Educational Themes of Intermediate and Advanced Complexity. In this section, we include all that is needed to master technical analysis such as complete coverage of price action themes: Support-resistance, volume, volatility, breakouts, reversals, trend and range trading, candlestick and chart patterns and formations, Elliott wave and Fibonacci retracements and extensions, and harmonic patterns. It includes also a section covering all indicators from simple moving averages to the complexity of Ehlels Filters.
Another sub-section is dedicated to trading systems desing.
The Kijun-Sen Crossover (Crossunder) Strategy is the second in my series over Ichimoku Kinko Hyo. There are two trades setups provided for the long and short side of a market.
K-Cross Strategy Bearish Entry
The Kijun-Sen Crossover (Crossunder) Strategy is the second in my series over Ichimoku Kinko Hyo. There are two trades setups provided for the long and short side of a market.
The Kijun-Sen Crossover (Crossunder) Strategy is the second in my series over Ichimoku Kinko Hyo. There are two trades setups provided for the long and short side of a market. This strategy also comes from Manesh Patel’s book, Trading with Ichimoku Clouds: The essential guide to Ichimoku Kinko Hyo technical analysis.
Patel called this the day-trading strategy. He warned that this trading strategy has the lowest risk factor out of all of his strategies. The positive expectancy rate is lower, and so being stopped out of trades is a normal consequence of this strategy. He also indicated that the win/loss ratio could be extremely high.
If Future Senkou Span A is less than Future Senkou Span B, then Future Senkou Span A must be pointing up.
Price, Tenkan-Sen, Kijun-Sen, and Chikou Span should not be in the Cloud. If they are, it should be a thick cloud.
Price not far from the Tenkan-Sen or Kijun-Sen
Optional: Future Cloud is not thick.
K-Cross Strategy Bullish Entry
Kijun-Sen Cross Bearish Rules
Prices cross below the Kijun-Sen.
Tenkan-Sen less than the Kijun-Sen.
If the Tenkan-Sen is less than the Kijun-Sen, then the Tenkan-Sen should be pointing up while the Kijun-Sen is flat.
Chikou Span in open space.
Future Senkou Span B is flat for pointing down.
If Future Senkou Span A is greater than Future Senkou Span B, then Future Senkou Span A must be pointing down.
Price, Tenkan-Sen, Kijun-Sen, and Chikou Span should not be in the Cloud. If they are, it should be a thick Cloud.
Price not far from the Tenkan-Sen or Kijun-Sen
Optional: Future Cloud is not thick.
K-Cross Strategy Bearish Entry
Sources: Péloille Karen. (2017). Trading with Ichimoku: a practical guide to low-risk Ichimoku strategies. Petersfield, Hampshire: Harriman House Ltd.
Patel, M. (2010). Trading with Ichimoku clouds: the essential guide to Ichimoku Kinko Hyo technical analysis. Hoboken, NJ: John Wiley & Sons.
Linton, D. (2010). Cloud charts: trading success with the Ichimoku Technique. London: Updata.
Elliot, N. (2012). Ichimoku charts: an introduction to Ichimoku Kinko Clouds. Petersfield, Hampshire: Harriman House Ltd.
The Ichimoku Kinko Hyo System
When I use the Ichimoku Kinko System in my trading, I can look at a chart and immediately know whether a trade can be taken
Ichimoku Kinko Hyo system
The Ichimoku Kinko Hyo System
When I use the Ichimoku Kinko System in my trading, I can look at a chart and immediately know whether a trade can be taken
The Ichimoku Kinko Hyo System
When I use the Ichimoku Kinko System in my trading, I can look at a chart and immediately know whether a trade can be taken in less than a minute. Ichimoku means, at a glance. Use this system enough, and you will be able to glance at a market and know if a trade is viable or not. What is singularly fascinating about this trading system more than any other is that it encompasses nearly every element of Japanese and Technical Analysis in a single system with just five components. The system measures momentum, volatility, breadth, depth, and even incorporates things we associate with the later part of the 20th century Western analysts like ATR (average true range) and the Bollinger Squeeze (see Bollinger Bands by John Bollinger).
This lesson will be an introduction to the components of the Ichimoku Kinko Hyo system. While Ichimoku is often listed as an indicator in much charting software, it is not an indicator. It is a trading system. It is a trading system made up of 5 indicators.
Books you should own
I loathe the illegal dissemination and downloading of technical analysis literature. One of the significant deterrents for expert traders and analysts in our field from publishing their work is that it is to easily copied and pirated. Additionally, there is a substantial amount of incorrect, incomplete, and false information regarding the Ichimoku system. I am recommending that the books below be on your trading bookshelf. The authors are experts in the field of technical analysis and traders themselves. I am very grateful that they have risked the fruit of their labors from being stolen so that they can share their knowledge for a fair price in a medium that will last for many, many years.
Trading with Ichimoku: a practical guide to low-risk Ichimoku strategies. – Karen Peliolle
Trading with Ichimoku Cloud: the essential guide to Ichimoku Kinko Hyo technical analysis – Manesh Patel
Cloud Charts: trading success with the Ichimoku technique – David Linton
Ichimoku Charts: An introduction to Ichimoku Kinko Cloud – Nicole Elliot
The 5 Components that make up the Ichimoku system
Ichimoku Kinko Hyo system
You will more than likely observe that the system appears to made up of several moving averages. And you would be correct. While I a staunch opponent of the use of any moving average based trading system, the Ichimoku system is an exception. If you remember the first article in this series, I ended it by pointing out the importance of ‘balance’ and ‘equilibrium’ in Japanese technical analysis. This system is a pure form of equilibrium in a market. The moving averages that you will first learn about are the Tenkan-Sen and Kijun-Sen. These are not moving averages calculated using the close of a candlestick. Instead, these moving averages are calculated by determining the highest high and lowest low of a period and then dividing that number by two. The moving average then plots the average of that line. Equilibrium, balance, and the mean is a consistent behavior in this system.
A quick note regarding the nomenclature of this system: Depending on the charting software you are using, the labels for the components will be in Japanese or your native language. For traders utilizing the beginners trading software of TradingView, TradingView utilizes the non-Japanese labels. I will be using the Japanese names. I believe it is essential that you learn to use the Japanese titles for these five components.
The first component of the Ichimoku Kinko system is the Tenkan-Sen. The Tenkan-Sen is the fastest and weakest line of the Ichimoku system. It is a 9-period moving average that is plotted by adding the highest high and lowest low of the last 9-periods and then dividing that number by two.
Key Points
Price should not be very far away from the Tenkan-Sen.
If price and the Tenkan-Sen are both moving close together (up or down), then this means there is little volatility, and the move may be very persistent. Do not trade against an instrument that is displaying this behavior.
Kijun-Sen (Base Line)
Kijun-Sen
The second component of the Ichimoku Kinko Hyo system is the Kijun-Sen. The Kijun-Sen represents medium-term movement and equilibrium. It is a 26-period moving average that is plotted by adding the highest high and lowest low of the last 26-periods and then dividing that number by two.
Key Points
Many entry and exit signals are derived from the Kijun-Sen (Peliolle).
Price should not be very far away from the Kijun-Sen
Use an ATR x2 to gauge how far is ‘too far.’ (Patel)
Ichimoku trader Jon Morgan suggests identifying what calls ‘max mean.’ This is done by recording the last 17 major highs and lows away from the Kijun-Sen, adding those values together, and then divide by 17. If price gets close to that number of pips/ticks/points away from the Kijun-Sen, it will more than likely snap back to the Kijun-Sen or range until the averages catch up. (Morgan)
The T-K Cross and the relationship of the Tenkan-Sen with the Kijun-Sen
The Tenkan-Sen and Kijun-Sen represent the market’s pulse. The Tenkan-Sen indicates price volatility and the strength of a given movement through its slope. The Kijun-Sen establishes levels upon which equilibrium occurs, calling back prices when a state of disequilibrium can no longer sustain itself. (Peliolle)
Key Points
Crosses of the Tenkan-Sen and Kijun-Sen are not a signal.
In Forex markets, Morgan suggests that crosses may be an essential signal but only on daily and higher charts (3-day, Weekly, Monthly, etc.). This is especially true if there has been a significant amount of time since the last T-K Cross occurred. It can be an early warning sign of an impending corrective move or trend change. (Morgan)
TKCross
The chart above is the hourly chart for GBPJPY. The black vertical lines delineate a test period that records when the Tenkan-Sen crosses the Kijun-Sen. You can see how many whipsaws and trades you would have taken (136 to be exact). Compare that to the daily chart below and how important T-K crosses are when there is a significant gap between the last cross.
Daily TK Cross
You can see that the difference in time between these two crosses is significant. From the Tenkan-Sen crossing below the Kijun-Sen on March 27th, 2019, it took 162 calendar days before the Tenkan-Sen crossed above the Kijun-Sen on September 6th, 2019.
The Kumo (Cloud) – Senkou Span A and Senkou Span B
The Cloud – Senkou Span A and Senkou Span B
The Kumo (Cloud) is made up of the third and fourth components of the Ichimoku Kinko Hyo system, Senkou Span A and Senkou Span B. The ‘Cloud’ is the most distinguishing feature of the Ichimoku system. This ‘blob’ of color on the screen is perhaps one of the most ingenious applications of technical analysis theory in all of Technical Analysis. I say this because it is one of the very few forms of Technical Analysis that actively projects non-trend line-based data into the future – essentially turning lagging analysis into leading analysis. The Cloud is nothing more than the space between the two averages of Senkou Span A and Senkou Span B. Most software will then shade the area between these zones to correlate to the position of Senkou Span A to Senkou Span B. If Senkou Span A is above Senkou Span B, space is shaded green. If Senkou Span A is below Senkou Span B, the area is shaded red. The Cloud’s construction and interpretation is one that can cause significant confusion for someone new to this system, so I am going to break it down for each level.
Senkou Span A is the ‘faster’ line and is a measure of market balance and past volatility. (Peliolle) Senkou Span A is plotted by taking the average of the Tenkan-Sen and Kijun-Sen (Tenkan-Sen + Kijun-Sen) and dividing that number by two. It is then projected forward 26 periods.
Senkou Span B is the most powerful support and resistance level in the Ichimoku Kinko Hyo system. Senkou Span B is plotted by taking adding the highest high and lowest low of the last 52-periods, dividing that number by two, and then projecting it forward 26 periods.
Key Points
A flat Senkou Span B represents strength.
Thick Clouds equal strength. Thick Clouds also represent consolidation. (Linton)
Thick Clouds tell us when not to trade. If you see price inside the Cloud, move on to another chart! (Morgan)
Kumo Twists (Senkou Span A crossing Senkou Span B) are indicative of likely changes. Sometimes a Kumo Twist is the most immediately visible sign of a trend change. (Linton)
The Cloud represents volatility.
The First Question You Should Ask Yourself
Price inside the Cloud
When using the Ichimoku Kinko Hyo system, the first question you should ask yourself is this: Is price inside the Cloud? If the answer is yes, then ignore that chart. Leave it alone. Find something else to do, find another chart to look at. That chart is dead to you if the price is inside the Cloud.
The Chikou Span (Lagging Span)
The fifth and final component of the Ichimoku Kinko Hyo system is the Chikou Span. I believe that this is the secret weapon of the entire system. If you have taken any classes or watched videos of the Ichimoku system anywhere else, the author or presenter may have removed the Chikou Span. I’ve read and observed a shocking number of people disregard the Chikou Span and treat it like it’s some pointless component that is not needed. People treat like it’s the gallbladder and just cut it out and think everything’s going to be just fine. That is a horrible idea.
This is my favorite tool in the entire system. It is very, very simple, and requires no averaging. It is merely the current price action shifted back 26 periods. It’s like a mirror image of the current price action. Even though it is simple to understand, visualizing this line can be hard. Look at the image below.
Chikou Span
The image above shows the Chikou Span on a Japanese Candlestick chart. If you are new to this trading system, you still may have a hard time ‘visualizing’ what the Chikou Span looks like. I think the easiest way for people to finally get it and experience the ‘ah-ha’ moment is to change the chart from a candlestick chart to a line chart. See below.
Candlesticks to Line Chart
When we change from a candlestick chart to a line chart, it is much easier to grasp and visualize what the Chikou Span is – because it is straightforward. The Chikou Span is just our current price shifted back 26 periods.
The Chikou Span represents the market’s memory. (Peliolle) It represents momentum. (Patel) David Linton identified what I consider one of the most crucial signals that can be generated on an Ichimoku chart. He wrote: When the Chikou Span crosses above or below the Cloud, it is THE confirmation signal in Ichimoku Analysis. (Linton)
Key Points
Look for when the Chikou Span is in ‘Open Space.’ Manesh Patel identified Open Space as a condition when the Chikou Span won’t intercept any candlesticks over the next 5 to 10 periods. This indicates a much easier move for the price with almost no supportive/resistive structure to stop price.
If the Chikou Span is trading ‘inside’ the candlesticks, the market is beginning to consolidate.
The Chikou Span responds to the same support and resistance levels as the price does. (Peliolle)
Why 9, 26, and 52?
One of the biggest questions people will ask is, why does the Ichimoku system utilize the periods of 9, 26, and 52? Much of this has to do with history and Japan’s normal trading week. A trading week in Japan was six days, so 9 is 1.5 weeks. (Elliot). There are roughly 26 trading sessions in a month. (Elliot) 52 is approximately two full trading months. Do not change these values.
Let me repeat that.
Do. Not. Change. Those. Values.
You can change your timeframes all you want but never change the base Ichimoku settings. You will read people give reasons why you should do it for this market and that market. You will read reasons why using Western values is useful for Western traders. You will hear a myriad of reasons why you should change the base values. Don’t. The Ichimoku Kinko Hyo system is a time tested, proven profitable, and robust trading system. Don’t muck it up by introducing variables that are not a part of the system.
The following articles in the Ichimoku series will detail advanced Ichimoku concepts such as Hidenobu Sasaki’s Three Principles as well as trading strategies utilizing the Ichimoku system.
Sources: Péloille Karen. (2017). Trading with Ichimoku: a practical guide to low-risk Ichimoku strategies. Petersfield, Hampshire: Harriman House Ltd.
Patel, M. (2010). Trading with Ichimoku clouds: the essential guide to Ichimoku Kinko Hyo technical analysis. Hoboken, NJ: John Wiley & Sons.
Linton, D. (2010). Cloud charts: trading success with the Ichimoku technique. London: Updata.
Elliot, N. (2012). Ichimoku charts: an introduction to Ichimoku Kinko Clouds. Petersfield, Hampshire: Harriman House Ltd.
Ichimoku is not an indicator (many platforms incorrectly label it an indicator) – it is a trading system. Ichimoku Kinko Hyo is, in my opinion, the
Ichimoku Kinko Hyo
Ichimoku is not an indicator (many platforms incorrectly label it an indicator) – it is a trading system. Ichimoku Kinko Hyo is, in my opinion, the
Ichimoku Kinko Hyo
Ichimoku is not an indicator (many platforms incorrectly label it an indicator) – it is a trading system. Ichimoku Kinko Hyo is, in my opinion, the most effective trading system to use with Japanese Candlesticks.
The reasons for this require a deep dive into the fundamentals behind the differences of Japanese VS Western analysis – but that is for another article. The Ichimoku system – and it is a system, not an indicator – is perhaps the most complimentary system that you could ever use with Japanese candlesticks. The reasons for this are rooted in history.
History of Japan: Edo, Meiji, and Candlesticks
One of the most important and famous economists in history, Milton Freidman, often used a specific point in Japan’s history to show how powerful free markets are. This period was known as the Meiji Restoration. If you are unaware of this period of history, you should do a little reading. It’s an astounding story. The period we are most interested in is the period after the end of the Tokugawa Shogunate (Edo Period) and the beginning of the Meiji Period.
It’s important to understand that before the Restoration, Japan was militantly xenophobic. For over a quarter of millennia, no foreigners were allowed in Japan, and no Japanese were allowed to leave. This policy ended almost literally overnight when the Emperor opened the doors of Japan to foreign capital, industry, and ideas. In just a couple of decades, the Japanese went from mostly medieval technology to fast-forwarding their technology ahead almost 350 years. I mean, think about it. In 80 years, the people went from medieval plowshares to aircraft carriers. It’s truly fascinating. But the major transition wasn’t just the technological leap; it was the capital and market-based leap as well.
Believe it or not, Japan created the first futures exchange. The Dojima Rice Exchange was created in 1697 by samurai. Samurai were not just masterful warriors, but they had various duties throughout their existence – one of which was collecting taxes. Rice was the de facto currency in Japan for centuries – it’s how people paid taxes. Rice coupons were issued and used as the first futures contracts.
