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Toxic Flow in Forex Business

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Everything You Ought To Know Regarding Toxic FX Flow

What Exactly Is Meant By Toxic FX Flow?

It is a fact that any particular flow which might appear to be toxic for any particular market maker might end up being rather beneficial for another person out there. At present, technology has become the center of the FX businesses, and it has a significant role to play when it comes to controlling the rules and regulations of the game to a great extent. The term “Toxic FX Flow” has got a direct connection on most occasions with the technology which is actually behind this liquidity factor.

However, the question here might arise regarding what exactly is the toxic flow in FX? Unfortunately, it is not possible to answer this question in a simple manner. In fact, the answer demands lots of things to take into consideration. To be frank, different types of forms can be taken by toxic flow right now. It might be in the form of trading on some unacceptable market prices, trading in the very same direction across more than one trading venue simultaneously at the very same time or even trading on the inadequacies of any FX technology which is not sophisticated by any means. In general, one can view Toxic flow as any predatory or unwelcome stuff but here we would like to mention that although something might appear to be rather toxic to any particular market maker, this does not imply that it is going to be the same for any other person out there. In fact, it might be rather beneficial for him in the long run.

Similar types of problems will be encountered by all those traders in the margin FX space who make an attempt to implement similar techniques that have been employed by them in the futures as well as the stock markets in recent times. The reason for this is the fact that there is an absence of any backup in the form of genuine items and also there isn’t any central exchange whatsoever. Under normal circumstances, when some person is winning the other will be losing out; however, irrespective of this, one can expect that all of the participants in the market will be playing by the regulations with the purpose of maintaining proper law and also avoiding any undesirable incident and chaos out there.

However, the unfortunate thing here is that you will come across individuals every now and then who like to pose challenges for the system or would like to take advantage of its weaknesses and drawbacks. In the subsequent paragraphs, we have provided a few examples of Toxic FX Flow that you should consider going through.


1. “Picking-Off” The Feed Or Latency Arbitrage

This can be considered to be a sort of trading at present which has been designed specifically to capture any deviation of the price. This is meant to involve placing trades on the application or technology which is known to be slow or latent to the market and after that, covering all these positions at a particular profit once the provider is able to catch up to the genuine market.

Instead of being trading on the marketplace, it is actually trading on somebody else’s incompetent technology and is a fantastic instance of predatory flow.

There is no secret about the fact that lots of market makers function at present without any sophisticated pricing engine and, because of this, it might become slow when it comes to updating the prices. This will leave ample room for every type of arbitrage out there.

2. Impact Made With The Market On Multiple Orders

It is possible for a market maker to stream liquidity to more than one price venue at the same time and this might, therefore, be vulnerable to getting “hit” at the identical price by the same customer, at the identical time, on more than one platform.

For instance, any financial institution might agree to offer “top-of-book” liquidity of as many as EURUSD 10 million to 5 platforms presuming that all those venues are going to stream their prices to a bigger and diverse customer base. Somebody (being aware of the fact that the price depicted here is only valid for EUR 10 million) might use this to their advantage and strike all of the 5 platforms in EUR 10 million simultaneously. Therefore, rather than presuming a position of EUR 10 million, the financial institution will be offered EUR 50 million at a top-of-book rate which was actually meant only for the EUR 10 million. Here, it has been possible for the customer to create at a particular price which had been “off-market” for one single EUR 50 million trade.


3. New Trading

It will be possible to make the financial institutions crazy by sending more than 1 or bigger-than-usual trades once the markets move on any particular news release or due to a global event which took place unexpectedly. At times, this might be possible by figuring out the precise timing of the movement of the price.

As many as 32 to 100 price updates are sent by the banks every second every currency pair, and it will be possible for the top-notch trading systems to identify the direction of the market within only the initial few updates. They can also place the trades accordingly. Financial institutions which have to face this kind of situation might not have adequate time for covering themselves in the marketplace before prices begin to move against their direction. As a result, they are going to fight against this kind of trading technique by either modifying or discontinuing their pricing to the customer, particularly before any significant news release.

