The Handbook of Technical Analysis + Test Bank_ The Practitioner\'s Comprehensive Guide to Technical Analysis ( PDFDrive )

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the hAnDbook of teChnICAL AnALySIS

5.7 Trend Retracements


retracements: Dow, fibonacci, and gann one‐thirds
and one‐eighths
There are various approaches to measuring trend retracements. Fibonacci retrace-
ments are based on various ratios related to the Fibonacci Phi (Φ) ratio. Dow paid
particular attention to the one‐third and two‐thirds retracements, while Gann em-
ployed one‐third and one‐eighth retracement ranges. Probably the most important
retracement percentage of all is the 50 percent retracement level. Both Gann and
Dow regarded 50 percent as the most significant retracement percentage, with most
major tops and bottoms forming around this retracement level. These retracement
approaches will be dealt with in more detail in a subsequent chapter. For now see
Figure 5.54 for a table comparing the various retracement percentages used in the
Fibonacci, Dow, and Gann approaches to trend retracement. We see strong conver-
gence of retracement percentages around specific retracement ranges, especially the
between the 33 to 38.2 percent, 50 percent, and 61.8 to 66 percent ranges.

5.8 Gaps and Trends


Gaps help to define various stages within a trend, which helps to provide an indi-
cation of potential tops and bottoms in the market. There are basically four types
of market gaps, namely:


  1. Common Gaps: Gaps that occur within a trading range (considered insignificant)

  2. Breakaway Gaps: Gaps that are created as price breaks away from a consoli-
    dation or chart pattern.

  3. Runaway/Measuring/Midway/Continuation Gaps: Gaps that are created in a
    strong trend phase. There may be more than one runaway gap appearing in a
    strong trend.

  4. Exhaustion Gaps: Gaps that are created at the end of a trend, after which a
    consolidation or reversal occurs. It is indicative of potential trend exhaustion.


Figure 5.55 depicts the four types of market gaps on a weekly chart of Wheat. We
see common gaps within the consolidation phase followed by the trend‐related gaps.
We see prices top after the third gap, which represents potential trend exhaustion.

figure 5.54 Comparative Analysis of Popular Retracement Ratios.
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