Fast forward to the end part of the Edo period; we have the first instance of what we now know as Japanese Candlesticks coming to use. Munehisa Homma (nicknamed Sakata) is credited with creating Japanese Candlesticks. It is important to note that Japanese Candlesticks (the mid-1700s) were used well before the invention of American Bar Charts (1880s). More on the history of Japanese Candlesticks and Mr. Homma’s invention will be discussed in another article.
Ichimoku Kinko Hyo History
The man who created Ichimoku is Goichi Hosada. David Linton’s book, Cloud Charts – Trading Success with the Ichimoku Technique and Nicole Elliot’s book, Ichimoku Charts –An Introduction to Ichimoku Kinko Clouds provide an excellent history of both Japanese candlesticks and Goichi Hosada’s time spent creating Ichimoku. Both of those books should be on your shelves!
The translation for Ichimoku Kinko Hyo is this: At a glance (Ichimoku), Balance (Kinko), and Bar Chart (Hyo). The most important word here, Kinko, for balance. Experienced traders in Japanese theory and pedagogy will know that one of the most important characteristics in Japanese technical analysis is the focus of balance and equilibrium. This trait is constant in the Ichimoku system. The focus of equilibrium and balance is constant in various Japanese chart forms as well (Heiken-Ashi and Renko). The concept of balance will make more sense when you learn the Ichimoku system in the next article.
Sources: Péloille Karen. (2017). Trading with Ichimoku: a practical guide to low-risk Ichimoku strategies. Petersfield, Hampshire: Harriman House Ltd.
Patel, M. (2010). Trading with Ichimoku clouds: the essential guide to Ichimoku Kinko Hyo technical analysis. Hoboken, NJ: John Wiley & Sons.
Linton, D. (2010). Cloud charts: trading success with the Ichimoku technique. London: Updata.
Elliot, N. (2012). Ichimoku charts: an introduction to Ichimoku Kinko Clouds. Petersfield, Hampshire: Harriman House Ltd.
The Relative Strength Index (RSI) indicator was developed in 1978 by J. Welles Wilder. the RSI is a Momentum indicator that measures the change of the price movement. In this
The Relative Strength Index (RSI) indicator was developed in 1978 by J. Welles Wilder. the RSI is a Momentum indicator that measures the change of the price movement. In this
The Relative Strength Index (RSI) indicator was developed in 1978 by J. Welles Wilder. the RSI is a Momentum indicator that measures the change of the price movement. In this educational article, we will review how to apply the RSI with the Elliott Wave Analysis.
The basics
Possibly, the RSI indicator is the most widespread indicator from professionals to retail traders. The RSI is an oscillator that moves in a range between 0 to 100. Alexander Elder describes it as a “leading or coincident indicator – never laggard.”
Some applications of RSI are tops and bottoms identification, divergences, failure swings, support and resistance, and chart formations.
In the Elliott wave theory, the RSI application can to aid in the wave identification process. In particular, the identification of divergences is the most used application in the wave analysis.
J. W. Wilder describes the divergence between the price action and RSI path as a “powerful indication that the market could reverse soon.
A divergence takes place when the price is still increasing, while the RSI began decreasing (bearish divergence). Or when the price falls, and the RSI climbs (bullish divergence.) In the wave analysis terms, divergences appear between the end of waves three and five. Let’s see a couple of examples.
RSI and the Elliott Wave Principle
Johnson & Johnson (NYSE:JNJ), on its weekly chart, illustrates the RSI and the Awesome Oscillator. Both indicators show the divergence created between the end of waves three and five.
On the JNJ chart, we also can observe the RSI levels when price action runs in a wave three. When this occurs, the RSI tends to move between the levels 70 and 80.
In a bull market scenario, usually, the price action tends to find support near to level 40. When the price moves in a bear market, the ascending correction tends to find resistance near to level 60. This concept, with the swings identification, can support the wave analysis.
The following chart corresponds to the Dollar Index (DXY) in its 8-hour timeframe. From the figure, we observe the bullish sequence developed in five internal legs, in which we observe that each leg has three waves.
As a conclusion from the study using the RSI indicator and wave analysis, the price action unveils an ending diagonal pattern. The Elliott wave structure shows us that the Greenback should see new lower lows.
Indicators are a useful tool that can aid in supporting the analysis process. In this educational article, we will review the Awesome Oscillator and how it can help us in
Indicators are a useful tool that can aid in supporting the analysis process. In this educational article, we will review the Awesome Oscillator and how it can help us in
Indicators are a useful tool that can aid in supporting the analysis process. In this educational article, we will review the Awesome Oscillator and how it can help us in an Elliott Wave study.
The basics
The Awesome Oscillator (AO) is also known as the Elliott Wave oscillator, was developed by Bill Williams. The AO measures the immediate momentum of the five previous periods, compared with the momentum of the last 34 periods.
The calculation is based on the simple moving average of the midpoint (HL / 2) of 34 periods minus the simple moving average of the midpoint of 5 periods.
Elliott Wave and the Awesome Oscillator
The following chart corresponds to the Johnson and Johnson (NYSE:JNJ) weekly chart. The bullish motive wave started with the August 2015 low at $128.51 per share. From this low, JNJ began to a bullish sequence, which drove it to reach the $148.32 level.
From the AO oscillator, we can recognize the following elements of the price action:
Trend bias: If the trend is bullish, the AO will be positive. If it is bearish, the oscillator will move on the negative side. For our example, the market direction of the range of time studied corresponds to a bullish trend.
Wave three: We can identify wave three with the most prominent distance of the AO. From the JNJ example, we distinguish a wave (3) of Intermediate degree labeled in black. At this point, the stock reached $125.90 per share. After this peak, JNJ started a corrective sequence, and the oscillator began to decrease, even moved in the negative side.
Wave five: In the same way as the third wave, we can recognize the fifth wave watching the AO because momentum follows the dominant trend. However, in this segment, the oscillator shows a divergence between the peaks of waves three and five. In our example, JNJ ended the wave (5) on the half of January 2018 at $148.32 per share. We can observe the bearish divergence between the price and the oscillator.
Corrective waves: We can use the AO to identify corrective waves watching how it decreases against the prevailing trend. From the JNJ chart, the oscillator turns negative when the price develops a retracement.
In summary, the Awesome Oscillator can be a useful tool to complement the EW analysis, especially in wave identification. A divergence involves the exhaustion of the movement, but the price is not compelled to reverse the trend.
Harmonic Pattern Example: Bearish 5-0 Harmonic Pattern
The 5-0 Harmonic Pattern
Like the Shark Pattern, the 5-0 pattern is a relatively new pattern discovered by the great Scott Carney. Carney
Harmonic Pattern Example: Bearish 5-0 Harmonic Pattern
The 5-0 Harmonic Pattern
Like the Shark Pattern, the 5-0 pattern is a relatively new pattern discovered by the great Scott Carney. Carney
Like the Shark Pattern, the 5-0 pattern is a relatively new pattern discovered by the great Scott Carney. Carney revealed this pattern in his second book in his harmonic series, Harmonic Trading: Volume Two.
The 5-0 pattern is easily one of the wonkiest looking patterns. Depending on where you are at with your knowledge of harmonic patterns, the 5-0 will look foreign. And this is primarily because the 5-0 Pattern starts a 0. If you are used to seeing XABCD, then 0XABCD will undoubtedly look odd.
5-0 Elements
The pattern begins (begins with 0) at the beginning of an extended price move (direct quote from Carney’s work).
After 0 has been established, an impulse reversal at X, A, and B must possess a 113 – 161.8% extension.
The projection off of AB has a 161.8% extension requirement to C. C can move beyond the 161.8% extension but not beyond 224%.
D is the 50% retracement of BC and is equal to AB (a Reciprocal AB=CD Pattern).
The reciprocal AB=CD is required.
One of the best ways to interpret this pattern is to view it from an exasperated trader’s point of view. If we take the Bullish 5-0 Pattern as an example, then we can see why. The AB leg ends with B below X, creating a lower low. We then get an extended move in time where the BC leg is the most prolonged move with C ending above A. The movement from B to C may take on the appearance of a bear flag or bearish pennant. C to D shows intense shorting pressure and a belief among bears that new lows are going to be found. Instead, we get to D – the 50% retracement of BC. Instead of new lower lows, we get a confirmation swing creating a higher low. That move will more than likely generate a brand new trend reversal or significant corrective move.
Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall. Gilmore, B. T. (2000). Geometry of markets. Greenville, SC: Traders Press. Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley.
Harmonic Pattern Example: Bearish Deep Crab
The Deep Crab Pattern
The Deep Crab is a variant of the regular Crab pattern. It is still a 5-point extension, and it still
Harmonic Pattern Example: Bearish Deep Crab
The Deep Crab Pattern
The Deep Crab is a variant of the regular Crab pattern. It is still a 5-point extension, and it still
Harmonic Pattern Example: Bearish Deep Crab
The Deep Crab Pattern
The Deep Crab is a variant of the regular Crab pattern. It is still a 5-point extension, and it still has the endpoint (D) at the 161.8% extension of XA, but the AB=CD importance is a little different.
The most distinguishing component of this pattern is the importance of the specific 88.6% retracement point of B. Along with the Crab Pattern, the Deep Crab Pattern presents an especially extended and long move towards D.
Carney stressed that the Crab and Deep Crab represent significant overbought and oversold conditions, and reaction after completion is often sharp and quick. It is the opinion of many traders and analysts that the Crab Pattern and Deep Crab represent some of the fastest and profitable patterns out of all harmonic patterns.
Deep Crab differences from the Crab
BC leg projection is not as extreme as the Crab.
B must be at least an 88.6% retracement. Common to move more than 88.6% retracement level not above/below X (not above X in a Bearish Deep Crab and not below X in a Bullish Deep Crab).
AB=CD pattern variations are more important in the Deep Crab Pattern.
The BC leg is a minimum of 224% but can extend to 361.8%.
Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall. Gilmore, B. T. (2000). Geometry of markets. Greenville, SC: Traders Press. Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley.
Harmonic Pattern Example: Bearish Shark
The Shark Pattern
The Shark Pattern is the newest harmonic pattern from Carney’s work (2016). He revealed this pattern in his third book in
Harmonic Pattern Example: Bearish Shark
The Shark Pattern
The Shark Pattern is the newest harmonic pattern from Carney’s work (2016). He revealed this pattern in his third book in
Harmonic Pattern Example: Bearish Shark
The Shark Pattern
The Shark Pattern is the newest harmonic pattern from Carney’s work (2016). He revealed this pattern in his third book in his Harmonic Trading series, Harmonic Trading: Volume Three.
To gain a further understanding of the terminology used in this article, I would strongly encourage everyone to pick up all three of Carney’s books.
The Shark Pattern shares some of the more peculiar conditions that exist on some of the most extreme patterns. For example, both the 5-0 and the Shark Pattern are not typical M-shaped or W-shaped patterns. The Shark Pattern shows up before the 5-0 Pattern. It also shares a specific and precise Fibonacci level that the Deep Crab shares: The 88.6% retracement.
One behavior that might sound abnormal to all other harmonic patterns is that the reaction to the completion of this pattern is very short-lived. I think this is one of the most potent harmonic setups in Carney’s entire work because I am an intraday trader, and this pattern is very much for active traders.
Shark Pattern Elements
AB extension of 0X must be at least 113% but not exceed 161.8%.
BC extends beyond 0 by 113% of X0.
BC extension of AX must be at least 161.8% but not exceed 224%.
Because the Shark precedes the 5-0 Pattern, the profit target should be limited to the critical 5-0 Fibonacci level of 50%.
Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall. Gilmore, B. T. (2000). Geometry of markets. Greenville, SC: Traders Press. Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley.
Price action traders are to get clues from what the price has been doing. Horizontal Support/ Resistance, Trend Line Support/Resistance, Fibonacci Levels, Equidistant Channel along with Candlestick Pattern are price
Price action traders are to get clues from what the price has been doing. Horizontal Support/ Resistance, Trend Line Support/Resistance, Fibonacci Levels, Equidistant Channel along with Candlestick Pattern are price
Price action traders are to get clues from what the price has been doing. Horizontal Support/ Resistance, Trend Line Support/Resistance, Fibonacci Levels, Equidistant Channel along with Candlestick Pattern are price action trader’s main weapons. A trader must know how to use these tools as far as price action trading is concerned. Moreover, traders often need to adjust to marking levels, which are to be integrated with price action and market psychology. In today’s lesson, we are going to show an example of that.
The price has been heading towards the downside with strong bearish momentum. Ideally, traders are to look for short opportunities at upside pullback. See the first reversal candle. The candle closes within the support of the last bearish candle. Thus, the traders must wait to go short since the support holds the price. Let us see what happens next.
At the last candle, the price goes towards the downside but comes back within the support again. Equations are different now. Long lower shadow and proven support suggest that the traders may have to wait longer than they thought.
As expected, the price consolidates on choppy price action, which makes traders wait. Traders find horizontal support. Let us draw it.
The price obeys the support level several times. However, do not forget that the price had a strong rejection. This is where traders may need to make an adjustment.
The price has been heading towards the adjusted support. Risk-Reward does not look right here. It is better to wait for either a downside breakout or a bullish reversal to go long. Let us see what happens next.
We have a bullish reversal here. A bullish engulfing candle right at the support level suggests that the traders may have to look for long opportunities here. The question is, shall we take an entry right after the last candle closes or not. The answer is ‘No”. We have to wait for an upside breakout. Can you guess where the breakout level is? Think for a minute, and then proceed to the chart below.
The price has been obeying a down-trending Trend line producing a Descending Triangle. Thus, the breakout at the Trend line resistance is a signal to go long here. All the buyers need here a breakout by a bullish Marubozu candle.
Here comes the breakout that the price action traders shall wait for. The buyers may trigger a long entry right after the breakout candle closes. Stop Loss is to be set below the horizontal support. Let us find out how it proceeds.
The price heads towards the North and provides 1:1 Risk-Reward. So far here, it seems that it is having consolidation. Some traders may want to come out with their profit. Some may shift their Stop Loss at the breakeven and take some profit out targeting to go all the way towards the swing high. This depends on how a trader wants to manage his trade. With these above charts and examples, we have realized the importance of adjustment in marking support/resistance.
The Cypher Pattern
The Cypher Pattern is another type of Harmonic Pattern – except it isn’t – but it is. This is one of the few patterns not identified by
The Cypher Pattern
The Cypher Pattern is another type of Harmonic Pattern – except it isn’t – but it is. This is one of the few patterns not identified by
The Cypher Pattern
The Cypher Pattern is another type of Harmonic Pattern – except it isn’t – but it is. This is one of the few patterns not identified by Scott Carney. Darren Oglesbee discovered this particular pattern.
This pattern is very similar to the Butterfly in both it’s construction and where it typically will occur (near the end of trends). However, the Cypher Pattern is a rare pattern and not one that shows up with a high amount of frequency. Don’t confuse rarity with being more powerful or profitable. I do not know enough about this pattern, nor have I had the opportunity to trade it enough to gauge it’s ‘power’ versus its peers. All I do know is that in the times I have traded it, its positive expectancy rate is high, no different than a Bat or Alternative Bat in my experience. The same goes for the Crab and Deep Crab, for that matter. Just like all of the other Harmonic Patterns that you will have learned about, the Cypher has specific rules and conditions that must be met for it to be a specified Cypher pattern.
Cypher Confirmation Conditions
B must retrace to an expansive range between 38.2% and 61.8% of XA. At least 38.2% but not exceeding 61.8%
C is an extension leg and moves beyond A – but must move to at least 127.2%, but it is normal for it to go as far as the 113% – 141.4%. It is considered invalid if it moves beyond the 141.4%
CD leg should break the 78.6% level of XC.
The PRZ (Potential Reversal Zone) of D is a wide range where the price must get to. Price can move anywhere between 38.2% to 61.8%.
I’ve created a simplified approach to how to ‘see’ this pattern.
Simplified Approach (Bullish Cypher)
C must be higher than A.
D must be less than B but greater than X.
We should see a higher high (C > A) and a higher low (D > X).
Simplified Approach (Bearish Cypher)
C must be less than A.
D must be more than B but less than X.
The same approach as above, reverse: lower high (D < X) and a lower low (C < A).
This pattern can be confusing (all harmonic patterns can be complicated), but in a nutshell, what we see happening with the Cypher pattern is the first pullback/throwback of a trend (B). After B, the small pullback/throwback of B occurs with the C leg. From a bullish perspective, when we see prices making lower highs and lower lows, but there is no follow-through shorting pressure, we should be on the lookout for some powerful and influential moves to occur in a very short period of time. It is not uncommon to see a bullish candle engulf several days of consolidation with this pattern.
Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall. Gilmore, B. T. (2000). Geometry of markets. Greenville, SC: Traders Press. Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley.
The crab pattern is another of Carney’s harmonic patterns and one of the first that he discovered. The essential condition of this pattern is the
The Crab Pattern
The crab pattern is another of Carney’s harmonic patterns and one of the first that he discovered. The essential condition of this pattern is the
The Crab Pattern
The crab pattern is another of Carney’s harmonic patterns and one of the first that he discovered. The essential condition of this pattern is the extremely tight and resistance endpoint of 161.8% of the XA leg.
Like almost all harmonic patterns, the potential reversal in price action after this pattern has been complete is generally fast, violent and powerful. However, Carney gives special attention to this pattern and reports that it is usually the most extreme of all harmonic patterns.
The pattern is not as frequent as others due to its five-point extension structure. It is desirable to utilize an oscillator to filter entries of this pattern according to any divergence between price and your selected oscillator.
The BC projection can be quite extensive, generally 261.8%, 314%, or 3618%.
An AB=CD 161.8% or an Alternate AB=CD 127% is required for the formation of this pattern.
The extension of 161.8% of XA is the end limit of the pattern.
C has an expansive range between 38.2% and 88.6%.
Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall. Gilmore, B. T. (2000). Geometry of markets. Greenville, SC: Traders Press. Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley.
Forex trading is a hard business. A trader has to work hard to learn the algorithm of it as well as psychologically strong enough to apply them when it comes
Forex trading is a hard business. A trader has to work hard to learn the algorithm of it as well as psychologically strong enough to apply them when it comes
Forex trading is a hard business. A trader has to work hard to learn the algorithm of it as well as psychologically strong enough to apply them when it comes to making money out of it. Some individuals may have enormous knowledge as far as trading is concerned, but they do not do well in trading. It is because they are not capable of dealing with the real heat.
Having losses is another inevitable issue with trading, which every trader is to encounter. It does not matter how good a trader is; he or she must face losses. In trading when a trader loses a trade, he loses in two ways
He loses his money
He loses faith in his calculation or belief
Losing the Money
When a trader loses money in trading, I do not think it needs an explanation of how bad it feels. Losing money on any occasion hurts. Traders are bound to err because this is a game of chances, so they sometimes lose money. In the Forex markets, a trader can lose an unlimited amount of money. He can lose an amount of money he even cannot think of. Experienced traders do err as well.
In most cases, it is not about making mistakes. The market can be unpredictable from time to time. Even excellent trade setups don’t always work. This fact may make a trader believe something wrong with the strategy. He starts adding/changing more things with the strategy; runs after Holy Grail. We know what the last consequence is. He quits after losing valuable time and invested money. Statistics show that only around 5% of investors are successful in the Forex market.
How to Overcome It?
A trader must be ready to take losses. He should look at trading as a business, and count his losses as business expenditure. Let us consider. If we run a business, we have to pay utility, rent, wage, miscellaneous spending. A trader may count his losses as an expenditure of his trading business.
Losing on Own Belief
We often ignore this issue at the time of analyzing traders’ psychology. I find this to be a severe issue. When a trader takes an entry, he throws his skill, experience, belief in it. If it goes wrong, he loses a trade on his calculation. Psychologically, it hurts a lot. We can compare the feeling when our favorite team loses a match against an archrival. Losing on own belief is often more painful than losing the money only.
How to Overcome It?
It is a severe psychological trading issue. To overcome this issue, a trader must remember that there is no such strategy in the Forex market, which is 100% successful. Even the best of the best strategy is bound to encounter losses. Typically, if a strategy is successful even in 60% cases, the market analysts consider it as a good strategy.
The Bottom Line
A trader is to take trading as a business. The market is not an ATM. Making money consistently does not mean a trader makes money on every single trading day. A trader is to have some good days and some bad days. There is no point in jumping with joy on good days or being grumpy on bad days. Just take them professionally.
Intermarket Analysis studies the correlation or relationship between different markets or assets. In this educational article, we will review how to apply the correlation analysis within the Elliott Wave Principle.
Intermarket Analysis studies the correlation or relationship between different markets or assets. In this educational article, we will review how to apply the correlation analysis within the Elliott Wave Principle.
Intermarket Analysis studies the correlation or relationship between different markets or assets. In this educational article, we will review how to apply the correlation analysis within the Elliott Wave Principle.
The basics
In financial markets, we use the correlation to measure the relationship between two or more assets. These assets can be from the same or different markets.
For example, we can analyze the relationship between a commodity and a currency pair. In the first figure, we observe the relationship between Crude Oil (NYMEX:CL) and the FX pair US Dollar – Canadian Dollar (USDCAD).
From the figure, we observe that Crude Oil holds an inverse relationship with USDCAD. It means that, if CL soars, the USDCAD should decrease, and vice-versa. This type of correlation is known as negative or inverse correlation.
In the contrarian case, when an asset moves in the same direction that the second one is known as positive or direct correlation.
The second key concept in the Intermarket analysis is convergence and divergence. In the same way that we use and identify divergences, or deviations, on technical indicators, we use it with correlations. Divergences allow us to foresee the exhaustion of a sequence.
From the figure one, we identified the divergence with the red arrow. In the example, we observe at the end of a wave, when Crude Oil soars, the Loonie decreases. In general, we find divergences when the fifth wave is in progress.
Putting all together
The next chart corresponds to the NASDAQ Biotechnology ETF (IBB) and the stock price chart of MERCK & Co. (MRK), in the weekly timeframe and log scale.
In this case, both assets belong to the same sector. Thus, we expect a positive correlation with each other. From the chart, we observe that IBB and MRK started a rally in the third quarter of 2009.
MRK looks like it’s near to end the bull trend; however, IBB unveils an incomplete bullish five-waves sequence.
Finally, please, note how the divergence appears at the end of the third wave on IBB, while MRK started the wave four.
Harmonic Pattern Example: Alternate Bat Bullish
The Alternate Bat Pattern
The Alternate Bat Pattern is another pattern by Scott M. Carney. This pattern comes from his second Volume Two in
Harmonic Pattern Example: Alternate Bat Bullish
The Alternate Bat Pattern
The Alternate Bat Pattern is another pattern by Scott M. Carney. This pattern comes from his second Volume Two in
Harmonic Pattern Example: Alternate Bat Bullish
The Alternate Bat Pattern
The Alternate Bat Pattern is another pattern by Scott M. Carney. This pattern comes from his second Volume Two in his Harmonic Trading series of books. He discovered this pattern roughly two years after (2003) his discovery of the Bat Pattern (2001). Carney wrote that ‘the origin of the alternate Bat pattern resulted from many frustrated and failed trades of the standard framework. The standard Bat pattern is defined by the B point that is less than a 0.618 retracement of the XA Leg.’ Essentially, with the Alternate Bat Pattern we observe an extension beyond the 88.6% level at D, where D moves slightly below X (in a bullish Bat) or above X (in a bearish Bat). I view Alternate Bats as classic and powerful bear traps and bull traps. And they are just plain nasty if you find yourself thinking that a new low means further downside movement and a continuation lower – but instead to you get whipsawed by a massive reversal.
Alternate Bat Elements
Whereas the 88.6% retracement is nearly singular to the Bat Pattern, the Alternate Bat Pattern utilizes the 113% retracement of XA to determine the endpoint.
B must be a 38.2% or less retracement of XA.
Minimum projection of 200%
The AB=CD pattern must be an extended AB=CD and often is a 161.8% level.
The pattern is potent when using a form of divergence detection, such as the Composite Index, to confirm the pattern.
Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall. Gilmore, B. T. (2000). Geometry of markets. Greenville, SC: Traders Press. Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley.
Harmonic Pattern Example: Bearish Bat
The Bat Pattern
The Bat Pattern is another harmonic pattern that was not identified by Gartley, but instead by the great Scott M. Carney –
Harmonic Pattern Example: Bearish Bat
The Bat Pattern
The Bat Pattern is another harmonic pattern that was not identified by Gartley, but instead by the great Scott M. Carney –
Harmonic Pattern Example: Bearish Bat
The Bat Pattern
The Bat Pattern is another harmonic pattern that was not identified by Gartley, but instead by the great Scott M. Carney – found in Volume One of his Harmonic Trading series (I believe that Mr. Carney’s work is essential in your trading library).
I am particularly grateful to Carney’s work because it was his work that introduced me to a very powerful Fibonacci retracement level: 88.6%. Previously, I have followed Connie Brown’s suggestions in her various books utilizing only the 23.6%, 50%, and 61.8% Fibonacci levels – the 88.6% is now a near-constant in my own analysis and trading. That particular level, the 88.6% level, is the primary level to reach with the Bat pattern.
One of the key characteristics of this pattern is the strength, power, and speed of the reversals that occur after a confirmed and completed pattern is verified. As a Gann based trader, this is the pattern I personally look for to identify the ‘confirmation’ swing in a new trend (the first higher low in a reversing downtrend and the first lower high in a reversing uptrend).
Bat Pattern Elements
B wave must be less than the 61.8% retracement of XA – ideally the 38.2% or 50%.
BC projection must be at least 1.618.
The AB=CD pattern is required and is often extended.
C has an expansive range between 38.2% and 88.6%.
The 88.6% Fibonacci retracement is a defining and particular level to the Bat Pattern.
The 88.% D retracement is the defining and exact limit of the end of this pattern.
C should be inside the 50% and 61.8% retracement range.
Ideal Bearish Bat Conditions
B wave must be less than the 61.8% retracement of XA – ideally the 38.2% or 50%.
BC projection must be at least 88.6%.
BC projection minimum of 161.8% with the max extensions between 200% to 261.8%.
AB=CD is required, but the Alternate 127% AB=CD is ideal.
C wave retracement can vary between the 38.2% to 88.6% retracement levels.
Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall. Gilmore, B. T. (2000). Geometry of markets. Greenville, SC: Traders Press. Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley.
How to determine Dependency in your Trading System
As we have explained in our previous article How to be sure your trading strategy is a winner, traders usually apply position
How to determine Dependency in your Trading System
As we have explained in our previous article How to be sure your trading strategy is a winner, traders usually apply position
How to determine Dependency in your Trading System
As we have explained in our previous article How to be sure your trading strategy is a winner, traders usually apply position size strategies that conform with the belief that future outcomes somehow are influenced by the previous result or results. This phenomenon, in statistical terms, is called dependency, which means the probability of the next event happening depends on the last or past events.
The example of a card game such as Blackjack or Pocker, can enlighten this concept. In a deck of cards, the odds of getting a particular card, such an ace is dependent on the cards already on the table. So, the first time, with no card drawn, the probability of drawing an ace is 4/52. But the next time we draw a card, the probability changes to 4/51 or 3/51, depending on if an ace was drawn on the last time.
What does dependency mean to Trade
Having dependency on a trading system or strategy would mean that the odds of the next trade being profitable or unprofitable change with the outcome of the last trade. If we really could prove dependency and its kind, we could adapt our trade size accordingly, making the system more profitable than assuming non-dependency.
As an example, if we devise a system on which a winning trade precludes another winner and a losing trade another loser, we could increase trade size while on a winning streak and decrease it on losing streaks. That way, we could maximize profits and minimize losses.
How do we determine if a system shows dependency
Dependency on trading has two dimensions. The first dimension is dependency in terms of wins and losses, which is the sequence of wins and losses showing dependence. The second dimension is if the size of wins and losses also show dependency.
The run Test
On events such as drawing cards without replacement, it is evident that there is a dependency. But when we cannot determine if the sequence of results show dependence, we can perform a Run Test.
The run test is merely obtaining the Z-scores for the win and loss streaks of the results. A Z-score tells us how many deviations our data is away from the mean of a normal distribution. We are not going to discuss run tests here, as there is a simpler and more complete method to find out dependency. If interested in this subject, you can find multiple sources by googling the term.
Serial Correlation
Dependency can easily be measured, using a spreadsheet, since dependency is measurable using a CORREL() function between the trade results, and the same data shifted one place. This technique uses the linear correlation coefficient r called Pearson’s r, to quantify dependency relationships.
As an example, I passed one trade system of mine I backtested some time ago to a through the correlation function CORREL. The system produced 55% winners with 1.7 reward-to-risk factor on the DAX30 Futures contract.
The following image shows the result on this system, with about 250 trades (only the first 30 shown)
Image 1 – Dependency test on a DAX System
If you click on the image, you can see the result is 0.0352, which means the test failed miserably for dependency. That means we should separate our entry decisions from the trade size. Trade size will be a function of the system’s drawdown and our appetite for risk, not a function of the last trade being a winner or a loser.
Another test in an old trade system I devised back in 2016 for the ES futures gave this result:
In this case, the correlation factor was 0.249. That is a relatively high positive correlation for a system. The figure implies that big willers aren’t usually followed by big losses, and also the vice versa: Big losses are seldom followed by big wins. Using this system, we could improve the results if we increase our trade size after a win, and decrease the trade size after a loss.
A negative correlation can be as helpful as a positive correlation. For example, on a system with a negative correlation, we can expect large wins after a large loss, so it is wise to increase the trade size if that event occurs. Also, we can expect a large loss after a large win, so it is best to reduce the trade size before a large win.
To better determine dependency, Ralf Vince, on its book The Mathematics of Money Management, recommends splitting the total data of your system into two or more parts. First, determine if dependency exists in the first part of your data. If you detect it in that section, then check for dependency in the second section, and so on. This will eliminate the cases where it seems to be dependency, but in fact, there is not.
Corrective Waves Construction. Elliott, in his Treatise, spent a large part of time describing corrective waves. In this section, we present different corrective formations.
Equidistant Channel is a very reliable trading tool for the price action traders. In an ascending Equidistant Channel, the buyers wait for the price to come at the support level
Equidistant Channel is a very reliable trading tool for the price action traders. In an ascending Equidistant Channel, the buyers wait for the price to come at the support level
Equidistant Channel is a very reliable trading tool for the price action traders. In an ascending Equidistant Channel, the buyers wait for the price to come at the support level and to get a bullish reversal candle to go long. It is vice versa, in the case of a descending channel. However, some other equations are to be taken care of by the traders when trading with an Equidistant Channel. In today’s lesson, this is what we are going to demonstrate. Let us get started.
The chart above shows that the price is caught within an ascending Equidistant Channel. Look at the last bearish wave. After a rejection, the price heads towards the support. As a trader, we shall wait for a bullish reversal candle to go long here. Let us proceed to find out what happens next.
Wow! The price action traders always dream of this. This is one good bullish reversal candle. A bullish engulfing candle right at the channel’s support, the buyers, shall jump into the pair to start buying. However, we must set stop loss, take profit. Stop Loss level looks very evident here, which will be below the signal candle (Bullish Engulfing Candle here). What is about the Take Profit level? Where shall we set it? Typically, we set it at the upper band of the channel since the price usually goes towards the resistance of the channel after having a bounce at the support level.
Look at the chart. At the last wave, the price produced a bearish engulfing candle right at a strong horizontal resistance (arrowed). It had a rejection at this level earlier, as well. Thus, this is a level, which must be counted at the time of setting Take Profit level.
Despite having an engulfing daily candle, the price does not head towards the North with a good buying pressure. Anyway, it heads towards the upside. Look at the rejection. This means setting our take profit at the horizontal resistance would give us 1:1 risk and reward ratio here. This is not bad. However, if we make a target to go all the way towards the upper band, it may get us a loss instead.
Let us see how the price action acts afterward.
We would not make a loss here, but see how the price action has been. It gets choppy. It may still offer more long entries since the support is held by the price. However, we know what else is to look for, a breakout at a significant level of horizontal resistance.
Key Points to Remember in Equidistant Channel trading:
A significant level of horizontal support/resistance is to be broken.
If there is no horizontal support/resistance, an anti-trend line is to be broken.
The signal candle is to be a strong trend reversal candle.
In the case of having horizontal support/resistance in the middle of a channel, at least the Risk-Reward ratio is to be 1:1.
The Elliott wave principle has its origin in the early 1930’s decade. The introduction of the wave concept was published in 1934 by R.N. Elliott in his work “The Wave
The Elliott wave principle has its origin in the early 1930’s decade. The introduction of the wave concept was published in 1934 by R.N. Elliott in his work “The Wave
The Elliott wave principle has its origin in the early 1930’s decade. The introduction of the wave concept was published in 1934 by R.N. Elliott in his work “The Wave Principle.”