Is it possible for the primary liquidity market makers (financial institutions) to reverse trades? Will they request the liquidity distributors to put an end to the trading? Obviously, they can. How frequently is this performed? The answer, in this case, will be “very seldom”.

All these above-mentioned facts are simply a few instances of what can be regarded by many individuals as toxic flow. There is no doubt that lots of innovative and interesting cases are arriving on the scene every single day, and it will be really intriguing to see what is in store for us in the near future.

Smoothed moving average

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Smoothed moving average is a moving average that deals with a longer period, allowing for an easier price calculation and viewing and represents combination of simple moving average and exponential moving average. A smoothed moving average does not refer to a fixed period, but rather collects and enrolls all available data from the past. To calculate today’s moving average, you have to subtract the yesterday’s smoothed moving average from today’s price. After that, you have to add the result to the yesterday’s price.

smoothed moving average vs simple moving average


Properties

Period. This characteristic deals with the number of bars in the chart. In case of daily data, the period will stand for days, whereas for months, it will denote months, and so on. The app sets a default of 9, but for the user’s convenience, the period is lengthened, which allows you to view the data easier and create a general vision of the current price trend.

Aspect. Deals with the symbol field where the data series are calculated. As you enter the app to look for a symbol in the chart, it will be set to “default” which is identical to the “Close” symbol.

Smoothed moving average series (SMMA) calculation

The combination of simple moving average and exponential moving average is called smoothed moving average. The value of SMMA is approximately equal to the EMA value, with just the period as double of that of EMA. This smoothing technique allows the analysts to reduce volatility in a series of data. Since this technique takes input from past time periods that’s why it captures the economic scenario better than non smoothed graphs.

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Some analysts take out all EMA, SMA and SMMA and then analyse the market trends. Anyways, it is always a personal choice as of how many parameters to consider.

The formula to calculate the SMMA is –

SMMA = (SMMA# – SMMA* + CLOSE)/N

Where

SMMA# – Previous bar’s smoothed sum

SMMA* – Previous bar’s smoothed moving average

CLOSE – Present closing price

N – Period of smoothing


How it works?

A smoothed moving average differs from a simple moving average in several aspects. The most important difference refers to the period taken into account while doing the calculation of the average. A simple study uses only the most recent data for generating the average, while a smoothed study takes also into account data from distant past, say a month or two months ago, which plays a role in determining a more accurate and relevant average. Still, older data and new data are not assigned the same weight, due to their relevance in establishing the current price. Price data collected one month ago, for example, will be given lower significance in calculating the smoothed moving average, due to its small impact on the current price trends. Nonetheless, it is not removed from computation process, as it fosters a long-term vision of the trading trends.

The main advantage of smoothed moving average is that it removes short-term fluctuations, and allows to view the price trends much easier.

Smoothed moving averages are widely used in trending markets. You are alerted about a new buy signal when the line that denotes a short term average crosses above the line that stands for a longer term average. At the same time, a sell signal occurs when short-term average crosses below the long term average. Marketing technicians suggest to use longer term averages while trading with two smoothed moving average that use the same signal.

Another approach in trading is to know how to manage the current price. If you have a current price that passes over the smoothed average line, you buy. When the current price gets below the moving average you simply remove the position. As regards a short position, you sell when the price crosses below the moving average. When it rises above, you remove the position.

If you want to become a successful trader, you should learn to tell simple from smoothed moving averages. While simple average works with a short-term period and processes only new data, smoothed average promotes a longer term study, assigning weight to old data, for a clearer view on price trends.

Measuring market trends and then investing in the right stock is the best way to make money, it is accepted by every investor out there. It is the sense of analyzing the trend which makes the difference.

