Category: Forex Technical Analysis

This section covers all educational articles on technical analysis. it is the root category for the different categories related to TA. We will cover everything needed to master technical analysis. Articles on Price action, Elliott Wave, harmonic, Technical Indicators will be covered and placed in its own category.

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Forex Elliott Wave

Corrective Waves Construction – Part 5

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.

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Forex Elliott Wave

Corrective Waves Construction – Part 4

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.

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Forex Elliott Wave

Corrective Waves Construction – Part 3

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.


Categories
Forex Elliott Wave

Corrective Waves Construction – Part 2

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.




Categories
Forex Elliott Wave

Corrective Waves Construction – Part 1

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.


Categories
Forex Elliott Wave

Trading the Elliott Wave Principle – Part 2

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.

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Forex Elliott Wave

Impulsive Waves Construction – Part 4

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.


Categories
Forex Elliott Wave

Elliott Wave Theory and Fibonacci

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.

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Forex Elliott Wave

Trading the Elliott Wave Principle – Part 1

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.

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Forex Elliott Wave

Impulsive Waves Construction – Part 3

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.




Categories
Forex Elliott Wave

Impulsive Waves Construction – Part 2

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.


Categories
Forex Elliott Wave

Impulsive Waves Construction – Part 1

Previously we presented an ideal model of motive waves; however, the real market is not exactly perfect. In this educational article, we will develop the principles of impulsive waves.
The

Previously we presented an ideal model of motive waves; however, the real market is not exactly perfect. In this educational article, we will develop the principles of impulsive waves.
The

Previously we presented an ideal model of motive waves; however, the real market is not exactly perfect. In this educational article, we will develop the principles of impulsive waves.

The nature of impulsive waves

Before we begin to identify impulsive waves, we must consider the following rules that compose it:

  1. It must have five consecutive segments, or waves, that develop a trend.
  2. Three of these five waves must move in the same direction; this can be bullish or bearish.
  3. After the initial wave, a shorter sequence must be developed in the opposite direction of the first movement. This movement should never be greater than the advance of the first wave.
  4. The third wave must be larger than the second movement.
  5. After the third impulsive movement, a similar sequence to the second wave should be developed. However, the third segment trend must prevail over the fourth.
  6. The fifth wave, in most cases, will be more extense than the fourth movement. If the fifth wave is smaller than the fourth wave, this is called a “failure.”
  7. When comparing the lengths of waves 1, 3, and 5, the third wave does not necessarily have to be the longest. However, it should not be the shortest.

If one of these rules is not followed, then the movement is not an impulse, the structure corresponds to a corrective sequence.

The alternation principle

Elliott defines alternation as a law of nature, as the day and night alternates, the movements of a market also alternate. The alternation principle establishes that when two waves of the same degree are compared, they are different from each other.

We observe the alternation in:

  • The distance that price travels.
  • The duration of each wave.
  • The retracement of the depth of each impulse (waves 2 and 4).
  • The complexity of each wave, that is, the number of internal waves that compose it.

The following daily chart corresponds to the EURAUD cross. In the chart, we observe the alternation in price and time. The first bullish movement began on August 21, 1997, at 1.42014, this wave was developed on 118 days and increased 2,919 pips or 20.55%. Wave 3 surged on 131 days and reported an increase of 19.83% or 3,121.6 pips. Finally, the fifth wave grew in 81 days, advancing 3,059.5 pips, or 17.44%, reaching the high at 2,05983 on October 06, 1998.


In the following EURAUD daily chart, we recognize the alternation in the retracement. From wave 2, we observed that the retrace of wave 1, was developed for 44 days, and the cross plunged 8.05% or 1,377.9 pips. Finally, wave 4 fell 1,334.1 pips (7.07%) of wave 3 in 36 days.


Categories
Forex Elliott Wave

Planning your First Wave Analysis – Part 2

In a previous post, we talked about the ideal structure of an impulsive and corrective wave. Also, we discuss the starting point of the study of a market. In this

In a previous post, we talked about the ideal structure of an impulsive and corrective wave. Also, we discuss the starting point of the study of a market. In this

In a previous post, we talked about the ideal structure of an impulsive and corrective wave. Also, we discuss the starting point of the study of a market. In this opportunity, we will deepen the steps to identify a wave.

 

Watching the waves

 

Before continuing, we must consider the concept of “wave.” A wave is a defined movement of the market, which is reflected in a price variation. Depending on the price action, the change may have a higher or slower speed, but it will never be perfectly horizontal or vertical.