The Wave Principle
In Elliott’s treatise, the author indicates that financial markets as a socio-economic activity hold a specific structure composed of five waves. In his model, Elliott teaches us that waves 1, 3, and 5, move following the direction of the dominant trend. On the contrary, waves 2 and 4 develop an opposite movement to the primary trend.
Parts of the Cycle
The Elliott wave cycle has two components; these components are an impulsive wave and a corrective wave.
As said before, an impulsive sequence holds five waves; and a corrective wave contains three segments. In consequence, a complete cycle has eight waves.
The next figure unveils a complete Elliott wave cycle.
The Analysis Process
When R.N. Elliott developed its theory, he defined a specific terminology to maintain the order in the analysis process. The author established a series of degrees that must be considered in relative terms about price and time.
The next table illustrates the different degrees defined by Elliott.
The analysis process starts with the relevant highs and lows identification in a larger timeframe. After this, we proceed to study the prices’ sequence; to aid to do this step, we examine the proportionality and the relation between price and time. The next chart illustrates the relationship between price and time.
The next stage is to identify impulsive waves. The basic guidelines of motive waves are:
It has five consecutive segments building a trend.
Three segments move in the same direction.
Wave three never is the shortest.
Wave two never ends below the origin of wave one.
When an impulsive movement finishes, it starts a corrective move of the same degree.
Alternation is a key concept of the wave principle. We observe the motive and corrective waves alternate one with another.
We observe the alternation in:
Distance.
Time.
Retracement.
Complexity.
The following EURAUD charts illustrate the concept of an alternation.
In the financial market, there is a saying, “Trend is your friend.” When the price makes a strong move towards a direction breaching a significant level of support/resistance, traders start
In the financial market, there is a saying, “Trend is your friend.” When the price makes a strong move towards a direction breaching a significant level of support/resistance, traders start
In the financial market, there is a saying, “Trend is your friend.” When the price makes a strong move towards a direction breaching a significant level of support/resistance, traders start looking for opportunities to take entries. The word ‘opportunity’ signifies a lot. After making a strong move, the price usually makes a correction/consolidation. At the correction/consolidation, the price finds a level of support/resistance. This is what gives a good risk-reward ratio to traders. In the end, it brings more winning trades, as well. In this lesson, we are going to demonstrate how a retracement gives us an entry.
The price produces a Double Bottom and breaches the neckline level. The buyers are to look for opportunities to go long on the chart. Look at the last two bearish candles. The price seems to have started having a correction. The last candle closes within the support. We might as well get a buying opportunity here. A bullish reversal candle at this level shall attract the buyers to go long. Let us see what happens next.
A bullish engulfing candle is produced here, which is considered the most powerful reversal candle. We have been eyeing to buy. Make a decision. What shall you do? Are you going to click the “Buy” button? Hang on. You must consider an equation before going long here. Look at the chart below.
The bullish reversal candle is produced at a level of support where the price had its last bounce. This is consolidation where the price is caught in a range. Thus, until the price makes a breakout at the resistance, we must not buy. Let us look at the chart below to find out what happens next.
The price comes out from the consolidation zone by making a downside breakout. It seems that the price is going to have a long retracement. Honestly, it appears that the buyers may not get the opportunities to go long. The price has been heading towards the South by making an ABC pattern, and the bullish trend is about to collapse. A down-trending Trend Line works as a resistance as well. Then, this is what happens.
We have a massive bullish engulfing candle at the level where the price has had several bounces. This is the candle, you may click the “Buy” button, right after it closes. A question shall be raised here that we do not take the long entry at the first bullish engulfing candle, but we do it now. What is the reason behind that? Before answering the question, look at the chart below.
The signal candle this time makes a breakout at the down-trending Trend line. This means along with a strong bullish reversal candle, we get a breakout as well. This is what makes the price action traders click the “Buy’ button this time. Let us have a look at the chart how it looks after clicking the “Buy” button.
It looks good. The price heads towards the North with good buying pressure. This is what we love to see. However, this does not come as easy as it sounds. The first bullish engulfing candle does not offer us entry, but this one does. The reason is it makes a breakout. We need to have a lot of practice, study, and research to be well acquainted with consolidation, correction, reversal, and breakout. Stay tuned to get more lessons on these topics.
The Butterfly pattern is a harmonic pattern discovered by Bryce Gilmore. Gilmore is the author of Geometry or Markets (now in its 4th Edition, initially published in 1987)– a must-read for those interested in harmonics patterns. He is the creator of his proprietary software called WaveTrader. The Butterfly is one of the most potent harmonic patterns because of the nature of where it shows up. Both Carney and Pesavento stress that this pattern typically shows the significant highs and significant lows of a trend. In fact, in utilizing multiple time frame analysis, it is not uncommon to see several Butterfly patterns show up in various timeframes all at the end of a trend (example: the end of a bull trend can show a bearish butterfly on a daily chart with a 4-hour and 1-hour chart showing a bearish butterfly ending at the same time). This pattern is an example of an extension pattern and is generally formed when a Gartley pattern (the Gartley Harmonic pattern) is invalidated by the CD wave moving beyond X. From a price action perspective, this is the kind of move where one would ‘assume’ a new high or low should be established, but extreme fear or greed takes over and causes prices to accelerate in both volume and price to end a trend.
Failure, Symmetry, and Thrust
Pesavento identified three crucial characteristics of the Butterfly pattern.
Thrust – C should be observed as an indicator of whether a Gartley or Butterfly pattern will form. He indicated specific Fibonacci levels that are important for gaps – but that is important for equity markets that are rife with gaps. That is not important for us in Forex markets (gaps in Forex are rare intra-week and typically form only on the Chicago Sunday open, Forex also has an extremely high degree of gaps filling). He noted that thrusts out of the CD wave point to a high probability of new 161.8% extensions rather than a 127.2% extension.
Symmetry – The slope of the AB and CD wave in the AB=CD should be observed strictly. Depending on how steep the angle is on the CD wave, this could indicate a Butterfly pattern is going to be formed. Pesavento also noted that the number of bars should be equal (10 bars in AB should also be 10 bars in CD). Regarding the steepness of the CD wave, this is where Gann can become instrumental. In my trading, and depending on the instrument and market, I utilize Gann’s various Squares (Square of 144, Square of 90, Square of 52, etc.). If you use a chart that is properly squared in price and time, there is very little ambiguity involved in identifying the speed of the slope of a CD wave.
Failure Signs – Very merely put, Pesavento called for close attention to any move that extends beyond the 161.8% XA expansion. And this is an excellent point because one of the most dangerous things we can do as traders is an attempt to put to much weight on a specific style of analysis. It’s easy to think, ‘well, the Butterfly pattern is strong, so if it completes that must be the high or low.’ That is a very foolish and dangerous assumption to make. When markets, even Forex, make new highs or lows in their respective trends, that is generally a sign of strength. So while the Butterfly pattern does indicate the end of a trend – common sense confirmation is still required. The Butterfly pattern should help confirm the end of a trend, not define it.
The Five Negations
Continuing on with the great work of Pesavento and Jouflas, they identified five conditions that would invalidate a Butterfly pattern:
No AB=CD in the AD wave.
A move beyond the 261.8% extension.
B above X (sell) or B below X (buy).
C above A or C Below A, respectively.
D must extend beyond X.
Ideal Butterfly Pattern Conditions
Carney identified six ideal conditions for a Butterfly pattern. You will note that the combination of Pesavento and Jouflas’s work greatly compliments Carney’s.
Precise 78.6% retracement of B from the XA wave. The 78.6% B retracement is required.
BC must be at least 161.8%.
AB=CD is required – the Alternate 127% AB=CD is the most common.
127% projection is the most critical number in the PRZ (Potential Reversal Zone).
No 161.8% projection.
C should be within its 38.2% to 88.6% Fibonacci retracement.
Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall. Gilmore, B. T. (2000). Geometry of markets. Greenville, SC: Traders Press. Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley.
The Gartley is probably the most well-known pattern in Gartley Harmonics. Gartley himself said that this pattern represents one of the best trading opportunities. Its profitability
Harmonic Pattern: Bearish Gartley
The Gartley is probably the most well-known pattern in Gartley Harmonics. Gartley himself said that this pattern represents one of the best trading opportunities. Its profitability
Harmonic Pattern: Bearish Gartley
The Gartley is probably the most well-known pattern in Gartley Harmonics. Gartley himself said that this pattern represents one of the best trading opportunities. Its profitability remains exceptionally resilient. This is especially true when we consider how old the pattern is and how it has remained profitable in these contemporary trading environments. Pesavento reported (at least I think he was the one who wrote this statistic) that it is profitable seven out of ten times and has remained that way for over 80 years. It is important to remember that all harmonic patterns have stringent ruleset. There is no room for interpretation in the construction of any pattern, and the Gartley pattern is no different.
Rules
D cannot exceed X.
C cannot exceed A.
B cannot exceed X.
Characteristics
X is the high or low of a swing.
It is impossible to project or determine A.
Main Fibonacci levels are 38.2%, 50%, 61.8% and 78.6%.
Precise 61.7% retracement XA for B.
BC projections have two specific Fibs: 127% or 161.8%.
The BC projection must not exceed 161.8%.
Symmetrical AB=CD patterns are frequent.
C retracement has a wide range between 38.2% and 88.6%.
An exact D retracement is 78.6% of the XA move.
Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall Gartley, H. M. (2008). Profits in the stock market. Pomeroy, WA: Lambert-Gann Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley
The AB=CD Harmonic Pattern is the most basic and common pattern in harmonic geometry. It is the building block of all other patterns. It is the ‘bread and butter’ pattern. Pesavento and Carney recommended that this pattern should be learned first – and reading this article does not qualify for having learned this pattern. Like any form of analysis, you will need to regularly and consistently train your brain and eyes to find this pattern. You won’t be able to get very far in the study of harmonic patterns until you can see this pattern just by glancing at a chart.
CD is an extension of AB, generally from the Fibonacci ratio of 1.27% to 2.00%.
CD’s slope is steep or longer/wider than AB.
BC often corrects to the Fibonacci ratios of 38.2%, 50%, 61.8%, or 78.6%.
AB=CD Pattern Reciprocal Ratios
Point C Retracement
BC Projection
38.2%
24% or 261.8%
50%
200%
61.8%
161.8%
70.7%
141%
78.6%
127%
88.6%
113%
Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall Gartley, H. M. (2008). Profits in the stock market. Pomeroy, WA: Lambert-Gann Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley
Gartley Harmonic Pattern Example: Cipher Pattern
Harmonics – Gartley Geometry
Out of the myriad of different approaches and methods of Technical Analysis, there seems to be one particular method
Gartley Harmonic Pattern Example: Cipher Pattern
Harmonics – Gartley Geometry
Out of the myriad of different approaches and methods of Technical Analysis, there seems to be one particular method
Gartley Harmonic Pattern Example: Cipher Pattern
Harmonics – Gartley Geometry
Out of the myriad of different approaches and methods of Technical Analysis, there seems to be one particular method that draws new traders to it more than Gartley Harmonics. People see these wonky triangles on a chart and automatically assume that because it looks so complicated and esoteric, they should probably learn these patterns right away. If that sounds like yourself, stop reading the remainder of this article and come back once you have learned the fundamentals of technical analysis. And certainly, don’t implement a new and complicated form of technical analysis like that harmonic geometry you’re your trading until you can look at a chart and tell what patterns exist just by glancing at it. Folks – I need to repeat this: Harmonic Geometry takes time to learn – this isn’t like learning about support and resistance. It’s not a topic that you can read about, understand, grasp, and learn in one weekend and then implement into your trading. The best way I could explain the time it takes to learn Carney’s harmonic structures is comparing it to the time it takes for a person to be able to look at a chart using the Ichimoku Kinko Hyo system and know, just by looking, if a trade can be taken and what the market is doing. That’s the best comparison I can find. Until you can look at a chart and within 10-20 seconds identify an important harmonic pattern on that chart – without having to draw it – then you should not use this in your trading. You need to become an expert in the analysis part before you start to trade with it.
I believe we should be calling these patterns Carney Harmonics or Gilmore Harmonics because Gartley never gave a name any designs – the genius work Bryce Gilmore and Scott Carney did that in his various Harmonic Trader series books. Scott Carney is the man who discovered and named a great many patterns and shapes that we see today. And Carney’s work is some of the most developed and contemporary work of Gann’s and Gartley’s that exists today. But the understanding and application of Carney’s and Gilmore’s patterns have been woefully implemented by many in the trading community. Any of you reading this section or who were drawn to it because of the words ‘harmonic’ or ‘Gartley’ must do two things before you would ever implement this advanced analysis into any trading plan:
Read Profits in the Stock Market by H.M. Gartley – this is the foundation of learning and identifying harmonic ratios.
Read Scott Carney’s Harmonic Trader series: Harmonic Trading: Volume 1, Harmonic Trading: Volume 2, and Harmonic Trading: Volume 3.
There are a series of other works by expert analysts and traders that address Gartley’s work and are worth reading, such as Pesavento, Bayer, Brown, Garrett, and Bulkowski. Do not consider their work merely supplementary – I find their work necessary to fully grasp the rabbit hole you are attempting to go down. Harmonic Patterns are an extremely in-depth form of analysis that encompasses multiple esoteric and contemporary areas of technical analysis. If you think finding the patterns and being able to draw them is sufficient to make a trading plan, you will lose a lot of money. Additionally, some words of wisdom from the great Larry Pesavento: An understanding of harmonics requires an in-depth knowledge of Fibonacci.
Harmonic Geometry, in a nutshell
In a nutshell, Harmonic Geometry is a study and analysis of how markets move and flow as a measure of proportion from prior price levels. These proportional levels are measured using Fibonacci retracements and extensions. When these patterns (triangles) complete, they create powerful reversal opportunities. Carney calls the end of these patterns PRZs – Potential Reversal Zones. The significant error that many new traders and analysts make when they find a complete pattern is the same problem many new traders make with any new tool, strategy, or method: they don’t confirm. Make no mistake: Harmonic Patterns are powerful. But like any analysis or tool, it is not sufficient to take a trade. Harmonic Pattern analysis is just one tool in your trading toolbox. And like any toolbox, you need multiple tools to tackle the various projects and goals you want to achieve.
Harmonic Trading Ratios
Contrary to popular belief, Gartley did not utilize Fibonacci levels or ratios in his work. Nonetheless, harmonic ratios are based on three classifications of harmonic ratios: Primary Ratios, Primary Derived Ratios and, Complementary Derived Ratios. As you develop a further understanding of the various patterns and their ratios, you will come to appreciate the very defined structure of this type of technical analysis.
Primary Ratios
61.8% = Primary Ratio
161.8% = Primary Projection Ratios
Primary Derived Ratios
78.6% = Square root of 0.618
88.6% = Fourth root of 0.618 or Square root of 0.786
113% = Fourth root of 1.618 or Square root of 1.27
127% = Square root of 1.618
Complementary Derived Ratios
38.2% = (1-0.618) or 0.618 squared
50% = 0.707 squared
70.7% = Square root of 0.50
141% = Square root of 2.0
200% = 1 + 1
224% = Square root of 5
261.8% = 1.618 squared
314% = Pi
361.8% = 1 + 2.618
Elliot Wave and Harmonic Geometry
Ellioticians are very aware of the strong connectedness that Gartley’s and Carney’s work has within Elliot Wave Theory. There are significant elements between the two types of technical analyses that create a mutual symbiosis. However, while they are very similar, it is crucial to understand that there are some significant differences between the two.
Elliot
Gartley
Dynamic, Flexible.
Static, Definite.
Wave counts are more fluidly labeled.
Each move is labeled either XA, AB, BC, or CD.
Many variations and intepretations
No variation permitted.
Wave alignment varied and malleable.
Each price point alignment must be exact.
The combination of Elliot and Gartley is powerful, and Gartley Harmonics can help confirm Elliot Waves. The following articles will describe, in further detail, specific Harmonic Patterns.
Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall Gartley, H. M. (2008). Profits in the stock market. Pomeroy, WA: Lambert-Gann Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley
In today’s lesson, we are going to demonstrate an example of a breakout created by a gap or price adjustment. Usually, we get a gap at the start of a
In today’s lesson, we are going to demonstrate an example of a breakout created by a gap or price adjustment. Usually, we get a gap at the start of a
In today’s lesson, we are going to demonstrate an example of a breakout created by a gap or price adjustment. Usually, we get a gap at the start of a new week. Extremely high impact news events make charts have a gap too. Price action traders do not like the gap. Gap usually provides fewer clues which lead the market to be in a range. However, it sometimes may create opportunities by making a breakout. Today we are going to see how a gap makes a breakout at the support of an up-trending trend line and offers us an entry. Let us have a look at the chart below.