There was a time, not very back when people used to buy and sell stocks according to their intuitions. But now, technical analysis has taken the market. There are several tools that consider the historical stock price data and give predictions based on that and this analysis has definitely increased the probability of your decision to be right.

Any tool cannot be perfect in analyzing the trends because the market never moves in a straight line, there are variations in the market every moment which one has to analyze which makes it a tedious task. The analysts take help of many parameters, out of which some are listed below –

Moving averages

This analysis technique is the most trusted and widely accepted because of its versatile nature. The most widely used form of moving average by the analysts is the 200-Day moving average. Here 200 days – moving average is plotted on a price chart, and whether the price of the stock is above the moving average line or below it, it is indicated that the stock should be sold or bought. Some analysts also consider 50 or a 10 day moving average.


There are two main types of moving averages –

1. Simple Moving Average

It is the most common method of taking out the average, it is taken out by adding the set of prices and then dividing it by the number of price data taken.

Let us take an example –

If following are 7 stock prices 10, 20, 30, 40, 50, 60, 70 and we want to take out the SMA then it would be

(10 + 20 + 30 + 40 + 50 + 60 + 70) / 7 = 40

So the simple moving average of this set of data is 40.

This data will prove to be very helpful in getting the clue of what might happen next in the market. It might seem to be a very simple technique but still, it has to face criticism from experts, this criticism is because of the “drop-off effect”.

Here what happens is that the latest prices make a very small impact while on the other hand the earliest prices sometimes make a very large impact. One needs to keep this in mind. The smoothed moving average can also be manipulated by discarding the earlier data. Any large change in the smoothed moving average can give wrong indications which can incur losses to the investor.

Also, there might be some older data that might be significant, which the simple moving average is not considering.

To eradicate these shortcomings of the simple moving average, analysts came up with the exponential moving average (EMA).

2. Exponential moving average (EMA)

It is a much versatile averaging technique used by the analysts. It values current prices more as compared to the past prices. It makes exponential moving average sensitive to recent price fluctuations.

Calculation of EMA also includes the previous recent EMA values.

The formula for calculating EMA is –

EMA = EMA# + SF*[P – EMA#] where

EMA# is the previous latest EMA value

P denotes the price in that period

SF stands for smoothing factor.

Because of its unique calculation, EMA follows prices more closely than an SMA

Smoothed moving average vs Simple moving average vs. Exponential moving average

EMA value is very sensitive to market trends, it can help the investor to take respective actions. For any investor who wishes to grasp the market trends quick, it will be much better to use EMA rather than an SMA value. But one disadvantage is that if there is a sudden spike or abnormal event in the market then EMA being very sensitive and prompt to market conditions will signal the investor to quit the stock making loss.

On the other hand, if the investor has a long term vision and is ready to wait and observe the market then SMA would be the best choice because of its smoothness. If a trend is set then it usually lasts for a long time that’s why choosing SMA, in this case, can be beneficial but since SMA shows a huge delay it will ignore good entry points and the investor might lose the opportunity to make profits.

Smoothed moving average as combination of SMA and EMA using smoothing technique allows the analysts to reduce volatility in a series of data and because of that smoothed moving average is SLOWER than SMA.

That’s why it is said that different trading patterns require different methods of analysis. One can never bank on any one analytical technique, one should use simultaneous techniques to get a broader perspective. Since trading is all about the probability that’s why you cannot be even sure that after so much of analysis you will achieve what you desired.

Trading is a game of chance and risks, one will have to devise their own methods, which suits them the most. Experimenting without fearing anything will be very beneficial in stock trading. The more you trade fearlessly the more sensitive you will become towards market trends. Even after so many analysis techniques, one should always listen to its gut feelings. After a certain period of time in trading people automatically develop the attitude of taking risks and start playing big, which pays them big as well as costs them big. Using smoothed moving average trader can get bigger picture of trend.

