E-mail:    

FOREX TRADING BOOKS

The Quarters Theory

In recent years, “The Quarters Theory” has gained recognition and popularity with currency traders. Created by Ilian Yotov, Chief FX Strategist at VanguardAxis, LLC and founder of AllThingsForex.com, The Quarters Theory is presented and explained in Ilian Yotov’s book “The Quarters Theory: The Revolutionary New Foreign Currencies Trading Method”, and serves traders as a reliable new compass to help navigate the complexities of daily fluctuations in the prices of currencies.
 
In this FX Trader Magazine exclusive, readers have the opportunity to get acquainted with this new theory and methodology thanks to the following excerpts from Ilian Yotov’s book, published by John Wiley & Sons, Inc.  
forex trading books the quarters theory
Go to Amazon Bookstore

The foundation of the quarters theory

Price is the most basic and most important unit of information available to a trader. Price represents the monetary value assigned to goods, services, and assets. In the financial markets, price is the numerical monetary value of equities, commodities, currencies, and other financial assets, determined as a result of an exchange or trade transaction between market participants. Price is measured by numbers grouped as mathematical objects in a numeral system.

The writing of numbers in the base-ten numeral system is known as decimal notation and uses various symbols, called digits, for ten distinct values 0, 1, 2, 3, 4, 5, 6, 7, 8 and 9 to represent numbers.

The most universally used numbers are the whole numbers as part of the real numbers.  Let us glance through the table of whole numbers in Table 1.1.

 

TABLE 1.1 Table of Whole Numbers

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

37

38

39

40

41

42

43

44

45

46

47

48

49

50

51

52

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

.

.

.

 

 

 

 

 

 

100

.

.

.

 

 

 

 

 

 

 

Have you noticed the first number in each row? The number 10 is the base and we know that the first number in each row of this table (except for the number 0) can be represented as a set of ten.

The first number in each row of the table of whole numbers represents a  critical junction that marks the end of a previous set and, at the same time,  the beginning of a new set of ten numbers.

For example, the number 10 marks the end of the set of ten single digits and the beginning of a new set of ten double-digit numbers known as the teens; the number 20 marks the end of the teens set and the beginning of the twenties; and so forth.

Because of their significance, The Quarters Theory gives the name  Major Whole Numbers to the first numbers in each row of the table of whole numbers.

The precision needed to represent currency exchange rates requires  the use of decimal whole numbers. These digits have a decimal point that indicates the start of a fractional part (1.1, 1.2, 1.3, etc.). Digits are placed to the left and right of a decimal point in order to indicate a number less than or greater than 1.

The Major Whole Numbers can be easily distinguished in currency exchange rates even with the decimal point numeral representation.   Every one of the Major Whole Numbers in currency exchange rates represents  a critical junction that marks the end of a previous set and, at the same time, the beginning of a new set of ten numbers. For example, if the EUR/USD pair’s exchange rate reaches $1.2000, the Major Whole Number 1.2000 would mark the end of the set of ten numbers: 1.10, 1.11, 1.12 . . . 1.19 (or the dollar teens) and the beginning of a new set of ten numbers: 1.20, 1.21, 1.22 . . . 1.29 (or the dollar twenties).

Currency decimalization has caused traditional denominations of currencies to be converted to the decimal system. Through the process of currency decimalization, one unit of the main currency is usually divided into 100 subunits. For example, 1 dollar and 1 Euro are divided into 100 cents, 1 pound into 100 pence, 1 franc into 100 centimes, and so forth. For even more precision, currency exchange rates are decimalized even further by dividing the subunits (1 cent, 1 penny, 1 centime) or the main unit of some currencies (e.g. 1 yen) into 100 additional subunits, called Price Interest Points (PIPs). A PIP is the smallest unit of price for any foreign currency (e.g., for EUR/USD one PIP—Price Interest Point—equals .0001 U.S. dollar). Whether the subunit is 1 cent, 1 penny, 1 centime, or 1 yen, each has 100 PIPs; 10 cents, 10 pence, 10 centimes, or 10 yen have 1000 PIPs.

The Quarters Theory recognizes that when represented in terms of Price Interest Points, the distance of 10 cents, 10 pence, 10 centimes, 10 yen, and so on between each two Major Whole Numbers establishes well-defined ranges of exactly 1000 PIPs.

Consider the illustration in Figure 1.1 showing the 1000 PIP Range between theMajor Whole Numbers 1.3000 and 1.4000. TheMajor Whole Number 1.3000 represents a critical junction that marks the end of a previous 1000 PIP Range between the major Whole Numbers 1.2000 and 1.3000 and, at the same time, the beginning of the 1000 PIP Range between 1.3000 and 1.4000.

forex-trading-booksthe-quarters-theory PIP range

The quarters

A quarter is one of four equal parts of something. It can be one-fourth of an hour, one-fourth of a kilo or a pound, or with money, it is the U.S. or the Canadian coin equal to one-fourth of a dollar.