Depending on the sequence of a group of waves, the market may develop an impulsive or a corrective wave structure. An “impulsive wave” is made up of five waves with a relationship of the same degree. On the other hand, a “corrective wave” is composed of a set of three waves. The following figure shows an ideal impulsive and corrective wave.


Wave proportionality

Once we define the start point and the timeframe of the market study, we must consider that waves should have specified “proportionality.” Consider that some Elliott structures could not be easily visible by simple observation. For this reason, we must be flexible in terms of the selection of the timeframe to analyze. Remember that the same timeframe will not necessarily useful to examine all markets. Elliott, in his “Treatise,” reminds us that in markets with low volatility, the weekly chart may be more fit than the daily chart.

 

Price and time relationship

In a sequential movement, the price action is developed following the relation between price and time. On the following chart, we observe the Financial Select Index ETF (AMEX: XLF) on a weekly timeframe. In the example, we note that the sequence starts in the March 2009 low at $ 4.47, and ends when XLF reached the February 2011 high at $ 13.90. After this top, XLF developed a retrace in February 2011, which led to a higher low at $ 10.02.



In this example, there is a similarity in the advance and retracement of the price with the time. In summary, the movement of two consecutive waves of the same degree cannot be less than one-third (1/3) of the greater in terms of price and time.

Categories
Forex Elliott Wave

Planning the First Wave Analysis – Part 1

Before to start to analyze any market, it’s necessary to set-up the chart earlier to begin to identify motive and corrective waves. In this article, we will learn how to

Before to start to analyze any market, it’s necessary to set-up the chart earlier to begin to identify motive and corrective waves. In this article, we will learn how to

Before to start to analyze any market, it’s necessary to set-up the chart earlier to begin to identify motive and corrective waves. In this article, we will learn how to start to analyze the market applying the Elliott Wave Theory.

 

Setting-up the first chart

The first step consists of choosing the market to be studied, and then select a starting point for the analysis. Once we decided the market of interest and the inception point, in a monthly chart, we will identify the highs and lows of the asset in the order of appearance. After that, we must establish the relevant date and price of every segment.

As an example, the following chart corresponds to the DAX futures in a monthly timeframe. As you can notice, there are identified the “relevant” highs and lows from March 2000 until the present.

Once we defined the starting point,  we will begin the analysis by moving our timeframe from higher to lower. In means, from monthly to daily timeframe, and even to an hourly chart. However, this could demand you extra time to update the analysis.

The identification process

When the identification is complete, we must distinguish the start and end of each wave. From our example, we will start from the March 2009 low at 3,588.5 pts, until the January 2019 high at 13,181.5 pts.

The same process must be realized in the weekly and daily timeframe. As you can notice, we still do not begin to talk about motive and corrective waves. The reason is that the first step is to learn to recognize the movement under study.

As was discussed in the previous article, we will use labels to identify each wave. In our example of the FDAX monthly chart is as follows.




Summarizing, the monthly chart of the FDAX shows a bullish sequence which currently should be developing a wave ((5)). As we learned, waves ((1)), ((3)), and ((5)) moves in the bullish trend direction; it is a motive wave. The waves ((2)), and ((4)) retraces the main trend movement, or in other words, these waves are corrective of the principal trend.

Categories
Forex Elliott Wave

Fundamentals of Elliott Wave Theory – Part 3

Until now, we have defined two kinds of waves, motive and corrective. In this article, we will introduce the concept of “degree,” which will help us in the process

Until now, we have defined two kinds of waves, motive and corrective. In this article, we will introduce the concept of “degree,” which will help us in the process

Until now, we have defined two kinds of waves, motive and corrective. In this article, we will introduce the concept of “degree,” which will help us in the process of waves identification.

The concept of degree

Elliott defined a series of “degrees” to maintain a hierarchical waves order. This order is based mainly on the relationship that the wave develops over time. In other words, while higher is the time elapsed in the wave formation, greater will be the wave degree.

The term “degree” must be considered in relative terms about the price and time relationship. It should not be considered strictly according to the duration, for example, a day, a week, or a month.

The blue box shows a bullish impulsive wave developed over126 days which attained a 25.95% advance. This wave started from the low of December 26, 2018, when the price found support at 2,346.6 pts and ended on May 1, 2019, when it hit the top at 2,954.4 pts. If we remember the basic structure of a wave, we can see that the upward movement was developed in five waves.

In the red box, we observe a corrective wave sequence disclosed in three waves. This retracement began on May 1 and ended on June 3, 2019, when SPX plunged to 2,728.8 pts. The bearish move unfolded over 33 days and eased 7.67%.


