The RatioTrader trade is the foundation for all the other signals you’ll be learning. It’s very important that you learn and understand this trading model first before moving on. Once you’ve learned this trade and its rules, the rest of the trading signals will make much more sense to you.
Here are the Tools you will need for this part of the course:
Once you’ve gotten your tools, you’re going to want to configure these Fibonacci numbers below:
- .50 and .618 are the main
- .786 and sometimes .886
- 1.272 and 1.618 extensions and sometimes 1.414
We start out by looking for an impulse leg also known as an X to A leg. Now, you may be wondering, what defines an impulse leg? Although there isn’t one specific defined way, here are a few things we look for:
- Impulse legs are usually equal or great to the 40% ATR of the market you are looking at.
- There is a clear defined swing low and swing high on the chart you are looking at.
- Impulse legs tend to be created after a market breaks out of consolidation.
Once an impulse leg has been created, we look for a retracement. The retracement NEEDS to occur no less than the 50% retracement and no more than the 61.8% retracement. Figure 1 below shows an example.
If the market comes into the 50% – 61.8% zone and HOLDS, then it has created what is now the A to B leg. If the market does not hold, then the RatioTrader pattern is cancelled.
Next, we are looking for the market to extend off the B-leg. We look for it to move to the 50%, 61.8% or 78.6% retracement of the A to B leg. If this happens, then we refer to the new leg as the B to C leg. Note the grey line in the image below.
If the market holds any of the C leg retracements, there are two things we do to project the final leg.
We take our Fibonacci extension tool and project from the A to B leg to see where the 1.27%, 1.414% and 1.618% extensions plot.
What we are looking for is for the extension of the A to B leg to have Ratio Confluence with the initial impulse leg retracement.
We also copy the value of the A to B leg with a simple line tool and paste it where C terminates. Since our methodology takes into account price symmetry, we look to see where the A to B leg would equal the C to D leg.
Wherever the symmetry and Ratio confluence meet, is where the pattern is complete. This is the D buy or sell point.