The Quarters Theory focuses on the 1000 PIP Ranges between the MajorWhole Numbers in currency exchange rates and divides these ranges into four equal parts, called Large Quarters. Each 1000 PIP Range contains four Large Quarters and each Large Quarter has exactly 250 PIPs (1000 PIP Range/4 = 250 PIPs). The numbers that mark the beginning and the end of each Large Quarter are given the name Large Quarter Points. The Large Quarter Points that coincide with Major Whole Numbers are also called Major Large Quarter Points, because they represent critical junctions that signal the end of a previous and, at the same time, the beginning of a new 1000 PIP Range. The exact half point of each 1000 PIP Range coincides with a Large Quarter Point and is also called the Major Half Point of the 1000 PIP Range.

The illustration in Figure 1.2 shows the 1000 PIP Range between the Major Whole Numbers 1.3000 and 1.4000 divided into four equal parts or four Large Quarters of 250 PIPs. The four Large Quarters are marked by the Large Quarter Points: 1.3000 and 1.3250, 1.3250 and 1.3500, 1.3500 and 1.3750, 1.3750 and 1.4000. Note that the Major Large Quarter Points are also the Major Whole Numbers 1.3000 and 1.4000 that define the 1000 PIP Range. The exact half point of the 1000 PIP Range between 1.3000 and 1.4000 is the Large Quarter Point 1.3500 (LQP 1.3500), which is also the Major Half Point of the 1000 PIP Range between 1.3000 and 1.4000.

forex-trading-booksthe-quarters-theory PIP Range Major

The Large Quarters within the 1000 PIP Ranges may be represented by different digits measuring the exchange rates in a variety of currency pairs, but the price ranges remain constant. The range between two Large Quarter Points is always exactly 250 PIPs, and the range between two Major Large Quarter Points (Major Whole Numbers) is always exactly 1000 PIPs, no matter which currency pair and no matter what digits represent the currency exchange rate.

For example, an exchange rate between the EUR/USD may show a 1000 PIP Range between the Major Large Quarter Points 1.3000 and 1.4000 with four Large Quarters of 250 PIPs each between the Large Quarter Points: 1.3000 and 1.3250, 1.3250 and 1.3500, 1.3500 and 1.3750, 1.3750 and 1.4000. On the other hand, the USD/JPY pair may have its exchange rate within the 1000 PIP Range between the Major Large Quarter Points 100.00 and 110.00 yen, with four Large Quarters of 250 PIPs each between the Large Quarter Points 100.00 and 102.50, 102.50 and 105.00, 105.00 and 107.50, and 107.50 and 110.00. Obviously, the Major Whole Numbers and the Large Quarter Points in the exchange rates of these two currency pairs have different digits and numeral representation. However, whether a 1000 PIP Range is between the Major Large Quarter Points 100.00 and 110.00, or the Major Large Quarter Points 1.3000 and 1.4000, the range between two Major Large Quarter Points (Major Whole Numbers) always remains a range of exactly 1000 PIPs. Whether a Large Quarter is between the Large

Quarter Points 1.3500 and 1.3750, or between the Large Quarter Points 105.00 to 107.50, the range of each Large Quarter remains the same and is always exactly a range of 250 PIPs.

The Quarters Theory offers universal, constant, and familiar price ranges that allow quick and precise price analysis of any currency pair.

The premise of the quarters theory

The Quarters Theory is based on the premise that the daily fluctuations of currency exchange rates are not random and that currency exchange rates fluctuate in an orderly manner between the Large Quarter Points within each 1000 PIP Range defined by two Major Whole Numbers (Major Large  Quarter Points) in a systematic effort to complete the Large Quarters.

The Quarters Theory proposes that every significant price move in currency exchange rates takes place from one Large Quarter Point to another, in gradual increments of 250 PIPs, the range between two Large Quarter Points.

The Quarters Theory challenges the notion that the financial markets are chaotic and that market prices are random. With its clearly defined, constant price ranges of 250 PIPs and orderly price moves from one Large Quarter Point to the next, The Quarters Theory organizes the daily fluctuations of currency exchange rates in a systematic arrangement.

The Quarters Theory provides the roadmap—the 1000 PIP Ranges divided in four equal parts or four Large Quarters of 250 PIPs each—and establishes the route with a distinct starting point and a clear destination—every significant price move begins at a Large Quarter Point and ends at a Large Quarter Point.

The Large Quarter Points serve as constant support/resistance levels, as well as familiar, invariable price targets.

When a targeted Large Quarter Point is reached, the Large Quarter is  considered to be completed. If prices fail to complete a Large Quarter,  the unsuccessful completion of a Large Quarter usually causes a reversal  that takes prices back toward the preceding Large Quarter Point.

The outcome of both events always leads to a price move that targets a  familiar level—a Large Quarter Point.

The repetitions of the series of Large Quarter completions from one Large Quarter point to the next, or reversals back toward a preceding Large Quarter Point as a result of unsuccessful completions, regularly manifest themselves as recognizable price patterns in the daily fluctuations of currency exchange rates.

forex-trading-booksthe-quarters-theory PIP Range Major

Excerpts from “The Quarters Theory: The Revolutionary New Foreign Currencies Trading Method”

Copyright © 2012 by Ilian Yotov. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

Go to Amazon Bookstore