R.N. Elliott, in his work “The Wave Principle” defined a series of degrees, with specific terminology and it’s as follows:

  • Grand Super Cycle.
  • Super Cycle.
  • Cycle.
  • Primary.
  • Intermediate.
  • Minor.
  • Minute.
  • Minuette.
  • Sub-Minuette.

However, Prechter & Frost, in “Elliott Wave Principle” added six degrees:

  • Supermillennium.
  • Millennium.
  • Submillennium.
  • Micro.
  • Submicro.
  • Miniscule.

Despite the wide-spread degrees, Hamilton Bolton says that the most common degrees used are Minor, Intermediate, and Primary.

Wave Labeling

Labels are useful to keep the order in the wave analysis. It’s necessary to assign a symbol on each wave of each wave that is studied. In the Elliott Wave Theory there is a set of labels for each degree as follows:

The wave labels are essential to understand the current market position and will allow us to respond to the question “where goes the market?”.

The following chart corresponds to the application of waves labeling. In this case, the SPX daily chart developed a complete cycle of Intermediate degree.


Categories
Forex Indicators

Five Great Things you’ve Never Heard about Bollinger Bands

 

Everybody knows Bollinger Bands, that kind of rivery thing surrounding prices. But almost nobody knows what to do with them. Maybe we can help a bit with that.
1

 

Everybody knows Bollinger Bands, that kind of rivery thing surrounding prices. But almost nobody knows what to do with them. Maybe we can help a bit with that.
1

 

Everybody knows Bollinger Bands, that kind of rivery thing surrounding prices. But almost nobody knows what to do with them. Maybe we can help a bit with that.

1 – Bollinger Bands and Trends

Bollinger Bands are based on Moving Averages. Therefore the central line is the 20-period moving average. As a corollary, if the price of an asset is above the mid-BB-Line, it usually is trending UP. Conversely, if it is below the mid-BB-Line, it tends to be trending down.

Fig 1 – Uptrends see prices moving near the +1 Bollinger line

2 – Bollinger Bands Are more Useful Customized

There is no need to use only the standard 2-StDev Bollinger bands. We, as traders, can create different band types. In my case, I use to draw 1-StDev and 3-StDev bands. The reason will come clear in the next bullet point.

Fig 2 – 1,2 and 3 sigma Bollinger Bands as a Map of the Price Action

3 – Bands and Price Action

Bollinger Bands maps the price action. By that, I mean we can assess how much the price is away from the mean. If we think of the mean price as the consensus of value at a particular moment, Bollinger bands help evaluate if the asset is overpriced or underpriced and profit from that information. That is so because the lines are pictured at a standard distance from the mean.

There is one theorem about a broad class of probability distributions called Chebyshev’s inequality (also called Bienaymé–Chebyshev inequality). The Chevyshev’s inequality guarantees that there is a minimum of data values within a certain distance from the mean value of a distribution. And it does not need to be a normal or bell-shaped distribution for this theorem to hold. It only needs to have a finite average.

From these figures, we can see that if we spot prices moving beyond the +2 Bollinger line, there is a 75% chance the price moves back. If that price extension goes to the +3 BB-Line the chance of it retracing is 89% and so on. That applies to the negative side as well so, prices below -2BB-line and -3BBline have 75% and 89% chance of reversing.

That means Bollinger bands are terrific overbought and oversold indicators. Consequently, it pays to have visible at least a couple of bands in our charts. There bands: +1, +2 and +3 Sigma bands will map your price action beautifully.

 

4 – Prices Tends to Visit the Mean

From the extremes, the price tends to find support on its Mean price. That means the price tends to visit the mean Bollinger line before resuming the trend (of course, this also happens when the trend changes). One recurring pattern is for the price to move beyond +2 BB-line, creating one or two candlesticks with a large upper wick and closing lower. Then, the following candles move steadily back (or sideways) to visit the mid-BB line, and then start a new leg up. That also applies to downward trends. The price moves below the -2BB-line and even the -3BBline and then creates a large lower wicked candlestick to, then, move back to the mean.

Since the mean is a moving average, the mean continues moving up or down in the subsequent bars, so, it is not uncommon that the price moves quite horizontally as can be seen on the chart.

 

5- From Impulses to Corrections

Bollinger Bands warns about pauses and the end of a trend. It also warns about the continuation of the trend.

Bollinger Bands expand with volatility and shrink with le lack of it. When we spot that the Bollinger bands are starting to shrink, it is almost sure the trend has stopped moving. It might be a consolidation period or a reversal. Therefore, band shrinkage is a flag for traders to take some profits out of the table.