A strong uptrend is pushing the price towards the North. In this chart, traders shall look for opportunities to go long. Along with horizontal support, we shall draw an up-trending trend line here.
The buyers shall be more confident now. On the other hand, the sellers are to wait to get a downside breakout. In this case, the trendline has been a vital element. Thus, a trendline breakout may attract sellers to look for short opportunities. Have a look at how the breakout takes place here.
The breakout should have been done with a good-looking bearish candle. We do not see any here, but the price stays below the trendline. There has been an adjustment or price gap which has made the breakout. The question is do we consider it as a breakout?
The first sign of a downside breakout is the price goes past a support level. We have that here. Do you see that the price starts having an upward correction after the breakout? It closes within the flipped support of the trendline. This is the confirmation of a breakout. This means we have a confirmed breakout here which is done by a gap meaning the gap creates an opportunity here. Everything looks good so far. The price action traders are to wait for the final signal to go short. Can you guess how it may look like? Close your eyes for twenty seconds and think about the signal candle that you may want to have here. Open your eyes and have a look at the chart below.
See how strong the last candle looks. This is the signal candle that the price action traders always dream of. A short entry may be triggered right after the last candle closes.
Let’s now have a look at how the chart looks like after triggering the entry.
Looks good right. It does, but there has been an instantaneous upward correction. That may have created some butterflies in the sellers’ stomach. The price is held way above the signal candle’s resistance and in the end, the price heads towards the South with good selling pressure. The bottom line of the story “A breakout which is created by a gap helps the price action traders grab some green pips”.
The Double Bottom is one of the strongest bullish reversal patterns that price action traders wait for once they see the price may have found a support zone. On a
The Double Bottom is one of the strongest bullish reversal patterns that price action traders wait for once they see the price may have found a support zone. On a
The Double Bottom is one of the strongest bullish reversal patterns that price action traders wait for once they see the price may have found a support zone. On a strong downtrend, the first bounce does not attract the buyers to go long. On the second bounce, however, it attracts the buyers to start looking for long opportunities. In today’s lesson, we are going to demonstrate an example of how a Double Bottom offered us an entry.
What do you think about the price action here? A choppy price action where the price gets caught within a horizontal range. It is best to avoid taking entries when the price action is like this. You may have noticed that the price has several bounces on the support and rejections on the resistance. To get a clearer picture, look at the chart below.
The price has a rejection of the resistance and a bounce on the support. The price goes up again; it had a rejection and a bounce on the same level. This means we may get a Double Top or a Double Bottom here. The chances are the same. Thus, we must wait for the price to make the decision.
Here it goes. An upside breakout takes place here. A Double Bottom and Breached Neckline, a perfect buying meadow. Do we start buying from here? No, we must wait for a confirmation. A pullback and another bullish move are needed to go long. See what happens next.
It seems like we may not get an opportunity to trigger an entry here. The price continues to go towards the North. Do not get into a trap. Never jump into a running train. Keep patience. See what happens next.
Here it goes. Finally, the price starts having a correction. Look at the last H4 bearish candle closing obeying the level where the price on minor time frames has bounces. It is time to wait for a bullish reversal candle. Is it going to be the very next candle or do we have to wait longer?
It is the very next candle that signals us that it is the time to trigger a long entry. The candle closes above the consolidation resistance having a tiny upper shadow. A perfect signal candle that the buyers have been waiting for.
The price heads towards the North with good buying pressure. 1:1 Risk and reward is easily achieved here. Such a nice price action this is! I have a question to you though. Do you see any other potential buying opportunity here? If you do, write on the comment box what the price action would be like if it is to offer another long entry. I am looking forward to getting your comments.
In the introduction of his book, “Thinking fast and slow,” Daniel Kahneman presents a face with an expression similar to the following image as an example of your mind
In the introduction of his book, “Thinking fast and slow,” Daniel Kahneman presents a face with an expression similar to the following image as an example of your mind
In the introduction of his book, “Thinking fast and slow,” Daniel Kahneman presents a face with an expression similar to the following image as an example of your mind working in automatic mode.
By looking at the image, you’ll experience what is called intuitive thinking. In a fraction of seconds, you’ll notice it is a brown-haired young woman (not an old one, not a man or any other animal or object), and you instantly know she is upset. You feel also she is going to start saying harsh words in a loud voice. All that came to your mind automatically and without effort. It merely happened without you intending to do that assessment.
This is an example of what Dr. Kahneman calls System One.
Now look at this:
28 x 13
Looking at it, you knew it is a multiplication immediately, but the result does not come to your mind instantly. You know you can solve it with paper and pencil or in your head, but you need to make a conscious effort to do it, and the solution comes slowly. If you engage in the process of solving it, you’ll experience the slow thinking process as you follow the steps you’ve learned to solve a multiplication operation. Dr. Kahneman describes this process as “deliberate, effortful and orderly.”
This is what Dr. Daniel Kahneman calls System Two.
System One is in charge of automatic activities such as
Detecting if an object is distant or near
Finding the source of a sound
Complete the phrase “piece of c..”
Change the facial expressions
detect a warning or a hostile voice
Read
drive a car
understanding a language
System One includes innate abilities. We are “programmed” to interpret the reality that surrounds us, recognize objects, focus our attention, and avoid dangers. System One also learns by the association of ideas, and also learn skills such as reading, driving a car, or pattern recognition, such as a chess player or a trader do.
The operations of System Two have one common characteristic: they require deliberate attention, and the process can be disturbed by a loss of concentration.
Here are examples extracted from the book:
Focus on the voice of a single person in a noisy room
look for a woman with white hair
trying to identify a surprising sound
telling someone your phone number
Count the number of times a word appears in a page
The Interaction between both Systems
The usual situation when we are awake is that System One and Two both are active. According to Kahneman’s book, System One runs automatically while System Two works in “low-effort” mode, in which almost no effort from its part is needed. System one sends summary information to system two, and System Two has the final word.
Under this scenario, System One continually creates “suggestions” for System Two: impulses, feelings, intuitions, impressions, and intentions. When confirmed by System Two, these impressions become beliefs, and impulses turn into voluntary actions.
It is usual, under normal circumstances, that everything moves placidly. Under these situations, System Two adopts the suggestions sent by System One with small modifications, if any. We usually believe in our impressions and act on our desires.
When System One finds something it cannot solve, it asks for the help of System Two, as in the process of multiplying 28×13. We can feel this whenever we are surprised. That’s the activation of System Two. Surprises activate and orient our attention. That can be lifesaving. A hole in the road, a tiger, appearing 100 meters from you.
System two has been taught by our evolution to trust System One, as he is generally quite good at what it does: modeling familiar situations, short-term predictions, and initial reactions to challenges and dangers.
The Conflict
One limitation of System One is it cannot be switched off. Therefore, sometimes, there is a conflict between System One’s automatic reaction and System Two’s intention of control. Under uncertainty situations, System one triggers primary reactions such as fear or greed that System Two is used to believe and act upon. Even when the case does not call for such an automatic response, as usually happens when trading the Forex markets, System Two has a hard time to take control of the situation.
Since System One works in automatic mode, it cannot be turned off at will. Therefore errors due to intuitive thinking are very difficult to prevent. Also, biases cannot be avoided because System two is not aware of them, and when these biases are known, only by a System Two’s deliberate effort can be overcome. In the trading world that translates into people selling at the bottom and buying at the top. These people are making decisions based on the impressions generated by System One. Thus, System Two is inadvertently dominated by System One’s beliefs.
Final Words
If you find yourself reflected by the above scenario, you should establish the steps to break the dominance of your System One.
Define yourself as a Soldier when trading. A soldier only obeys, never thinks. That is the task of your other self: The Planner. Plans are rational and are to be done before the trade opens, not during a live trade. After the trade is open, a soldier executes the plan decided by the Planner.
Start trading using risk sizes that do not trigger your primary fears
Make a rational plan and build the discipline to follow it. You’re a soldier.
Before the market opens, rehearse trade situations from beginning to end. Establish how you’re going to react based on your trading plan when taking losses or profits. Visualize it in your mind. Look at your mental monitor screen and see the price moving and you making the planned decisions.
Write down your feelings during the open trades. Check for inner conflicts, explain to yourself why you do what you’re doing.
Create a log of trade results, also annotating the maximum adverse and also maximum favorable excursions.
Grade your trades from 0 to 5 or 10 based on the percentage of the total possible profit you obtained.
After your trading session ended, analyze the performance of your system in regards to the entry point, stop-loss, and profit target placements, and modify these parameters for the next session. But never change them while trading.
Compute your system’s performance and analyze if it is still performing as planned or there is a deviation from its past performance.
Triangles are the third fundamental Elliott wave corrective structure. In this educational article, we will review the guidelines to trade this pattern.
The basics
The triangle structure is a corrective
Triangles are the third fundamental Elliott wave corrective structure. In this educational article, we will review the guidelines to trade this pattern.
The basics
The triangle structure is a corrective
Triangles are the third fundamental Elliott wave corrective structure. In this educational article, we will review the guidelines to trade this pattern.
The basics
The triangle structure is a corrective formation with a 3-3-3-3-3 internal sequence. Triangles usually tend to appear in waves four and B.
In this formation, volume tends to decrease as the triangle progresses. Also, it characterizes by the balance between bull and bear traders.
The following figure illustrates the trading setup for a contracting triangle. The entry is triggered once the price action strikes and closes above the end of wave (D) labeled in black degree.
To place the potential targets, we can measure the Fibonacci projection from the origin of wave ((3)) or ((A)) labeled in red, and the lowest level of the triangle. The first target will be at 61.8%, and the second target at 100%.
The trading setup is invalid if the price pierces the wave (A) labeled in black degree.
Golden triangle
Gold, in its weekly chart, shows the guideline of an Elliott wave contracting triangle in progress. The bullish sequence starts on November 30, 2015, once the yellow metal found buyers at $1,046.54 per ounce.
The golden metal made the first rally until early July 2016 at $1,375.15 per ounce. After this move, Gold made an up and down sideways movement till late April 2019.
Now that we have identified the start of a price cycle, we have to face the question, “do I recognize an Elliott wave pattern?”
In this case, we start from the most straightforward formation, which could correspond to a Contracting Triangle.
Now that we have recognized a wave pattern, we advance to the second stage, which is to define our trading plan. Following the triangle setup guideline, we have to expect the breakout of wave (D) labeled in black at $1,346.75.
The theory says that the first profit target must be at 61.8% of the Fibonacci projection. However, this level is under the entry-level. In this case, we place the first profit target at the 100% level at $1,453.78. The second profit target will be at the 127.2% level at $1,543.80 per ounce.
The invalidation level is theoretically below the wave (A) labeled in the black degree at $1,122.10.
Now that we have defined the trading plan, the third stage is to manage the trade and risk. The first step is to reduce the risk. In this case, we move the protective stop from the theoretical invalidation level to the end of the wave (E) at $1,266.39, as shown in the next figure.
Once that we have reduced the risk and the trade advances, the trader must eradicate the risk. In this example, after Gold reached the first profit target at $1,453.78, we move the protective stop to the entry-level.
As an alternative to eliminate the risk, the protective stop could be placed considering the entry-level plus the trade costs, for example, commission costs and swap.
The last step of the trade management, before the trade reaches the final profit target, is to protect open profits. This last stage depends on the criteria of each trader.
In today’s lesson, we are going to demonstrate an example of how the price heads towards the direction of the trend upon a breakout. We know that it is not
In today’s lesson, we are going to demonstrate an example of how the price heads towards the direction of the trend upon a breakout. We know that it is not
In today’s lesson, we are going to demonstrate an example of how the price heads towards the direction of the trend upon a breakout. We know that it is not only the breakout that traders shall be looking at. There are other factors, such as consolidation or correction, breakout confirmation, and the signal candle. Let us have a look at what the price does before offering us an entry.
The price heads towards the North and has a rejection. Look at the candle at the top (arrowed candle). This is where the price has its first rejection and lands at the support zone. The price has another rejection at the level below (arrowed candle). However, it continues the consolidation. As a trader, you have to wait for a price to make a move either to make a breakout at the support of the consolidation or the resistance level. Let’s see what happens next.
Oh! Upside breakout! This is how a breakout candle should look like. It closes just below the second resistance. The first resistance is now a support. The price is to make a pullback to confirm the breakout. Let us see what happens next.
It rather continues its bullish journey and makes a breakout at the second level of resistance as well. Guess what shall we do here? Shall we wait for the price to come back to the first breakout level or the second breakout level? Have a look at the chart below.
The breakout level seems to be held and produces a bullish candle already. Shall we consider taking an entry here? The answer is no. The price does not come up to the breakout level. Let us see what happens next.
Look at the last candle. A bullish engulfing candle closes above the last highest high and confirms the breakout level by having a bounce on it. This is the signal candle price-action traders crave for. A buy entry may be triggered right after the candle closes by setting Stop Loss below the candle’s lowest low. In this case, the candle’s lowest low and breakout level are the same. If the signal candle had a bigger lower shadow below the breakout level, the Stop Loss should have been set below the candle’s lowest low.
About setting Take Profit level, there are several ways to determine it. To be very safe, you may have 1:1 risk and reward. This means the number of pips that we have set as our Stop Loss from the entry point; we shall set our Take Profit at a distance with the same amount of pips.
The price travels almost twice the distance than we have anticipated. Never regret, but keep studying to learn how to maximize your risk and reward ratio. We will write some articles on this. Stay tuned.
The flat pattern is the second fundamental Elliott Wave corrective structure. In this educational article, we will review the guideline to trade the flat structure.
The basics
Flat pattern is
The flat pattern is the second fundamental Elliott Wave corrective structure. In this educational article, we will review the guideline to trade the flat structure.
The basics
Flat pattern is
The flat pattern is the second fundamental Elliott Wave corrective structure. In this educational article, we will review the guideline to trade the flat structure.
The basics
Flat pattern is an Elliott wave corrective structure built by three waves, and its internal sequence is 3-3-5. There exist a single model to trade a flat formation. The following chart shows the trading setup of a flat corrective structure.
From the basic model, the entry is given once price action breaks and closes above wave 4 labeled in blue, of wave (C) labeled in black. The profit target is placed in the same way as the zig-zag trade setup. It is at 100%, 127.2%, and 161.8% of the Fibonacci projection of waves ((1)) and ((2)) labeled in red. The invalidation level is under the end of the wave (C).
Trading the flat pattern
Before to define place an order, we must answer the question, “Do I see some Elliott wave pattern?”.
In the example, the IBM (NYSE:IBM) in its 8-hour chart shows a first five waves bearish sequence started on April 10, 2014. Once IBM founded buyers on January 29, 2015, at $149.52 per share, the price developed a three waves movement as a flat pattern, which ended at $176,25 on May 04, 2015.
If our hypothesis is correct, it is the Elliott wave pattern recognized is a flat structure, we can do our trading plan. The entry should be placed after the completion of the second wave (B) or (2) labeled in black degree.
The short position is triggered after the breakdown and close below the last swing at $168.75. The target is defined using the Fibonacci projection between (A) and (B) waves. In our example, IBM reached the first target at $126.53 on 100% of the Fibonacci projection.
The third part of the trade is to manage the risk of the trading plan. The first stage is to reduce the risk; for this stage, we set the invalidation level above the end of wave (B) or (2) at $176.25. Once IBM plummets, we eliminate the risk after the price drops into the 61.8% of Fibonacci projection at $145.60.
Finally, we have to protect the open profits, for example, each $5 of advance, we can move the protective stop each $5 of progress.
Moving Averages
Of all the technical indicators that exist, moving averages are probably the most well known. Moving averages are also one of the only technical indicators ever used by
Moving Averages
Of all the technical indicators that exist, moving averages are probably the most well known. Moving averages are also one of the only technical indicators ever used by
Moving Averages
Of all the technical indicators that exist, moving averages are probably the most well known. Moving averages are also one of the only technical indicators ever used by market news broadcasters. Moving averages are generally one of the first types of indicators that new analysts and traders will learn about because they simple to calculate and simple to interpret. But are moving averages useful for trading? Are they appropriate for trading?
Dangers of Moving Averages
I want to preface any further commentary on moving averages by saying I am strictly opposed to their use. Outside of any singular purpose for their use, I will never advocate for their use of an analytical tool or a trading tool. The reasons for this opinion are my own trading experience, and the experience of teaching students – who have all (myself included) fell into the old trap of moving average crossover systems and the lies that are sold about their usefulness and profitability. That is not to say they are not helpful, useful, or profitable – but the temptation to believe in their positive expectancy and profitability is often too hard to avoid.
