, also based on percentage retracements. Plot the retracements on the anchor line and draw arcs from either the peak of an uptrend or the trough of a downtrend.

Fibonacci arcs Fibonacci arcs provide both price and time objectives. Divide the length of a trend by the Fibonacci ratios at .382, .50 and .618. With a compass, extrapolate these levels in the future in order to achieve price and time targets for retracements. 61

Fibonacci arcs 62

Fibonacci Lines, Fans and Arcs

Fibonacci retracements of channels (John Taylor)

Gann Geometric Forms Gann employed other geometrical forms, such as circles. A circle has 360 degrees, and this number, along with fractions of 360, is omni present in his work. Gann extrapolated 30, 90, 120, 180 and 360 days from significant chart points. These forward periods are potential reversal dates. The secondary reversal dates are 45, 135, 225 and 315.

Gann Geometric Forms

The Gann Emblem Pointer 91 ¼ days 121 2/3 days 182 1/2 days

The Cardinal Square – USD/JPY Application

The Cardinal Square – USD/JPY Application

The Cardinal Square – USD/JPY Application

Extensions When a rebound from retracement of a previous trend exceeds the previous high (in an uptrend) or low (in a downtrend), erase the old retracements and apply extensions.

Extensions Retracement ratios are equally valued for targeting prices on extensions. In the case of the Gann ratios, the extensions will be placed at: 1.125, 1.25, 1.375, 1.5, 1.625, 1.75 and 1.875. In the case of the Fibonacci ratios, the extensions will be placed at: 1.382, 1.5 and 1.618.

Extensions – USD/BRL

Extensions

Extensions

Extensions

Fibonacci Multipliers Fibonacci divisions are divisions of 1. Fibonacci expansions are Fibonacci ratios, which when multiplied equal 1. .236 * 4.236 .382 * 2.618 .5 * 2 .618 * 1.618 .764 * 1.309

Fibonacci Multipliers Application Assume B-A = .382 Multiplier of .382 = 2.618 If B-A = 100 points, then the target becomes 261.8 Add 261.8 to A The target is very aggressive B A

Fibonacci Multipliers Example

Extend in the Direction of Trend

Fibonacci Multipliers Primary Ratios # * 1.618 # * 2.618 Secondary Ratios # * 1.309 # * 2 # * 4.236

Extend Retracement from Pullback C to D = (B – A) *.618 or 1 or 1.618 Long-term targets C D B B D C A

Extend Retracement from Pullback

Fibonacci Multipliers Primary Ratios # * 1.309 # * 2 # * 4.236 Secondary Ratios # * 0.382 # * 0.5 # * 2.618 # * 4.236

Fibonacci Time Extensions

Fibonacci Time Extensions

Fibonacci Time Extensions

What Clients Need Correct entry/exit levels Timing Objective view of the markets

What We Provide Our Clients Timing Proprietary levels Model

Cyclical Analysis

Optimized Gann Fan Lines

Gann Channels

Trade of the Day

Short-term Trades Carry, trending and counter-trending recommendations for trades that are held for a maximum of a few days

Pointing out the “not-so-obvious” Trend following and designed to capture a trend approximately 12 weeks in length Models trade about 6 times a year Overbought/Oversold indicators square positions during excessive moves So let’s take a look at a specific example Let’s look at a trend. There are three things we know about them They exist, they overshoot, and they are subject to reversals. Here I’ve shown FX Concepts long term system. This particular model has a return to risk ratio based on the last 10 years of about .8 The trend in this example is up, and the model has an overbought oversold indicator used to take profit- so extreme price moves would trigger it. So far I think you’ll agree some of the more sophisticated banks have these types of models… but as we saw in our initial assumptions- sometimes trends overshoot so that take profit mechanism is going to sometimes prove quite annoying. This is where timing, or our cycles comes in. We will stay in a trade, even if our target is reached if we think it has longer to run. Conversely, we will exit a trade even if it is still in profit, if it’s time has run out.