How to Use NAV and RNAV (Revalued Net Asset Value) to Value Real Estate Stocks

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There are multiple ways that retail investors are able to determine the market value for each property held by a real estate developer. These include Net Asset Values (NAV), and Revalued Net Asset Value (RNAV). The following will explain them, and how to value real estate stocks.

What is RNAV?

This method is conducted after each property projects’ market value has been determined. The RNAV method is more complex as it requires using the net asset value (NAV), deducting the liabilities to find the Revalued Net Asset Value of the real estate developer.

The process:

1. Value changes within the company’s held investment property
2. Surplus value of held property for development
3. Company’s NAV shown on the balance sheet.

Therefore, the only surplus and change values considered are the properties book values within the portfolio. These are the figures shown on the balance sheet, used for adding the NAV of the company to calculate the Revalued Net Asset Value of the company.

Additionally, some may refer to RNAV as “Revised Net Asset Value”. In either case, there will typically be a premium or discount added to the RNAV, which accounts for factors including the management size, quality and the company’s overall track record, business risk and reputation.

Below is an example RNAV calculation:

Surplus Value: Property 1 ($$ m) 20.0
Surplus Value: Property 2 ($$ m) 10.0
Surplus Value: Property 3 ($$ m) 5.0
Total Surplus 35.0
+ Company Nav ($$ m) 210.0
+ Shareholders Funds ($$ m) 700.0
RNAV ($$ m) 945.0
Discount to RNAV 20%
Discounted RNAV 756.0
Number of Outstanding Shares (m) 800.0
RNAV per share ($) 0.95

What is NAV?

In theory, any type of financial product or business entity with operations of asset and liability accounting can have a Net Asset Value (NAV). When discussing business and company entities, the gap that exists between the asset and liabilities are commonly referred to as the company’s capital, net worth, or net assets.

NAV has become a popular industry trend associated with fund pricing and valuation, which is calculated by dividing difference of company assets and their liabilities by the total number of units or shares that investors hold. Therefore, the NAV of funds reflect the value per share. This is a simple method to use to value and transact shares of the fund.

NAV Formula

Calculating the Net Asset Value of a mutual fund is simple, for example:

Meanwhile, the funds’ asset and liabilities should include the proper qualifying items.

Using NAV with Mutual Funds

While common stock prices are constantly changing one second to the next, mutual funds are not priced in real-time, but based on the assets and liabilities when the day ends. Therefore, the mutual fund assets include the total market value when combining the mutual fund’s cash, investments, accrued and receivables income and cash equivalents. Meanwhile, the market value is determined daily depending on the closing price of securities held within the portfolio.

Because funds can have a specific amount of capital as liquid and cash assets, those are calculated under the heading of cash or cash equivalents. Accrued income includes money earned, but not received by the fund. Receivables refers to items such as interest payments or dividends applied during that day. Finally, all these and the qualifying variations are combined to determine the sum of the fund’s assets.

Generally, mutual fund liabilities include pending payments, a range of fees and charges owed to different associated entities, or money owed to banks. In addition, funds can have foreign liabilities which could include dividends or income to non-residents which are pending, or shares held by non-residents, along with proceeds that are pending repatriation. These can be classified further as short-term or long-term liabilities based on the length of payment.

For calculating NAV for a certain day, all the different items are categorized as assets or liabilities.

Example:

If a mutual fund has $200 million in total investments across multiple securities, based on the closing price for each asset that day. Additionally, it holds $8 million in cash or cash equivalents, $5 million receivable, and the days accrued income was $100,000. Meanwhile, the mutual fund also has $3 million long-term and $14 million short-term liabilities, while the days accrued expenses was $12,000 with 6 million outstanding shares. The following formula is used to calculate the Net Asset Value:

NAV = [($200,000,000 + $8,000,000 + $5,000,000 + $100,000) – ($14,000,000 + $3,000,000 + $12,000)] / 6,000,000 = ($213,100,000 – $10,988,000) / 6,000,000 = $33.69

How is RNAV Different from NAV?