Moving Averages: A simple visual representation of data
20-period Simple Moving Average
The orange line on the chart above is a moving average — specifically, a Simple Moving Average (SMA). A Simple Moving Average is a line that is plotted, showing the average close of a defined number of periods. On the chart above, it is a 10-period moving average. Meaning it is taking the last ten candlestick closes, adding them up, dividing that number by ten, and then displaying it as a line. But a Simple Moving Average is just one type of average. There is an enormous amount of various moving averages, each with their specific calculations. The chart below shows only some of those different moving averages, all with a 10-period average.
Various moving averages
From the image above, you can probably say that, depending on the moving average used, some averages are more responsive to price changes than others. Some move a lot; some move just a little. There is a myriad of different reasons why one moving average would be used over another, and there are specific moving averages that to be used only with particular trading systems and methods. Now, after I’ve bashed moving averages, I think it’s essential that I do show some examples of moving averages positively. The first would be using a long period moving average on a higher time frame. For example, a standard method of determining whether a stock is bullish or bearish is to use a 200-period on a daily chart. If a stock is trading above the 200-day average, it is considered bullish; if it is trading below, it is bearish.
200-day Moving Average of S&P500
Another example of a trading system using moving averages effectively would be Goichi Hosada’s Ichimoku Kinko Hyo system. This system will be discussed in much greater detail in another article, but the Ichimoku system is based almost entirely on moving averages. There is a significant difference between Western moving averages and Japanese moving averages. The Tenkan-Sen and Kijun-Sen in the Ichimoku system are calculated using the mid-point of the default periods. The utilization of the mid-point is particular not to just the Ichimoku system but is indicative of a large amount of Japanese analysis, which focuses on ‘balance’ and ‘equilibrium.’ So while I do rail against the use of Western moving averages, the use of the Ichimoku system’s moving averages is undoubtedly a significant exception due to it being a full trading system and one of the few trading systems that are a proven and profitable system.
Trading with Divergences
Almost all forms of technical analysis involve the use of lagging indicators – or lagging analysis. There are very few indicators that use any type of leading
Trading with Divergences
Almost all forms of technical analysis involve the use of lagging indicators – or lagging analysis. There are very few indicators that use any type of leading
Trading with Divergences
Almost all forms of technical analysis involve the use of lagging indicators – or lagging analysis. There are very few indicators that use any type of leading analysis. That is because we don’t know what will happen. All we can do is interpret what kind of future behavior may occur based on past events – this is the basis of all psychology and significant portions of medicine: we can only predict future behavior by analyzing past behavior. Now, just because most of the tools and theories used in technical analysis are lagging in nature – it doesn’t mean that there is no method of leading analysis.
Divergences are one method of turning lagging analysis into leading analysis – it’s not 100% accurate, but divergences can detect anomalies and differences in normal price behavior. Divergences are useful in identifying when a significant trend may be ending or when a pullback may continue in the prior trend direction. Let’s review some of those now.
Divergences are easily one of the most complex components to learn in technical analysis. First, they are challenging to identify when you are starting. Second, it can be confusing trying to remember which divergence is which and if you compare highs or lows. It is essential to know those divergences themselves are not sufficient to decide whether or not to take a trade – they help confirm trades.
When we look for divergences, we are looking for discrepancies between the directions of highs and lows in price against another indicator/oscillator. The RSI is the oscillator used for this lesson. We are going to review the four main types of divergences:
Bullish Divergence
Bearish Divergence
Hidden Bullish Divergence
Hidden Bearish Divergence
Bullish divergence
Bullish Divergence
A bullish divergence occurs, generally, at the end of a downtrend. In all forms of bullish divergences, we compare swing lows in price and the oscillator. For a bullish divergence to happen, we should observe price making new lower lows and the oscillator making new higher lows. When bullish divergence occurs, prices will usually rally or consolidate.
Bearish divergence
Bearish Divergence
A bearish divergence is the inverse of a bullish divergence. A bearish divergence occurs near the end of an uptrend and gives a warning that the trend may change. In all forms of bearish divergence, we compare swing highs in price and the oscillator. For a bearish divergence to happen, we should observe price making new higher highs and the oscillator making new lower highs.
Hidden divergences
The last two divergences are known as hidden divergences. Hidden does not mean that it is difficult to see or hard to find – rather, it shows where a short term change in direction is actually a continuation move. Think of it as a pullback or a throwback in a larger uptrend or downtrend. Hidden divergences tell you of a probable continuation of a trend, not a broad trend change. If you combine these with common pullback and throwback patterns such as flags and pennants, then the identification and strength of a hidden divergence can yield extremely positive results.
Hidden Bullish Divergence
Hidden Bullish Divergence
A hidden bullish divergence can appear in uptrends and downtrends but is only valid if there is an existing uptrend. It’s easier to think of hidden bullish divergences as pullbacks or continuation patterns. For hidden bullish divergences, we should observe price making new higher lows and the oscillator making new lower lows. The expected price behavior is a continuation of higher prices.
Hidden Bearish Divergence
Hidden Bearish Divergence
Our final divergence is hidden bearish divergence. Just like hidden bullish divergence, hidden bearish divergence can appear in both uptrends and downtrends but is only valid in an existing downtrend. Hidden bearish divergence is identified when price makes lower highs, and the oscillator makes new higher highs. We should observe a resumption in the prior downtrend when hidden bearish divergence is identified.
Key Points
Regular Bullish Divergence
End of a downtrend.
Often the second swing low.
Price makes new Lower Lows, but the oscillator makes Higher Lows.
Price makes Higher Highs, but the oscillator makes Lower Highs.
Trend changes to the downside.
Hidden Bullish Divergence
Valid only during an uptrend.
Price makes Higher Lows, but the oscillator makes a Lower Low.
The trend should continue to the upside.
Hidden Bearish Divergence
Valid only during a downtrend.
Price makes Lower Highs, but the oscillator makes Higher Highs.
The trend should continue to the downside.
Final words
It may be confusing trying to remember which divergence is which and you’ll find yourself asking questions such as, “do I use highs on this divergence or lows?” It’s easier to think about measuring divergences like this:
All Bullish divergences are going to compare lows to lows – lows in price and lows in an oscillator.
All Bearish divergences are going to compare highs to highs – highs in price and highs in an oscillator.
The zig-zag pattern is a corrective Elliott Wave structure developed by a 5-3-5 internal sequence. In this educational article, we will unfold two guidelines to trade this pattern.
Looking at
The zig-zag pattern is a corrective Elliott Wave structure developed by a 5-3-5 internal sequence. In this educational article, we will unfold two guidelines to trade this pattern.
Looking at
The zig-zag pattern is a corrective Elliott Wave structure developed by a 5-3-5 internal sequence. In this educational article, we will unfold two guidelines to trade this pattern.
Looking at the wave B
The first guideline is looking at wave B with the eyes placed in wave C progress. The following chart shows an idealization of this trading setup.
There are two different ways to set up the entry into the market. The first one is to wait for the retrace of wave (B) into the area between 38.2% and 61.5% of Fibonacci retracement. The second one settles once the price breaks and closes below wave B of wave (B). In the chart, wave B has a blue label, and wave (B) has a black degree.
The invalidation level is above wave 5, or the last swing. To set the profit target, we use the Fibonacci projection. The first target (conservative scenario) is at the 61.8% of waves (A) and (B). The second target is at 100%, and the last one is at 127.2%.
Following the trend
The second guideline is at the end of wave C. In this context; we seek to join the primary trend. The next chart explains the model for this setup.
The setup is as commented in the article “Trading the Elliott Wave Principle – Part 1.” In this case, from the previous chart, we enter the market after the breakout and close of wave 4 of wave (C).
The first profit target is at 100% of the Fibonacci projection of waves ((1)) and ((2)) labeled in red degree. Note that a conservative profit target could be at the 61.8% of the Fibonacci projection.
An alternative to placing the invalidation level is below the end of wave (C). A second option is under the origin of wave ((1)) labeled in red degree.
Trading the zig-zag pattern
The Bank of America Corp. (NYSE:BAC) 3-hour chart shows a zig-zag structure. The Elliott Wave formation started on December 31, 2014, when the price found sellers at $18.21 per share.
Sometimes, the line-chart can be helpful to unveil the internal structure. From the BAC line chart (left), we observe the 5-3-5 sequence started at the end of December 2014.
On the right side, we see the OHLC chart. In this figure, we observe the trading setup looking for trade the wave C.
From the example; the short position is active once BAC dropped and closed below $17.10.
The first profit target at $16.50 (61.8% Fib projection) is conservative. This level could allow us to move to breakeven and left the trade without risk. Finally, the BAC sell-off drove to the price to find the second target at $15.95 and the third target at $15.57.
Support and Resistance
One of the fundamentals of Technical Analysis is the theory and methodology of support and resistance. In a odd turn of events, some of the most advanced
Support and Resistance
One of the fundamentals of Technical Analysis is the theory and methodology of support and resistance. In a odd turn of events, some of the most advanced
Support and Resistance
One of the fundamentals of Technical Analysis is the theory and methodology of support and resistance. In a odd turn of events, some of the most advanced methods of identifying support and resistance are not only relatively unknown, but they are some of the original Technical Analysis theories. Some of those methods include identifying support and resistance according to naturally squared numbers, numbers related to an angular nature in Gann’s tools, harmonic ratios, pivots, Fibonacci levels, and other more esoteric methods. For this article, though, the focus is on identifying support and resistance based on prior traded price levels and ranges**.
What are Support and Resistance?
When you hear the word’s support and resistance, the definitions of those words may be the first thing that comes to your mind. Support indicates that something will assist or strengthen while resistance indicates rejection. In Technical Analysis, support means a level that is below the price, and resistance is above price.
The image above shows resistance as a red band and support as a green band. It’s important to understand that support and resistance on a candlestick chart should never be viewed as a static and exact price level. With a chart style that has such dynamic time and price levels, like Japanese candlesticks, support and resistance are an area or range of value. Determining the support and resistance levels requires a ‘zoomed’ out view of the chart. When you get a broader view of the past price action, you can see price levels where price has moved lower and then reversed higher (support) as well as price levels where price move higher and then reversed lower (resistance). The most important levels are those that show past resistance becoming support and vice-a-versa.
Prior Support turned into Future Resistance
Use another chart style to find support and resistance
Renko Chart
While it may seem simple to find support and resistance on a candlestick chart, there are some alternatives. The length of the wicks and body of candlesticks can vary and can add to the confusion. Using a Renko (above) chart simplifies the process of finding support and resistance by reducing the noise on the chart and providing less ambiguity when looking for highs and lows. Take note of how these resistance and support levels are drawn on a price-action-only chart. With a price action only chart, I don’t draw a value area like I would on a candlestick chart. But if you are not comfortable using a price-action-only chart and want to stick to a candlestick chart, then another trick that might help is to remove the wicks from the candlesticks. Look at the side by side comparison below.
Wicks VS No Wicks
Both charts display a weekly chart of the CADCHF pair. On the left, we have a regular candlestick chart with wicks – wicks that are all over the place. The chart on the right is the same as on the left, but with no wicks displayed. You can see how much more clear the tops and bottoms are on the right. This can make it a little easier to spot support and resistance levels.
** It is the view of this author that past support and resistance levels are inefficient for today’s markets. However, the method discussed in this article is part of a foundation of learning that can be applied to future price level analysis.
Bollinger Bands
Bollinger Bands are a type of volatility oscillator created by the great technical analyst John Bollinger. If this is your first time seeing this indicator, it probably looks
Bollinger Bands
Bollinger Bands are a type of volatility oscillator created by the great technical analyst John Bollinger. If this is your first time seeing this indicator, it probably looks
Bollinger Bands
Bollinger Bands are a type of volatility oscillator created by the great technical analyst John Bollinger. If this is your first time seeing this indicator, it probably looks both daunting, confusing, and somewhat silly. But it is a powerful tool for trading and identifying when prices are contracting and then when they finally breakout. There are some critical components of Bollinger Bands.
The middle line is just a moving average, by default, a 20 SMA.
The lines above and below the middle line are the volatility bands, observe how the ‘bubble’ gets expands as price moves up or down in a significant fashion.
Most important is what is called the ‘Squeeze’ or a ‘Bollinger Squeeze.’ The Squeeze signifies decreased volatility and is evident when the bubble gets smaller, and the lines become very close. Squeezes are extremely important to watch.
Let’s look at a chart and see these concepts.
Notice the bands contracting, ‘squeezing’ into each other.
Notice the release, price is continuously pushing higher against the bands, and the bubble is expanding.
Again, notice how price begins to consolidate and form another squeeze.
The release after the squeeze.
Top touches do not mean “sell”, and bottom touches do not mean “buy”
Too often, new traders view indicators and oscillators with certain upper and lower boundaries as conditions to trade to the contrary. Bollinger Bands are no exception. People often assume, incorrectly, that when prices touch the upper band, then the price is somehow ‘oversold,’ and then a short trade should be taken. The inverse is true with bottom band touches.
In reality, prices will often ‘walk’ the bands. You should look at any instrument and see how often prices will trend higher by piercing and riding the bands higher or lower. This frequently occurs after both the upper and lower bands converge closer together, and the space between them constricts. This pattern is known as ‘The Squeeze.’
The Squeeze
Mr. Bollinger himself wrote that The Squeeze was a condition that created more questions than any other component in his Bollinger Band system. At the beginning of this article, I mentioned that Bollinger Bands are a volatility indicator – that is precisely what the upper and lower bands represent. When volatility increases, the bands expand and move farther away from one another. When volatility decreases, that is when we see the bands constrict, forming The Squeeze. Squeezes always precede increased volatility, and squeezes always occur after a period of significant volatility – a classic chicken or the egg problem. Regardless of which happens first, The Squeeze should be recognized as an opportunity to identify when a future explosive move may occur.
One should observe the direction of the breakout almost with suspicion. You will often find many false breakouts occur where price begins to trade in one direction at the beginning of a squeeze, only to reverse and start trending in the opposite direction. There are many ways to filter and interpret which breakouts are genuine and which are false – but that is for a lesson for another time.
Key Points
Bollinger Bands are a measure of volatility.
Price touching the upper or lower bands does not mean an automatic inverse trading move.
Volume
Historically, and this is especially true in traditional equity markets, volume is often the most important indicator out there. Some people argue that volume is not overly reliable in
Volume
Historically, and this is especially true in traditional equity markets, volume is often the most important indicator out there. Some people argue that volume is not overly reliable in
Volume
Historically, and this is especially true in traditional equity markets, volume is often the most important indicator out there. Some people argue that volume is not overly reliable in forex markets. There is a significant debate on whether volume should be considered as important in forex markets as it is in equity markets due to the drastic differences in the amount of volume from one broker to another. Others believe that it is already (we can see volume from many of the exchanges). For the stock market and futures and almost any traded instrument, volume tells you what people are doing. And what they are not doing.
Volume helps you spot reversals and can tell you if the reversal candlestick is a ‘true’ candlestick. For example, in the image below, the hammer candlestick forms at or near the end of a downtrend. However, this candlestick (and those before it) should have increased and above-average volume. A hammer candlestick on high volume in a downtrend can be a great signal when you accompany it with another indicator, like the RSI.
Look at number one. The arrow is pointing to a very large hammer candlestick; the volume column is massive and definitely above the average volume (orange line average volume). If we look at the RSI, it is oversold. Those can be great conditions for going long!
Candlestick Principles with Volume
Volume is an extremely important component of any candlestick. A candlestick tells us what happened to move price in that period, but volume tells us how hard people fought for that movement and how much conviction was in that move. Here are some principles about candlesticks to keep in mind.
The length of any wick, either the top or the bottom, is ALWAYS the first point of focus because it instantly reveals strength, weakness, indecision, and (more importantly) market sentiment.
If no wick, then that signals strong market sentiment in the direction of the closing price.
A narrow-body indicates weak sentiment. A wide-body represents strong sentiment.
A candle of the same type will have a completely different meaning depending on where it appears in a price trend.
Volume often validates price – Any candlestick that closes at or near an important high or low should be watched very closely for how much volume was involved.
High volume near highs and lows
Volume can give a clear, early warning that a current trend (long term or short term) may be coming to an end. If you observe price moving lower, but volume starts to increase and become greater than a 20 to 30-period average, then you may be looking at the bottom of a move. In other words, the market may reverse and become bullish. Observe the chart below:
Price is declining as the price is dropping. That is a clear sign that no one is interested in buying or supporting higher prices.
