Most traders dealing in Forex exchange(Forex) are not familiar with forex market geometry since there are no specific rules for defining it. It mainly based on using earlier prior market data for predicting future trends. It is similar to the Elliott Waves theory which also uses earlier patterns for future prediction. However, Elliott’s theory is based on corrective, impulsive waves, and the rules are clearly defined. Market geometry can be used only with ranging or consolidating markets, having corrective waves, and mainly uses estimations for making predictions.
Forex market geometry represents a procedure where the traders analyze patterns, waves, angles, the distance between price levels in order to predict the trend, find the best setup to exist, or enter the trade. The most commonly used method is Elliott’s theory that analyzes waves.
Calculating Market Geometry using Ranges
For calculating market geometry a range is first required. For this, some type of consolidation of earlier data will be required. After this the swings around a particular point in the chart will be monitored, to make decisions for Forex trading like selling and purchasing Forex. The EUR/USD currency pair is widely used in Forex trading and the daily Forex chart can be used for understanding the principles.
Future prices calculated using geometry
For analysis of market geometry, a starting point should be chosen, which is at the initial part of the consolidation area. Usually, it is a point where price stabilized after a steep drop. Then a horizontal line should be drawn passing through the starting point. This line is used for making decisions after analysis of the market geometry. The amplitude of the lowest or highest point, when compared to the value of the starting point, is then measured. The point which is furthest from the starting point is the amplitude for further analysis.
Predicting the future
The amplitude of the market geometry can help in deciding when the opposite swing will take place and how it will look like. Usually, after some time, the market returns to the same levels as the starting point. After this, it is possible to define the inner levels for determining the entire range and trading in the future. Pricing related decisions should be taken only after confirming the amplitude. It is also possible to set up the market geometry using the amplitude information which has been confirmed following the guidelines listed below.
The distance of the amplitude spike can be used to protect it from the starting point and divide the channel into different parts, based on the value of the starting point. If the price falls on the upper half of this channel, there is a bearish bias, since the market will be attracted to the pivot level. On the other hand, if the price falls on the lower price range in the channel, the market bias is bullish.
The tool for Fibonacci retracement can be used for finding the 61.8%, 50%, and 38.2% levels for each of the channels. Depending on what the price is, these points become the entry point for short and long trades. When the price is at the upper half of the channel, the geometry trading recommends that the trader shorts at these levels. He should take profit when prices reach the pivotal level. Conversely, when prices are on the lower side channel, the trader should buy at Fibonacci levels and take profit at the defined pivotal level.
See one of the practical examples how to draw lines, and make chart geometry analysis video:
Though this approach appears simple, it is extremely profitable for the Forex trader, since the Forex market is still following the same pattern. The stop loss should be defined at the top and bottom of the range to complete the set up for the market geometry. While the ratio of risk to reward is not very impressive, it can be extremely profitable for the trader if the range remains the same. At some point, the range for the market will be broken, and the pricing will hit the stop loss, yet the trader has already made so much profit, that the loss is not significant
Overall profits are the main goal while trading in the Forex and other financial markets. Most traders find it difficult and it is usually difficult to implement market geometry. The trader should take a long term view, to remain profitable, one trade is not relevant in the long term. Traders who will make profits from winning trades will also lose money, yet overall the amount in the account should increase. It is important to understand the psychology of the market and how it affects the profit of the trader. Market geometry helps to ensure that the trader is disciplined, focuses on technical matters.