The RNAV is a more complex calculation requiring knowledge of additional company information. Whereas, NAV is a simpler calculation that just divides company assets and liabilities by the number of outstanding shares held by investors.

The RNAV method requires knowledge of the development property or company value, revaluation surplus, and outstanding shares held by investors. Additionally, any RNAV discounts are needed to correctly calculate the Revalued Net Asset Value.

Generally, because of the information requirements a retail investor cannot easily use the RNAV method for valuing real estate developments. Furthermore, acquiring the data to calculate each property’s market value a developer holds, can be costly. Therefore, analyst reports remain the best approach for retail investors when analyzing the developer because the already have access to the information.

How to Value Real Estate Stocks?

Prior to purchasing a property, it is recommended to figure out the value to ensure a fair price and transaction. This rule applies with real estate stock as with any other. There are three methods of analyzing real estate, depending on the property type and data availability.
1. Income
This method is used for estimating property value depending on the revenue generated. This method is frequently useful for properties that are producing income. This approach uses capitalization rates – which is the real estate property’s potential ROI – along with net operating income for estimating the property’s value. Additionally, discounted cash flow is a factor that can help derive property value.
The following is a basic example of the capitalization approach.
a. To find the property value based on capitalization rates, first determine what the net rentals realized, or net operating income is. Then, operating costs (minus monthly mortgages) are deducted from the total rental revenue to determine the net operating income.

b. Figure out the ROI you would like, along with the expected monthly rental. Then, using the following formula we can determine the property value:

Thus,

For example:
If you’re looking to purchase a condo and use it for a rental property that rents for $1,100/month and generates a 5% ROI, you would use the following to calculate the amount to purchase the property at (or below).
($1,100 x 12) / 5% = $264,000

2. Market or Sales Comparison Method
This method estimates the property value by evaluating the recent sell price of other similar properties within the area. The sales comparison method is often used to determine the value for family homes. Although, two different properties will never be the same. Therefore, adjustments will be required for ensuring the sell prices are similar to that of the property features. When a property offers features not available on the comparison properties, the sell price is adjusted upward, or downward when the subject property lacks a feature of a comparison property.
To determine real estate value using the market method:
a. Locate similar properties in the area sold recently.
b. Adjust based on differences in quality, quantity, size, location, etc.

3. Cost Method
This method estimates property value based around the costs for building or replacing the property. The cost method is frequently for purchasing recently constructed properties, which requires knowing the cost for materials and construction. In addition, the method is frequently used for purchasing properties that have hard to find comparisons sold recently, while not currently generating an income. Typically, the cost method considers the land value while including cost to build structures, while subtracting cost of depreciation.

Reproduction refers to the expenses to fully duplicate the property’s structure.
Replacement refers to the cost to build similar structure with updated materials and construction methods. Therefore, replacement costs are more common due to being based around current construction costs.
To estimate the replacement or reproduction cost, there are three common approaches:
1. Comparison or Square-foot approach is based on comparing recently developed properties based on cost per square-foot, multiplying it by the subject property’s total square footage.

2. Unit-in-Place approach is a modified version of a quantity survey. However, rather than analyzing the costs for every item used in construction, it calculates costs of materials, labor, entrepreneurial profit, and overhead for each section of the property. For instance, cost per sq. ft. of walls and roofs.

3. Quantity Survey approach combines the total cost of itemized materials, labor, entrepreneurial profit, and overhead. Appraisers rarely use this approach due to the time and in-depth work required.

Sharpe ratio

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In 1996, Sharpe ratio was created by William Sharpe. Ever since then it’s been used as the referenced risk in finance. It is that popular because of its ease of use. In 1990, Professor Sharpe was awarded a Nobel prize in Economic Science for his effort towards CAPM. And this later contribute to its credibility.