As prices have continued to make new lows, notice how the volume begins to spike higher – well above the most recent candlesticks volume.
This increase in volume indicates more participation and is generally a combination of new entrants going long (buying), and those current traders who are short, have to cover and convert to long. That volume becomes a powerful variable that reverses the price action.
Key Points
Look to see if the current chart is showing new and important highs or lows.
If new highs or lows are present, observe the volume indicator. If it is rising, then that can mean the current price action may reverse.
Fig 1- Chart with MACD. Click on it to enlarge
The Moving Average Convergence Divergence (MACD) is probably one of the most popular and well-known oscillator indicators in
The MACD
Fig 1- Chart with MACD. Click on it to enlarge
The Moving Average Convergence Divergence (MACD) is probably one of the most popular and well-known oscillator indicators in
The MACD
Fig 1- Chart with MACD. Click on it to enlarge
The Moving Average Convergence Divergence (MACD) is probably one of the most popular and well-known oscillator indicators in any market. It is one of our ‘modern’ indicators; created by Gerald Appel in the late 70s. It is essentially a two-part tool that traders can utilize.
Provides a quick look to see the direction and trend of your market using two lines/moving averages: the MACD line and a signal line.
It provides a divergence detection tool using a zero line and histogram.
The MACD line and the Signal Line
The first of these parts of the MACD is probably the one used most often, the MACD line and the signal line. General strategies related to the MACD is that you should consider taking a buy when the MACD line crosses above the signal line and sell when the MACD crosses below the signal line. Additionally, some strategies suggest more conservative entries based on when the MACD crosses the middle line (0-line).
The Histogram
The second part of the MACD, and perhaps the one that confuses many new traders, is the histogram with the 0-line. The histogram shows the difference between the MACD line and the signal line, basically, is showing the ‘gap’ between the two lines, as they grow and diverge away from one another, the histogram expands. However, the real strength of this is the ability to see divergences.
Pros and Cons
The downsides to the MACD indicator is that it is very notorious for causing whipsaws in traders. Whipsaws can be avoided by not using the MACD as your sole indicator of trade signals. The MACD is an excellent tool to help confirm your trades in a trending market, but it is not suitable for a ranging market. If you are a new trader, the MACD is a fantastic tool to help you train and learn about how indicators work. Spend some time watching markets live on smaller time frames and look at how the MACD works and moves with that market. You will notice things you like (i.e., identifying the trend and strength of that trend) and the things you don’t like (i.e., too many signals/crosses on short time frames).
A word of caution
I would caution against using the MACD in your trading. The MACD is an old indicator, and it is most useful as a tool for analysis on daily timeframes or weekly time frames. Because it is so well known and used so much by new traders, it is used against new traders. It is one of those indicators use to entice new traders into using – like bait. Just like moving averages, the MACD has several strategies that involve a crossover. A crossover strategy is simple to understand and easy to learn the strategy and so many new traders try to use this as one of their first strategies – but it doesn’t work. It may seem like it works, but it doesn’t. Again, the MACD is an indicator that is entirely lagging in nature. It is showing what has already happened, not what will happen. It’s most effective use will be a tool for detecting divergences – but even then, there are better indicators and oscillators out there for detecting divergences.
To evaluate, the quality of a strategy is an old quest, and its answer has to do with gambling theory, although it can apply to any process in which the
To evaluate, the quality of a strategy is an old quest, and its answer has to do with gambling theory, although it can apply to any process in which the
To evaluate, the quality of a strategy is an old quest, and its answer has to do with gambling theory, although it can apply to any process in which the probability of profits is less than 100%. Of course, the first measure to know if our system is winning is when the current portfolio balance is higher than in its initial state. But that does not give very much information.
A better way might be to record winners and losers, and have a count of both so that we could apply some stats. It would be interesting to know the percentage of winners we get and how much is won on average. That also applies to losers.
We could try to find out if our results are independent of each other or they are dependent.
Finally, we could devise a way to obtain its Mathematical expectancy, which would show how profitable the strategy is.
Outcomes and probability statements
No trader is able to know in advance the result of the next trade. However, we could estimate the probability of it to be positive.
A probability statement is a figure between zero and one specifying the odds of the event to happen. In simple terms,
Probability = odds+ / ( odds+ + odds – )
On a fair coin toss game: odds of heads (against, to one) = 1:1
probability Fair coin toss = 1/(1+1)
= 0.5
Probability of getting a Six on a dice:
odds = 5:1 – five against to one
Probability of a Six = 1/( 1+5) = 0.16666
We can also convert the probability into odds (against, to one) of occurring:
Odds = (1/ Probability) -1
As an example, let’s take the coin-toss game:
Odds of a head = 1/0.5 -1 = 2-1 =1:1
That is very handy. Suppose you have a system on which the probability of a winner is 66 percent. What are the odds of a loser?
System winners= 0.66 so -> System losers = 0.34
loser odds = 1/0.34 – 1 = 2 -> about 2:1.
That means, on average, there is one loser for every two winners, which means one loser every three trades.
Independent vs. Dependent processes
There are two categories of random processes: Independent and dependent.
A process is independent when the outcome of the previous events do not condition the odds of the coming one. For example, a coin toss or a dice throwing are independent processes. The result of the next event does not depend on previous outcomes.
A dependent process is one where the next outcome’s probability is affected by prior events. For example, Blackjack is a dependent process, because when cards are played, the rest of the deck his modified, so it modifies the odds of the next card being taken out.
This seems a tedious matter, but it has a lot of implications for trading. Bear with me.
What if we acknowledge our trades are independent from each other?
If we consider that our trades are independent, then we should be aware that the previous results do not affect the next trade, since there is no influence between each trade.
What if we know our system shows dependency?
If we know that our system’s results are dependent, we could make decisions on the position size directed to improve its profitability.
As an example, let’s suppose there is a very high probability that our system gets a winner after a loser, and also a loser after a winner. Then we could increase our trade size every time we get a loser, and, also, reduce or just paper-trade after a win.
Proving there is dependency on a strategy or system is very difficult to achieve. The best course of action is to assume there is none.
Assuming there is no dependency, then it is not right to modify the trade size after a loser such as martingale systems do since there is no way to know when the losing streak will end. Also, there is no use in trading different sizes after a winning or losing trade. We must split the decision-making process from trade-size decisions.
Mathematical expectancy
The mathematical expectancy is also known as the player’s edge. For events that have a unique outcome
ME = (1+A)*P-1
where P is the probability of winning, and A is the amount won.
If there are several amounts and probabilities then
ME = Sum ( Pi * Ai)
The last formula is suitable to be applied to analytical software or spreadsheet, but for an approximation of what a system can deliver, the first basic formula will be ok. Simply set
A = average profit and
P = percent winners.
As an example, let’s compute the mathematical expectancy of a system that produces 40% winners and wins 2x its risk.
ME = (1+2)*0.4 -1
ME = 3*0.4 -1
ME = 0.2
That means the system can produce 20 cents for every dollar risked on average on every trade.
Setting Profit Goals and Risk
Using this information, we can set profit goals. For instance, if we know the strategy delivers a mean of 3 trades every day – 60 monthly trades- The trader can expect, on average, to earn (60 * 0.2)R, or 12* R, being R his average risk.
If the trader set a goal of earning $6,000 monthly he can compute R easily
12*R = $6,000
R= $6000/12 = $500.
That means if the trader wants a monthly average of $6,000, he should risk $500 on every trade.
Final Words
On this article, we have seen the power of simple math statements, used to help us define the basic properties of our trading system, and then use these properties to assess the potential profitability of the strategy and, finally, create a simple plan with monthly dollar goals and its associated trade risk.
Elliott defined a complex corrective wave as the combination of two or three simple corrective structures. In this educational article, we will review the main characteristics of this group of
Elliott defined a complex corrective wave as the combination of two or three simple corrective structures. In this educational article, we will review the main characteristics of this group of
Elliott defined a complex corrective wave as the combination of two or three simple corrective structures. In this educational article, we will review the main characteristics of this group of EW formations.
The basics
Elliott named the combination of corrective waves combination as “double three” and “triple three.” These formations could present zig-zag, flat, or triangle patterns.
The price action can be characterized by a sideways movement. Each end of a simple corrective wave, as labeled by Elliott as W, Y, and Z, and each reactionary wave as X.
The following chart exposes the basic model of a double three and a triple three.
Consider that the difference between a double three and a triangle pattern is its internal structure. A triangle follows a 3-3-3-3-3 sequence. Meanwhile, in a double three, its internal wave C follows a five-wave movement.
Alternation and complexity
R.N. Elliott identified the alternation in corrective waves. If the first correction is simple, the next corrective move will be complex and vice-versa.
In the same way, a corrective wave alternates its formation. For example, consider an A-B-C sequence; if wave A starts as a zig-zag, wave B will likely be a flat pattern. Remember that wave C always runs as five waves.
The next figure shows the alternation in a corrective wave construction. This alternation is analogous if wave A is a flat pattern.
Alternation in the real market
The below chart corresponds to the NASDAQ Biotechnology Index ETF (IBB) in the 3-hour timeframe. The Elliott wave movement shows a decline started on October 01, 2018, when the price action found sellers at $122.97.
The wave A of Minor degree is composed of a corrective move developed as a zig-zag pattern ending at 100.67 on October 29, 2018. Once completed this path, IBB formed a regular flat pattern ending in early December at $111.58.
Finally, wave C of Minor degree was realized as a five waves sequence on the Christmas low at $89.64.
The third basic corrective formation is the triangle. This pattern follows a 3-3-3-3-3 sequence. In this educational article, we will unfold the main characteristics of this Elliott Wave pattern.
The
The third basic corrective formation is the triangle. This pattern follows a 3-3-3-3-3 sequence. In this educational article, we will unfold the main characteristics of this Elliott Wave pattern.
The
The third basic corrective formation is the triangle. This pattern follows a 3-3-3-3-3 sequence. In this educational article, we will unfold the main characteristics of this Elliott Wave pattern.
The basics
A triangle structure emerges when the two markets’ forces, buyers, and sellers, are in balance. When the triangle pattern is in progress, the volume and volatility tend to decrease over time.
The triangle pattern is the most common Elliott Wave structure. The main rule of construction is the composition of five segments, or internal waves, which are built by three waves each segment. The following chart shows the basic structure of a triangle pattern.
Triangle variations
There are four triangle variations; these are contracting, barrier, expanding, and running. The next chart exposes the different triangle variations.
A triangle pattern tends to appear before the end of a trend. For this reason, it is useful the study in recognition of this Elliott Wave structure.
The triangle pattern in action
The example corresponds to the weekly chart of Nikkei 225 futures (CME:NKD) in log scale. The Japanese index shows a motive wave of Cycle degree in progress. The bullish sequence started in March 2009, when the market found buyers at 6,950 pts.
Pay attention to the extension of the third wave of Cycle degree, which climbed over 16,000 pts. At the same time, the third wave of Primary degree soared 12,740 pts (154.42%).
From the chart, we observe two triangles formations. The first one is a barrier triangle and was developed on wave 3 of Primary degree. The Elliott Wave structure started in the second half of May 2013 and ended in the first half of October 2014.
The second one is an expanding triangle in progress. The EW structure belongs to the fourth wave of Cycle degree. Currently develops the segment C-D. Consider the possibility that the price action could not reach the previous high of 2018 at 24,515 pts.
For the current sequence, the most likely path is a marginal upside, giving way to a bearish move probably to the 18,000 pts. Once completed this corrective move, Nikkei should start a rally with the eyes placed at the 26,000 pts.
The second basic corrective formation is the Flat Pattern. Although this structure has three waves, it is different from the zig-zag. In this article, we will describe the structure of
The second basic corrective formation is the Flat Pattern. Although this structure has three waves, it is different from the zig-zag. In this article, we will describe the structure of
The second basic corrective formation is the Flat Pattern. Although this structure has three waves, it is different from the zig-zag. In this article, we will describe the structure of the Flats.
The basics
A Flat structure is an irregular corrective formation that contains three segments and built by a 3-3-5 sequence. If the price action breaks a motive wave rule, and the structure does not correspond to a zig-zag pattern, we are likely facing a 3-3-5 formation.
In a flat pattern tends to retrace less of the last impulsive move. Also, this corrective formation tends to occur after a strong trend; it means when the major trend is strong. In the following figure, we observe the basic structure of the flat formation.
Flat pattern variations
There are three types of Flat patterns: regular, expanded, and running flat. In a regular flat correction, wave B moves between the 2/3 and 100% of wave A, and wave C could travel from the 100% to 1/3 beyond of wave A.
In an Expanded Flat, wave B moves over the origin of wave A, and wave C extends ahead of wave A.
The Running flat structure, unlike the Extended Flat, characterizes by the extension of wave C, which ends before the end of wave A.
In the next diagram, we can appreciate the different flat formations.
Channeling in flat formations
A useful tool to identify a flat pattern is the channel. The channeling process allows us to visualize the potential next movement of the market.
The channeling process starts by tracing a horizontal line from the origin of wave A. Once completed; it must project the base-line at the end of wave A.
The next figure shows the different variations of the flat pattern.
The flat pattern in action
The e-mini SP 500 future (CME:ES) on its daily chart shows a sell-off started on October 03, 2018, when the price reached at 2,944.75 pts. The first decline was developed in three waves. As says the canalization process for this structure, we trace a horizontal channel from the origin to the end of wave A.
After this movement, ES made a sideways move in another three waves. Finally, the e-mini began a second bearish leg developed in five internal waves until 2,316.75.
R.N. Elliott, in his work “The Wave Principle” described the zig-zag structure as a corrective pattern. In this educational article, we will unfold the zig-zag formation.
The basics
The zig-zag
R.N. Elliott, in his work “The Wave Principle” described the zig-zag structure as a corrective pattern. In this educational article, we will unfold the zig-zag formation.
The basics
The zig-zag
R.N. Elliott, in his work “The Wave Principle” described the zig-zag structure as a corrective pattern. In this educational article, we will unfold the zig-zag formation.
The basics
The zig-zag pattern contains three waves in a higher degree, and follow a 5-3-5 sequence in its lower degree. This order means that the first leg (A) has five internal waves; the wave (B) has three segments. Finally, wave (C) is formed by five waves. The following picture shows the formation of a zig-zag pattern.
Zig-zag variations
A zig-zag pattern could develop some variations as a normal, truncated, and extended. The following chart represents the different variations of the zig-zag structure.
Consider as a key to classify what kind of zig-zag structure is running, each segment of the corrective wave must follow the 5-3-5- sequence, and the extension of wave C.
Zig-zag patterns: Channeling
Another tool to identify the type of zig-zag pattern is the use of channels. Channeling allows us to identify the potential movement of a zig-zag formation.
Channeling is developed in the same way as motive waves. In this case, we must connect the end of the last motive wave with the end of wave B and project the parallel line at the end of wave A.
In the next figure, we observe the difference between a normal and a truncated zig-zag not necessarily surpass the base-line of the channel. The main difference is that in a normal zig-zag, the wave C projection could be at least 2/3 of wave A.
In the truncated zig-zag, the wave C projection is between 1/3 and less than 2/3 of wave A.
On the extended zig-zag pattern case; the sequence could be indicative of a complex corrective sequence formation.
The S&P 500 weekly chart shows a zig-zag pattern. The bearish sequence started in October 2007 when the price reached at 1,576.1 pts. The corrective move ended on March 2009 at 666.8 pts. In some cases, the line chart could be helpful to visualize each segment of a wave. In this example, we observe in the line chart how the structure accomplishes the 5-3-5 sequence.
Corrections are formations that occur after each impulse. As we have seen before, corrective waves have three segments. In this article, we will see the main characteristics of the corrective
Corrections are formations that occur after each impulse. As we have seen before, corrective waves have three segments. In this article, we will see the main characteristics of the corrective
Corrections are formations that occur after each impulse. As we have seen before, corrective waves have three segments. In this article, we will see the main characteristics of the corrective waves.
Nature of the corrective waves
Generally, corrective waves are more challenging to identify than impulsive waves due to their variations. Elliott spent a large part of his time describing the different types of corrections. The author, in his Treatise, explains that “a corrective wave in progress is complicated to predict accurately between its pattern and extent.
Corrections are characterized by having three waves, except triangles that have five internal segments. Some factors that can influence the form of correction are time, speed, the extent of the previous movement, etc.
In the following figure, we observe the formation of the basic corrective structures.
Corrective waves formation
If the price action does not allow all the rules of formation of an impulsive wave to be verified, then the market is developing a corrective structure.