Sideways range-bound movements make the bands shrink. When a breakout of the range occurs, the bands expand, signaling a new period of increased volatility and price movements.

 

 

Categories
Forex Elliott Wave

Fundamentals of Elliott Wave Theory – Part 2

Waves develop in two classes, impulses and corrections. Impulsive movements are characterized by having a five-wave structure. Corrective waves, on the other hand, growth creating a three-wave structure. In this

Waves develop in two classes, impulses and corrections. Impulsive movements are characterized by having a five-wave structure. Corrective waves, on the other hand, growth creating a three-wave structure. In this

Waves develop in two classes, impulses and corrections. Impulsive movements are characterized by having a five-wave structure. Corrective waves, on the other hand, growth creating a three-wave structure. In this article, we will introduce the concept of motive waves, corrective waves, and cycles.

Motive waves

Motive waves receive this denomination because they create movement, or “impulse” to the price action, as it follows a trend. In the following figure examining the case of a bull market, waves 1, 3 and 5, are impulsive waves. This structure is analogous for a bear market.


Corrective waves

Corrective waves, as the name implies, are characterized by pushing back the price of the dominant trend. From the previous figure, waves 2 and 4 correspond to the corrective waves.

Cycle concept

As we have seen previously, a wave is composed of five waves, and a complete cycle is composed of eight waves, an impulsive part and a corrective part. For convenience in the identification process, we will label motive waves with numbers and corrective waves with letters. Later we will see the usefulness of wave identification to understand the stage in which the market under study is.


When an eight-wave cycle is completed, a new cycle of the same degree begins, as shown in the following figure. This formation generates a five waves sequence of a higher degree. At the moment, you should not be worried about the identification symbols. Elliott defined the labels and should be understood as a tool to help in the study, and not an objective in itself.


Recognizing this structure is essential to understanding the nature of the wave theory.

Categories
Forex Elliott Wave

Fundamentals of Elliott Wave Theory – Part 1

Ralph Nelson Elliott developed the Wave Theory in the 1930s. Elliott discovered that prices followed a sequence of repetitive patterns in form, but not in time and amplitude. He called

Ralph Nelson Elliott developed the Wave Theory in the 1930s. Elliott discovered that prices followed a sequence of repetitive patterns in form, but not in time and amplitude. He called

Ralph Nelson Elliott developed the Wave Theory in the 1930s. Elliott discovered that prices followed a sequence of repetitive patterns in form, but not in time and amplitude. He called these patterns “waves,” he also recognized that each movement was composed of five waves.

The Elliott Wave Theory is not a trading system nor a forecasting tool, but, rather, a description of market behavior. In this sense, Elliott waves enable us to understand the current price position and the scenarios that can be anticipated from it. In our first Elliott’s wave theory article, we will review its history and its underlying principles.

Nature and waves

In 1934, R.N. Elliott published his work “The Wave Principle.” It is this treatise, as he calls it, explains the basics of wave theory. In this work, Elliott explains that everything in nature is governed by a law which its causes could be unknown. However, when the law is known, forecasts can be made, regardless of whether or not the reasons that originated it are known. Both nature and universe, some phenomena are repetitive and can be predicted; for example, the lunar phases, the year seasons, the tides, and so on.

Human interactions are part of nature and are no exception in wave theory. The most common socio-economic activity is realized in the financial markets. Elliott remembers us that “there is no socio-economic activity in which so many resources have been allocated and with neither successful results as financial markets.” In this context, wave theory allows us to have an understanding of the current state of financial markets and their possible next path.

The five-wave structure

According to R.N. Elliott, the financial markets as a socio-economic activity hold a specific structure composed of five waves. These waves move in the direction of the dominant trend and are identified as wave 1, 3, and 5. Similarly, as the market is moving forward, an opposite movement is identified as wave 2 and wave 4. These movements happen against the primary trend.

Elliott, facing the question of why five waves and not another number, in his treatise explains that “it is a secret of nature” and it is not his goal to determine the origin or explanation of the five movements.

Elliott observed that wave 2 never moves beyond the beginning of wave 1, wave 3 is never the shortest, and wave 4 never enters the territory of wave 1. The following figure shows the basic structure of a five waves sequence.


