A System that can't Lose

[mich]

@Sweet_Pip

Going back through the thread, it became apparent that I didn’t really cover how to recognize trends and corrections …yes, based on Elliott Wave theory.

There are a few pattern guidelines. They may not hold true in all cases as nothing is guaranteed. However, since we are dealing in probabilities, they happen to have a high probability of forming and repeating in any time frame and market.

I like to use the ZigZag indictor…I don’t really classify it as an indicator because I think of it as more like a tool. It’s purpose is to draw lines connecting swing highs and lows.

You need to find out whether the market is in a trend or a correction when you open your chart. To do that, you need to find what completed last…a trend or a correction?

12345 Trends: Trends usually consist of 5 waves (also called swings, sections, or legs). Here’s a pic from BabyPips school illustrating an almost completed pattern.

When looking at a set of 5 swings, you need to recognize if it qualifies. It will if you can say the following about it (the guidelines):

1. Wave 2 high/low, is not higher/lower than the start of wave 1
2. Wave 3’s pip range is more than wave 1 and/or wave 5
3. Wave 4 did not close in the range of wave 1

A trend is considered complete when price moves (overlaps) back into and past wave 4 after wave 5. So where does a trend start? Usually at the end of a correction.

ABC Corrections: Corrections usually form at the completion of a trend.

Here’s a pic from BabyPips school illustrating the ABC pattern…

When looking at a set of 3 swings, you need to recognize if it qualifies. It will if you can say the following about it:

1. Wave C high/low has moved beyond wave A high/low
2. Price has moved back into wave A from Wave C. Once this has happened it means the minimum conditions for a correction has completed.
3. Price continues to move beyond wave B. This usually means the correction is complete.

The following picture is a Up ABC correction in a down trend. it illustrates the first 2 guidelines which again are the minimum conditions the waves must meet in order to be considered a correction. From this point it could either develop into a complex correction, totally reverse the past trend, or proceed to move down below B and be considered complete. If it’s a complex correction, it will continue to make a series of overlapping ABC patterns, until it finally completes or totally reverses the prior trend.

So what usually happens after a completed correction? A trend!

As correctly pointed out we need to understand the basics of Elliot Wave (ewave) technique before making inroad with this trading method.

Sweet Pip kindly mentioned the following and I quote:

1. Wave 2 high/low, is not higher/lower than the start of wave 1
2. Wave 3’s pip range is more than wave 1 and/or wave 5
3. Wave 4 did not close in the range of wave 1

I would like to add point No 4 as well

4. Wave 5 must exceed the end of wave 3.

It would be interesting to discuss the anticipated length of each wave based upon Wave 1. I do not know whether the length of each wave is the correct terminology. However, it is sufficient to assume that length of each wave is the price or the number of pips it represents (i.e. the Y axis). The attached diagram for RUR/USD as of COB Friday shows waves 1-5 and the length of each wave. The price distance of each wave is measured as a vertical distance from the beginning of the wave to the end of the wave. The length is measured in pips.

According to the available studies (for example see the attached PDF file), it is anticipated the following:

a) 73% of Wave 2s to be between 50% to 60% of Wave 1. In our example Wave 2 = 0.6 x Wave 1
b) The most common multiples of Wave 1 to Wave 3 are the 1.62 and 2.62 numbers. (If Wave 3 is extending, we typically monitor for 4.25 or higher ratios.). In our example Wave 3 = 1.80 Wave 1
c) Wave 4 is related to Wave 3 by the following standard ratios: Wave 4 = either 24% of Wave 3, or 38% of Wave 3, or 50% of Wave 3, or 62% of Wave 3. In our example Wave 4 = 0.55 Wave 3
d) Wave 5 either = Wave 1, or = 1.62 x Wave 1, or = 2.62 x Wave 1. In our example Wave 5 = 1.61 Wave 1.

I also note that the general litterature refers to three types of corrections, namely:

Zigzags (5-3-5; includes three variations: single, double, triple);

Flats (3-3-5; includes three variations: regular, expanded, running);

Triangles (3-3-3-3-3; four types: ascending, descending, contracting, expanding);

Double threes and triple threes (combined structures).

I really need to understand these corrective waves better. However, before getting there I would like to know how to correlate these two timeframes that this technique refers to. Ok we have daily EUR/USD with Wave 1-5. We also have RSI here between 48% and 70%, nice and neat. Now can someone explain how I can relate the daily timeframe findings to hourly timeframe. Can we actually use this technique to open trades in hourly timeframe?

Thanks

EURUSD_daily_20091025.pdf (59.3 KB)

EURUSD_hourly_20091025.pdf (51.4 KB)

Overview of Fibonacci and Wave Relationships[1].pdf (408 KB)

[Sweet_Pip]

As correctly pointed out we need to understand the basics of Elliot Wave (ewave) technique before making inroad with this trading method.

Sweet Pip kindly mentioned the following and I quote:

1. Wave 2 high/low, is not higher/lower than the start of wave 1
2. Wave 3’s pip range is more than wave 1 and/or wave 5
3. Wave 4 did not close in the range of wave 1

I would like to add point No 4 as well

4. Wave 5 must exceed the end of wave 3.

It would be interesting to discuss the anticipated length of each wave based upon Wave 1. I do not know whether the length of each wave is the correct terminology. However, it is sufficient to assume that length of each wave is the price or the number of pips it represents (i.e. the Y axis). The attached diagram for RUR/USD as of COB Friday shows waves 1-5 and the length of each wave. The price distance of each wave is measured as a vertical distance from the beginning of the wave to the end of the wave. The length is measured in pips.