What is sharpe ratio

The Sharpe ratio is number that adjusts a portfolio’s past performance—or expected future performance—for the excess risk that was taken by the investor.

The ratio formula is given here as:

S(x) = (Rx – Rf)/ StdDev(X)

Where;
X= the investment, Rx = x average return rate
Rf = best available rate of return, StdDev(X) = standard deviation
A. Rx i.e. return, if normally shared, may be per year, month week or per day. This then reveal the shortcoming of the ratio; all returns on asset are not often normally shared.

Kurtosis: This is the peakedness or flatness of graph of a frequency distribution
skewness: This is a headache to the ratio because standard deviation may not be an option when these problems occur. Sometimes, it can be risky to apply this formula when returns are not in normal distribution.
B. Risk-free rate of return (rf): This is applied to reveal if one is appropriately rewarded for taking further risk. Normally, the most archaic in U.S T-bill is risk-free rate on return. Though this kind of security is more stable, despite risk-free security has been debated by some that it supposed to match the period of comparable investment.
For instance, equities still remain asset that persist for long period. Perhaps we should not compare them with the long period risk-free asset present: IPS was issued by government? Applying IPS that can persist for long time would result into different ratio value, because normally under interest rate clime, T-bills have lesser returns compare to IPS.

For example, a decade index returned of three percent of year 2017 on inflation-protected securities was reported by BARCLAYS US TREASURY.
In contrast, within same duration of time, 7.4% index returned was reported by S and P 500. One may debate that investors giving preference to equities over bonds were fairly rewarded. If Sharpe ratio have bond index of 1.16% against 0.38% equity index means equities asset are riskier.

STANDARD DEVIATION
Since we’ve gotten excess return through subtracting risk-free rate of return from the return of the risky asset, hence there’s need to divide the answer by standard deviation of calculated risky asset. As stated above, as the number rises, the investment gets better.
The way of sharing the returns is Sharpe’s ratio soft rot. Bell curves were employed for convenience mathematically according to Nassim Nicholas and Mandelbrot in 2005.
Bell curves also never take big shift into account.
Nevertheless, leverage do affect ratio if standard deviation is small.
The return as well as the standard deviation can be two times their original size without hitches.
There’s an issue if the denominator is becoming too high. For instance, a stock price that’s supported 10 to 1 without much ado may drop by 10%, this is corresponding to 100% fall in startup capital.

The sharpe ratio and the risk

Knowing the relationship that exist between risk and Sharpe ratio is from calculating the denominator also refers to as total risk. Variance is calculated by squaring the standard deviation i.e. the denominator.
Why did Sharpe pick denominator to balance excesses? Since we are aware that Markowitz comprehend variance- which is one the way of measuring dispersion in statistics, something the investor detest. Standard deviation’s unit is the same as the measured data series.
Here are the examples showing reasons why investors should be mindful of variance:
Any investors are at liberty to pick 3 portfolios, having the expectation of returns of 10% on all in ten years.
The table given below depicts the given expectation. Investment horizon returns gained is shown per annum.
From the table it’s shown that standard deviation shifts return from expectation.
In the absence of risk standard deviation is zero. This means expectation is equal to returns.

Expected Average Returns
Year Portfolio A Portfolio B Portfolio C
Year 1 10.00% 9.00% 2.00%
Year 2 10.00% 15.00% -2.00%
Year 3 10.00% 23.00% 18.00%
Year 4 10.00% 10.00% 12.00%
Year 5 10.00% 11.00% 15.00%
Year 6 10.00% 8.00% 2.00%
Year 7 10.00% 7.00% 7.00%
Year 8 10.00% 6.00% 21.00%
Year 9 10.00% 6.00% 8.00%
Year 10 10.00% 5.00% 17.00%
Average Returns 10.00% 10.00% 10.00%
Annualized Returns 10.00% 9.88% 9.75%
Standard Deviation 0.00% 5.44% 7.80%

How to use sharpe ratio ?