Categories
Forex Harmonic

Harmonic price levels based on Music Theory

One of the most mind-boggling books regarding technical analysis and W.D. Gann was Tony Plummer’s book, The Law of Vibration – The Revelation of William D. Gann. It is easily

One of the most mind-boggling books regarding technical analysis and W.D. Gann was Tony Plummer’s book, The Law of Vibration – The Revelation of William D. Gann. It is easily

One of the most mind-boggling books regarding technical analysis and W.D. Gann was Tony Plummer’s book, The Law of Vibration – The Revelation of William D. Gann. It is easily one of the most enthralling and contemporary works for any Gannyst out there. Without going into extreme detail of the book, I want to focus on one part of this book that I found particularly interesting: Harmonics in Music. Back in the day, yours truly was a double-major in both music education and music performance (I was a Euphonium player – also the Trombone and Tuba). Anyway – on to the awesomeness of this article.

I want to stress that in the book, the author does not tell you how to apply the information into your trading or how to apply it on a chart. I think that is an homage of sorts to Gann himself (Gann also was very ‘cryptic’ about how to use his methods).

But I’m pretty sure I figured it out.

The Law of Three and Middle C

The opening of Chapter 6 in Plummer’s book begins with a quote from P. D. Ouspensky: “A study of the seven-tone musical scale gives a very good foundation for understanding the cosmic of octaves.” Plummer writes that Western music is based on a series of notes centered around the Middle C (The middle note of C on a keyboard, labeled C4). The Middle-C vibrates at a rate of 256 cycles per second. And one octave above that is the next C, C5. The rate of vibration of C5 is double that of Middle-C: 512.

In music, a scale is made up of 8 notes. In Music Theory and Aural Theory, or if you’ve watched The Sound of Music, you’re probably familiar with the song Do Re Mi. Do Re Mi is called solfege, or tonic solfa. The words: Do, Re, Mi, Fa, So, La, Ti, and Do represent the eight notes in a scale. And each one of those notes has its own rate of vibration. Here’s the table:

musicalharmonics

I’ve spent considerable time studying not only Gann’s own work, but also the work of Michael Jenkins, Constance Brown, George Bayer, James Hyerczyk, and others. One of the things I’ve learned from these Gann experts’ work was Gann’s use of Harmonics, which seems to be a broad term for calculating important price levels. There are various methods used that generally come to the same value area. Some of those methods are Gann’s Square of 9, Square of 24, natural squared numbers and others. Probably one of the most popular methods from the 1990s was a system called Murray Math. Murray simplified the application of harmonic ranges in both time and price. It’s useful, but not as accurate.

I’ve used a number of methods to apply Gann’s harmonics, and Plummer’s ratios have probably been the most effective. There is a piece of software called Optuma by Market Analyst. They actually have a tool that creates exactly what I figured out on my own. So it was pretty damn cool to use that software and see that I had come across a solution and application all on my own and have it confirmed by software created by people way smarter than me.

How I applied it

Using the vibrational number of 256, it’s easy to double that value and then double again. So 256, 512, 1024, 2048, etc, etc etc. These numbers, for whatever reason, appear everywhere in science and nature. Now, you can use these numbers for any type of stock, futures contract, forex pair or cryptocurrency. Here are some examples. Notice how much these zones act as support and resistance and how often prices trade within these zones.

Chart Examples

AUDUSD

AUDUSD

This AUDUSD chart is from using Optuma by Market Analyst. The harmonic values are starting at the octave of 65536 to 131072. I converted the 131072 to 1.31072. 65536 was converted to 0.65536.

XAUUSD (Gold)

XAUUSD

EURUSD

EURUSD

BTCUSD

BTCUSD

ETHUSD

ETHUSD

LTCUSD

LTCUSD

The rest of the images above are from Tradingview. I created a simple indicator that will plot out the lines depending on division or multiple of 256 that you want to use. You simply add the number you wish to, and it will plot out a full Octave from Do to Do.

Categories
Forex Elliott Wave Forex Market Analysis

Divergence between Gasoline and Crude Oil

A divergence between Gasoline and Crude Oil
Gasoline and Crude Oil are two energy commodities highly correlated. In the current session, Gasoline is moving

A divergence between Gasoline and Crude Oil
Gasoline and Crude Oil are two energy commodities highly correlated. In the current session, Gasoline is moving

A divergence between Gasoline and Crude Oil

Gasoline and Crude Oil are two energy commodities highly correlated. In the current session, Gasoline is moving bearish, but Crude Oil is moving bullish. We expect that Crude Oil would make a new lower high and continue inside the area between $70.61 to $73.06 to, then, develop a new bearish leg, with a target the zone between $63.47 to $60.28. Invalidation level is $75.24.



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