The most straightforward corrective structures are:
– Zig-zag, this formation has a 5-3-5 sequence.
– Flat, whose internal structure has a 3-3-5 configuration.
– Triangles, these formations develop in a sequence 3-3-3-3-3.
There are also corrective structures that are a combination of two or three simple corrective patterns. These formations are known as double three and triple three.
Alternation in the corrective waves
Just as impulsive waves alternate, corrective waves do too. In simple terms, Elliott points out that if wave two is a simple structure, wave four will be complex and vice versa. In the following figure, we observe how the corrective waves alternate in complexity.
Corrective waves can also alternate in the strength level. That is, a correction can be ordinary or strong. In the following chart, we observe the ideal model of the strength level in a corrective structure.
Wave five is the last movement in the direction of the trend. In this educational article, we will review two ways to trade the fifth wave.
Trend following
The first
Wave five is the last movement in the direction of the trend. In this educational article, we will review two ways to trade the fifth wave.
Trend following
The first
Wave five is the last movement in the direction of the trend. In this educational article, we will review two ways to trade the fifth wave.
Trend following
The first choice to trade the fifth wave is looking to join the primary trend. The following chart shows the trading setup.
There are two ways to place the order. The first option is following the retracement of a wave 4, which could extend from the Fibonacci levels 23.6% to 50%. The second option is to wait for the breakout and close above wave B of wave four.
For the invalidation level placement, we have to remember the Elliott Wave rule “wave four never end in the territory of wave one.”
To define the profit target levels, we use the Fibonacci projection from waves 3 and 4. In this case, the first target will be at 61.8%, the second at 78.6%, and the third target at 100%.
In some cases, if wave three is the extended wave, there is the possibility that wave five has the same extension that wave one.
Ending diagonal pattern
The second alternative to trade the fifth wave is when the price action builds an Ending diagonal pattern. In this case, we have two options to enter the market. The first one is to place the order after the breakdown of the lower trendline. The second one is after the close under the swing of wave 4.
The invalidation level is above the wave 5, and the profit target is at the end of wave 2.
The fifth wave in the real market
The next chart corresponds to PayPal Holdings (NYSE:PYPL) in its 8-hour timeframe. PYPL developed a rally from the Christmas 2018 low at $76.70 per share.
From the bullish cycle, we observe the wave three and the retracement developed by wave 4. PYPL retraced until the Fibonacci level 38.2%. In this sense, we can look for long positions from 23.6% until 50% of the Fibonacci retracement.
The price action drove to PYPL until 61.8% of the Fibonacci projection at $121.48 on July 16, 2019. As can be noted, PayPal Holdings started to decline once it reached the highest level of the year.
The invalidation level could be placed on two different levels. The first one is at the end of wave one at $94.59. The second alternative is at the 61.8% of the Fibonacci retracement at $97.34 per share.
The next weekly chart corresponds to the e-mini NASDAQ futures (CME:NQ). In this example, we observe an ending diagonal structure.
The sell position could be placed in two different ways, after the lower trendline, or once the price closes below the end of wave 4. Finally, NQ dropped until the bearish target at the end of wave 2 at 1,457.75 pts.
A diagonal is an impulsive pattern, but it is not an impulse. That is because Diagonals have the characteristics of corrective waves. In this article, we will explain the aspects
A diagonal is an impulsive pattern, but it is not an impulse. That is because Diagonals have the characteristics of corrective waves. In this article, we will explain the aspects
A diagonal is an impulsive pattern, but it is not an impulse. That is because Diagonals have the characteristics of corrective waves. In this article, we will explain the aspects of the diagonal formations.
Diagonal Pattern Structure
Diagonal patterns share rules of both impulsive and corrective waves. Even when, as a motive wave, wave 3 is never the shortest, in the diagonal pattern, wave 4 can enter the territory of wave 1. There are two main types of diagonals, leading diagonal and ending diagonal. The following figure shows these two cases.
Ending diagonal
This impulsive pattern develops mainly in a fifth wave, especially when the market has made a significant advance in time. The internal structure corresponds to a 3-3-3-3-3 sequence. In this formation, wave 1 and 4 may or may not overlap. However, this is not an exclusive requirement. It has also been observed that internal wave 3 is the most extended.
The following example corresponds to the mini NASDAQ index (NQ) futures on the weekly timeframe and semilog scale. The bullish motive sequence began in September 2002 until the end of October 2007. In the figure, we observe the progress made by the price over the upper line of the diagonal. Once the price surpassed it, NQ started a corrective movement that ended in October 2009.
Leading diagonal
This type of impulsive wave can appear in both a wave 1 and an A wave. Its internal structure can be 5-3-5-3-5 or 3-3-3-3-5. In the main diagonal, wave 1 and 4 can overlap. However, this is not a mandatory requirement. Also, there is a possibility that the diagonal formation is expansive rather than contractive.
In some cases, in the ending diagonal pattern, we can observe the truncation of wave five. The following Dollar Index (DXY) weekly chart shows a leading diagonal and an ending diagonal from where wave 5 is truncated.
Leonardo da Pisa developed the Fibonacci sequence in the thirteen century. The series starts like this: 1-1-2-3-5-8, and so on. Elliott, in his work “Nature’s Law,” said Fibonacci provides
Leonardo da Pisa developed the Fibonacci sequence in the thirteen century. The series starts like this: 1-1-2-3-5-8, and so on. Elliott, in his work “Nature’s Law,” said Fibonacci provides
Leonardo da Pisa developed the Fibonacci sequence in the thirteen century. The series starts like this: 1-1-2-3-5-8, and so on. Elliott, in his work “Nature’s Law,” said Fibonacci provides the mathematical basis of the Wave Principle. In this educational article, we will review how to apply the Fibonacci sequence to the Elliott Wave Theory.
The Fibonacci ratios
The Fibonacci sequence has its origin in Leonardo da Pisa’s work, “Liber Abacci.” In his work, the mathematician responses to the question:
How many pairs of rabbits placed in an enclosed area can be produced in a single year from one pair of rabbits if each pair gives birth to a new pair each month starting with the second month?
The answer to this question resulted in the series calculated as follows: The first month, there will be zero plus one that results in one pair. The next month, the rabbits will reproduce, expanding to two pairs. In short, the sequence of rabbits is as follows, 0, 1, 1, 2, 3, 5. The series concludes that at the end of the year, there will be 144 pairs of rabbits.
From the Fibonacci series, we obtain the main ratios of this sequence; these are 0.618 and 1.618; this number is known as the Golden Ratio.
In the Elliott Wave Analysis, we use some specific level to evaluate the retrace and potential next movement of the market; these levels are as follows:
Retracement:
0.09
0.146
0.236
0.382
0.5
0.618
0.764, some authors prefer to use the 0.786 level.
0.854, some authors prefer to use the 0.886 level.
Expansion:
0.618
1
1.272
1.414
1.618
2
2.272
2.618
Use of Fibonacci tools in the financial markets
Until now, we used neither a mathematical method to determine price targets. Consider that the price action is not compelled to respect a Fibonacci level by itself. These tools provide a probability zone to a reaction.
The following chart corresponds to AT&T (NYSE:T) in its daily timeframe. The bullish cycle started on August 24, 2019, when T found buyers at $30.97 per share.
The first Elliott wave movement calls for a leading diagonal structure, which made the wave 1 of Intermediate degree. Using the Fibonacci retracement tool, we observe that wave (2) retraces near to 38.2% o wave (1).
The wave (3) accomplishes the rule that commands “wave 3 is the largest wave.” In wave (4), we observe that respect the alternation rule that says, “if wave two is simple, wave four will be complex, and vice-versa.” This wave retraces between 23.6% and 38.2% of wave (3).
Finally, from wave (5), the price action drove to strike over the upper-line of the ascending channel.
The Elliott Wave Principle allows us to identify the primary trend and its correction. Also, it permits to recognize the maturity of the market, to determine price targets, and to
The Elliott Wave Principle allows us to identify the primary trend and its correction. Also, it permits to recognize the maturity of the market, to determine price targets, and to
The Elliott Wave Principle allows us to identify the primary trend and its correction. Also, it permits to recognize the maturity of the market, to determine price targets, and to provide a specific invalidation level. In this educational article, we will explain how to trade the Elliott Wave Principle.
Trading the waves
Before identifying a trading setup, we have to remember the basic structure of the cycle. Waves 1, 3, and 5 are motives and follow the principal trend direction. Waves 2, and 4 corrects the trend movement and moves in three internal waves. The following figure shows the basic structure of a cycle.
From the Elliott Wave cycle structure, we observe that waves 3, 5, A, and C, are tradeable. Waves 2, 4, 5, and B provide the retracement that generates the opportunities to entry following the direction of the trend.
Trading the wave three
Wave three characterizes by to be the best profitable movement of an entire Elliott Wave cycle. The following chart shows the way to trade wave three.
To place our entry, we have two options. The first alternative is following the retracement level, which could extend from 38.2% to 78.6%. The second alternative is to place the order after the wave B breakout.
The profit target is at least 100% of the Fibonacci projection from the origin, wave 1, and wave 2. Remember, the wave three rule “is not the shortest.” The second target is 127.2%, and the final corresponds to 161.8%.
The invalidation level is below the origin of wave 1; remember the rule “Wave 2 never moves below wave 1.” An alternative level is to set the invalidation below the end of wave C.
Wave three in action
Dow Jones Transportation (DJT), in its 8-hour chart, shows a bullish sequence that started on January 20, 2016, when the price found buyers at 640.33 pts. The first rally drove to DJT until 814.90 pts on April 20, 2016.
After this high, the price action retraced in three waves as an A-B-C sequence, piercing 61.8% of the Fibonacci retracement. From the chart, we observe the two possibilities to place the entry to the market. The first alternative is to go long between the 50% and 61.8%. The second one is to wait for a wave B breakout above 795.06 pts.
DJT reached the first target at 876.58 pts in the first half of November 2016. While the second target, located at 923.92 pts in early December 2016. However, DJT touched the third target at 984.21 pts on September 27, 2017.
An extension is an essential feature of an impulsive movement. In this article, we will see what the characteristic of this type of movement is.
Extensions
An extension is a
An extension is an essential feature of an impulsive movement. In this article, we will see what the characteristic of this type of movement is.
Extensions
An extension is a
An extension is an essential feature of an impulsive movement. In this article, we will see what the characteristic of this type of movement is.
Extensions
An extension is a movement that characterizes the longest wave of an impulsive wave. This movement allows us to differentiate between an impulse and a correction. An extension may appear in waves 1, 3, or 5, but it will never appear in more than one wave. In the following figure, we see the extended wave of “blue” degree and the “black” grade wave corresponds to the upper degree structure.
Extensions of extensions
As in the previous case, extensions can have internal extensions. The rules for this scenario are the same as in the case of simple extensions.
The following figure corresponds to the Dow Jones Industrial Average (DJI) in the semilog scale. The chart shows the impulsive wave that begins with the October 1987 low at 1,616.2 pts., and concludes on October 2007 when DJI touched the 14,198.1 pts. The cycle ended when DJI made a new low in 2009, reaching the 6,470 pts.
Dow Jones chart shows that the third wave of blue degree is the extended wave. Additionally, the third wave of the black degree is the extension of the extension in the bullish cycle.
Most of the people wanting to profit from the Financial Markets think that the secret to success lies in knowing the price turns to start a new trend and also
Most of the people wanting to profit from the Financial Markets think that the secret to success lies in knowing the price turns to start a new trend and also
Most of the people wanting to profit from the Financial Markets think that the secret to success lies in knowing the price turns to start a new trend and also detects when to get out of the trade. They might be right if there were a mathematical formula or crystal ball to show us the right timing. But the truth is the Financial Markets are chaotic and random. Thus, there is no sure way to be right.
The good news is that we don’t need to be right, but be profitable. That can be achieved by taking small losses when the trade goes against us and let profits run when the trade goes as we projected. And the key knowing if we are on the right track is measurements and analysis.
This article deals with how to extract information out of a set of results by computing an average. And also, by measuring the deviation from the norm extract wisdom hidden in the data collection.
Averages
Averages have the purpose of determining the typical value or center of a set. For instance, the mean profit achieved in a month or a year. We assume that the majority of the samples are located near the average, and, also, that the number of cases away from it decreases with the distance to the average.
The computation of an average is simple. We add all elements and divide them by the number of items in the set.
As an exercise, if we have a collection of trading results X, with elements x1 = $1, x2=$-1 and x3=$3 which is our average profit?
Average of X (M) = (x1+x2+x3 )/3 = (1+(-1) +3)/3 = 3/3 = 1 dollar.
The Sample Standard deviation (SD)
It is interesting also to measure how far could we expect the following trades to be away from this mean. There are several ways to measure errors, but the most used is the Standard Deviation. SD for short.
Computing the standard deviation is a bit more complicated than the average, but not much.
1.- We take the difference between the mean and every element, creating a new set of differences.
dxi = M-xi
2.- Differences may be negative or positive, so we square them to get dxi^2, creating a set of squared differences.
dxi2 = dxi^2
3.- We add all elements of this last set and divide by its n-1, the number of items minus one. This result is called variance
Var = Sum(dxi2)/(n-1)
4.- Take the square root of the variance.
SD = √ Var
let’s do it with our example:
1.- dx1 = 1-1 =0; dx2 = 1-(-1) =2; dx3 = 1-3 =-2
2.- dx1^2 = 0; dx2^2 =4; dx3^2 =4
3.- Var = (0+4+4)/(3-1) = 8/2 = 4
4.- SD = √4 = 2
After that, we can conclude that our system’s future performance will be one dollar plus or minus 2 dollars.
The Standard Deviation can be thought of as the average of the dispersion of the results.
Chebyshev’s Inequality
Once getting these results, we know a bit about our trading system. Chebyshev’s inequality gives us another handy piece of information. It addresses the question of how many of our samples will lie within a certain distance from its mean.
There are many classes of probability distributions. One of them is the Normal Distribution, with its typical Gauss or bell curve. The Normal distribution is very nice indeed, and many physical phenomena conform with it, such as the length of people or the distance from the target on a dart game. Unhappily, trading results do not conform to it.
The good news is that the Chebyshev’s inequality works with a wide variety of distributions, and guarantees that no more than a certain fraction of values can be farther away than a certain distance from the mean.
Specifically:
No more than 1/k^2 values can be farther away than k* SD
We can say it the other way around:
At least 1-1/k^2 of the values of a distribution are within k*SD from its mean. If we create a spreadsheet using these formulas we get:
Table 1 – Chebyshev’s Inequality
This table provides a lot of information. We see, for instance, that only 11.11% of the trades are farther than 3 SD from its mean.
That means close to 90% of the profit on future trades in the above calculation will be between -5 and 7 dollars.
Also, 75% of them will lie within 2 SD – between -3 and 5 dollars.
Since it can be applied to most of the distributions, we could use it with prices. That way, we could determine how far a price is away of its mean and assess overbought and oversold conditions with statistically relevant tools.
Final words
Knowing how to compute averages and the standard deviation will help traders quantify and qualify their performance.
It is interesting to know how to find the odds for a value to be at a determined distance from the mean value of the distribution.
A useful tool for motive wave analysis is the use of channels. In this article, we will review how to use channels to identify motive waves.
Channeling process
A channel
A useful tool for motive wave analysis is the use of channels. In this article, we will review how to use channels to identify motive waves.
Channeling process
A channel
A useful tool for motive wave analysis is the use of channels. In this article, we will review how to use channels to identify motive waves.
Channeling process
A channel is a technical figure that is formed by three points. In Elliott wave theory, channels allow us to identify the potential objective of waves 3 and 5, with “dramatic precision.”
R.N. Elliott, in his work “The Wave Principle” tells us that a channel cannot be drawn if wave two has not ended. Once this wave is complete, we can trace the first channel by connecting a line from the origin of the first impulse to the end of the second wave. Then, a parallel line is projected at the end of the first wave. The following figure shows the process.
Once the third wave is completed, the same process is repeated, this time, we connect the end of wave 1 and 3, and we make the projection at the end of wave 2. This channel will give us an approximation of the end of wave 4. To estimate the end of the fourth wave, we must consider that it should never be more profound than wave 3. The following figure shows this channeling process.
Finally, once the fourth wave is finished, we draw the baseline of the channel linking the ends of waves 2 and 4 and project the parallel line at the end of the third wave. This channel will give us as a possible end of the fifth wave.
The following Silver daily chart shows that the precious metal is completed a sequence of three waves. Currently, the commodity is running in a wave 4 with a potential target at the $17.5 zone.