Sharpe ratio maybe used to measure return, can also adjust risk so as to compare investment manager’s performance.
For instance, say one investment manager makes fifteen percent returns and the other twelve percent return. The latter looks excellent in performance. Though the latter took higher risks than the former, but the former risk-adjusted return may be better. To buttress this example, 5% free-risk rate is available, the first managers has eight percent standard deviation, five percent for the second manager. The first would realize Sharpe ratio of 1.25. then 1.4 goes to the second manager, this is better compare to the first manager. Hence as a result of this calculation, the second manager depending on the risk-adjusted got better return.
NOTE:
Ratio 1: Good
Ratio2: Very good
Ratio3: Excellent

Bottom line

Evaluation of risk and compensation is done together while making investment decisions, and this is the main focus of Modern Portfolio Theory.
Generally, variance or its square root drifts compensation away from the investor. So in order to choose investment it is advisable to deal with risk and reward together. Sharpe ratio will be helpful in making investment decision that will yield bigger returns even when the risk is considered.

How Do You Trade Fibonacci Expansion Levels ?

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Fibonacci Expansion Levels

Fibonacci Expansion Levels are lines in technical analysis, calculated as percentage between high and low price, which can be drawn above highest high or below lowest low price level. Fibonacci levels are always projection levels.
Fibonacci Expansion Levels or Fibonacci Extension levels follow the same logic like Fibonacci retracements.
The most common levels used for Fibonacci Expansion levels are 1.618% and than 2.618% (some traders use 123.6%; 138.2%, 150.0%, 161.8%, 200% and 261.8%)
The most common levels used for Fibonacci retracements are 23.6%, 38.2%, 61.8%.
retracements and expansion fibonacci levels

Main Facts about Fibonacci Expansion (Extension) levels and Fibonacci retracements

When it comes to technical analysis, the term that refers to any area of resistance of support is known as a Fibonacci retracement. It will also use a horizontal line in order to point where there might be resistance or support and each of those levels will be labeled using percentages. That percentage amount is a pricing amount that has moved and been retraced. The levels that happen within Fibonacci retracements are 78.6%, 61.8%, 38.2%, 23.6%, while even though it may not be official 50% can be used.

This is considered to be useful due to it being able to show highs and lows between different price points and this creates the known level between the selected points.

For instance, if the price started out at $10, and it suddenly drops to $3.82, then it has done a retrace and this percentage is a retraced 38.2%, which is a number of the Fibonacci retracement. These particular set of numbers can be found everywhere in nature, so it is believed that these particular numbers are relevant within the financial market.

Formula Used to Find the Fibonacci Expansion (Extension) and Retracement Levels
An indicator will not have a formula, so whenever a trader applies an indicator to charts and two points are picked, once selected, the lines that are drawn will show the move percentage.

For instance, if there is a price that goes from $15 to $20, and the two prices are what have been selected to find the indicator, then simply multiply the amount difference between the two prices by the Fibonacci Retracement percentages to find the levels. Therefore, you would take $20 – ($5 X 0.5) = $17.50 and so on.

If a trader wanted to calculate the levels, you would follow the formula listed above and use the percentage of a particular price range that has been selected.
However, many ask where these particular set of numbers originate from. They are all based off what is known as the Golden Ratio.
If a person was to create a specific number sequence that began with the number zero, then added one, and eventually just continuously adding the first two numbers, this string of numbers would just continue indefinitely. For instance, it would look something like this:

0+1 = 1, 1+1=2, 1+2 = 3, 3+2 = 5, 5+3=8, 8+5 =13, 13+8=21, 21+13 = 34, 34+21=55, 55+34=89, and it would continue on just like this. The sums would make up the entire of string of number and would go on indefinitely.

All of the levels are going to come from this string of numbers, however this excludes the first very few numbers so when the string is going, if the number is divided by the number that comes next, you will end up with the level numbers. However, taking time to carefully explore these options, a person would notice that all of these percentages, except for 50% will be considered to be a true Fibonacci number as 50% is not seen to be an official percentage. All of these percentages will be based on math calculations based on this particular number string.

Another interesting thing about the Golden Ratio, is that 1.618 or 0.618 can be located within galaxy formations, historical architecture and artifacts, shells and even in sunflowers.

What Do the Levels Say?

The Fibonacci retracements are able to be used in order to find out the levels of stop loss, help to set target prices, and place entry orders. If a trader notices that a stock is moving up and after it moves it ends up with a 61.8% retrace and then it begins to bounce once again. Because the bounce was considered to be at a level on the Fibonacci scale, and if the trend stays for a long time, then a trader may decide to buy. Which means that a trader could create a stop loss within the 78.6% level or 100% where it originally started.

These levels can also be utilized in various types of technical analysis. For instance, they are seen in the Elliott Wave theory and Gartley patterns. After a price has moved down or up significantly, when a price starts to retrace its path, which it seems to always do, these analyses will find the retrace and notice that it reverses to certain levels.
These levels are often at a static price that will not change often, unlike a moving average. In order to easily and quickly identify price levels, a static nature will be needed. This allows investors and traders to react and anticipate when a level may be tested. The levels will often be an inflection point, which may indicate where a price action could be expected, whether it be a break or a rejection.

How Do You Trade Fibonacci Expansion Levels ?

The simply strategy is to use highest high and lowest low and add Fib levels using MT4 platform :
fibonacci levels insert from metatrader

If you pick Fib. levels retracements or Expansion levels you will get in both cases expansion levels. Expansion levels tool will give you only 2 most common levels for your target.

So your strategy can be for SELL TRADE :
Step 1 : Pick low and high on chart.
Step 2: If you see that price on hourly close is below 61.8% Fibonacci retracement than make SELL trade.
Step 3: Put stop loss on High Price.
Step 4: Set your target to be either 161.8% expansion level or 200% expansion level or 268.1% expansion level.
fibonacci expansion target

OR you can cut small amount of lots on each target and move stop loss whatever you like.

See this strategy for sell trade on image below:
how to trade fibonacci expansion levels example for sell trade

Differences Between Expansions (Extensions) and Retracements levels

The Fibonacci extensions are the percentages that go back to a trending direction while the retracements are the percentages that pullback. For instance, if you have a stock that increases from $5 all the way up to $10, but then it goes back down to $6.75, then it is considered to be a retracement, but if that price happens to increase up to $16, then it is called an extension.
Level Limitations
Even though retracement levels can show where a price may potentially find resistance or support, there are not any assurances that this particular price will stop at that point. This can be seen as a reason as to why a trader should look for other signals that may be utilized, such as prices bouncing off of a particular level.

Another argument against a retracement level is that, due to there being several levels, the price could possibly reverse near one of these levels and this can happen a lot more often that it would not. The overall problem being that a trader could possibly struggle to locate which one that would be useful during any retracement that may be happening at that point and is being analyzed.
The Key Takeaways
An indicator connects two points that a trader will view as being relevant, which is often a low and high point. Once an indicator has been selected and drawn on the chart, these levels will be considered as fixed and will not change. The percentages that are provided will be locations where pricing may reverse or stall. A trader should not solely rely on the levels. For instance, it is detrimental to assume that a price will reverse after hitting a particular Fibonacci level. It could, but then it may not.

A Fibonacci retracement level can be used to show areas of interest that may show potential. If traders are looking to buy, they will watch to see if a price stalls at a Fibonacci level and wait for it to bounce off that particular level before they decide to buy at all.
The ratios that are the most commonly used will include 78.6%, 61.8%, 38.2%, 23.6%, while 50% is seen to be an unofficial retracement level. These percentages will show how much of a previous move was made, whether it be retraced or corrected.

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