According to the available studies (for example see the attached PDF file), it is anticipated the following:

a) 73% of Wave 2s to be between 50% to 60% of Wave 1. In our example Wave 2 = 0.6 x Wave 1
b) The most common multiples of Wave 1 to Wave 3 are the 1.62 and 2.62 numbers. (If Wave 3 is extending, we typically monitor for 4.25 or higher ratios.). In our example Wave 3 = 1.80 Wave 1
c) Wave 4 is related to Wave 3 by the following standard ratios: Wave 4 = either 24% of Wave 3, or 38% of Wave 3, or 50% of Wave 3, or 62% of Wave 3. In our example Wave 4 = 0.55 Wave 3
d) Wave 5 either = Wave 1, or = 1.62 x Wave 1, or = 2.62 x Wave 1. In our example Wave 5 = 1.61 Wave 1.

I also note that the general litterature refers to three types of corrections, namely:

Zigzags (5-3-5; includes three variations: single, double, triple);

Flats (3-3-5; includes three variations: regular, expanded, running);

Triangles (3-3-3-3-3; four types: ascending, descending, contracting, expanding);

Double threes and triple threes (combined structures).

I really need to understand these corrective waves better. However, before getting there I would like to know how to correlate these two timeframes that this technique refers to. Ok we have daily EUR/USD with Wave 1-5. We also have RSI here between 48% and 70%, nice and neat. Now can someone explain how I can relate the daily timeframe findings to hourly timeframe. Can we actually use this technique to open trades in hourly timeframe?

Thanks

First off…WOW!..lol

Yes, in Miners book he did say there are about 13 patterns just for complex corrections alone. :eek: But if you can understand the complicated approach to cycle degrees, subdivisions and alternate wave counts without getting bogged down with paralysis of analysis that so many e-waver get who can’t then be able to put it into practice, then good on you!..lol

So pardon my dismissal of most of what you said…lol…but as far as relating to a higher timeframe, my thoughts are this.

I read somewhere that one should use a factor of 4 or 5 to determine the higher time frame. So if using 15min, then also use the hourly. If using the hourly, then use the 4H. If using the daily, then closest is the weekly, and weekly would use the monthly.

So you find a good quality pattern on whichever timeframe, and bump up to the appropriate higher time frame and check it’s momentum. Hopefully you’ve got the momentum indicator’s period set on both time frames so that the swings of the momentum indicator best match the price swings on the chart.

The following setup rules apply to the indicators. Here’s a couple of terms to understand:

-A bullish reversal is when the indicator has changed from a down swing to an upswing.

• A bearish reversal is when the indicator has changed from an upswing to a down swing.

[U][B]Higher T/F = Bull direction, not Overbought[/B][/U]

On the lower timeframe, only long positions should be considered when it’s momentum indicator has made a bullish reversal. This is the ideal go long setup. The bullish momentum is now going in the same momentum direction as the higher timeframe.

[U][B]Higher T/F = Bull direction, Overbought Zone[/B][/U]

On the lower timeframe, the upside profit potential may be limited, so no new long positions should be taken. Short positions may be considered if there is a bearish reversal. It is also not a condition to exit an existing long position.

[U][B]Higher T/F = Bear direction, Not Oversold Zone[/B][/U]

On the lower timeframe, only short positions should be considered when it’s momentum indicator has made a bearish reversal. This is the ideal go short setup. The bearish momentum is now going in the same momentum direction as the higher timeframe.

[U][B]Higher T/F = Bear direction, OverSold[/B][/U]

On the lower timeframe, the downside profit potential may be limited, so no new short positions should be taken. Long positions may be considered if there is a bullish momentum reversal. It is also not a condition to exit an existing short position.

Hope that helps

[Sweet_Pip]

As correctly pointed out we need to understand the basics of Elliot Wave (ewave) technique before making inroad with this trading method.

I really need to understand these corrective waves better.

Thanks

You know where you might get more indepth insight? Try this thread 301 Moved Permanently. Maybe you can get a dialogue going with Jebatfx.

[mich]

@Sweet_Pip

You know where you might get more indepth insight? Try this thread http://forums.babypips.com/gbpjpy/10964-gbp-jpy-technical-analysis.html. Maybe you can get a dialogue going with Jebatfx.

Thanks again Sweet Pip.

I have a simple question here. Assuming that in my daily EUR/USD chart, I have seen the end of Wave 5. If there is no further consolidation to be made, it is plausible to assume that the corrective Wave A should follow. Now on the RSI at the bottom of the daily chart I have created a blue circle to mark it out. Assuming that we will be lucky and there will not be a significant EUR/USD opening gap, then on the basis of probability of repeating patterns the RSI pattern will repeat itself and RSI downtrend will continue until it hits the 63.49% RSI, which means we can go short until that value. Is this a reasonable assumption?

Thx

EURUSD_daily_20091025_RSI.pdf (57.7 KB)

[Sweet_Pip]

Thanks again Sweet Pip.

I have a simple question here. Assuming that in my daily EUR/USD chart, I have seen the end of Wave 5. If there is no further consolidation to be made, it is plausible to assume that the corrective Wave A should follow. Now on the RSI at the bottom of the daily chart I have created a blue circle to mark it out. Assuming that we will be lucky and there will not be a significant EUR/USD opening gap, then on the basis of probability of repeating patterns the RSI pattern will repeat itself and RSI downtrend will continue until it hits the 63.49% RSI, which means we can go short until that value. Is this a reasonable assumption?

Thx

Good questions There is a way to measure a potential end of wave point using fibonacci. That’s the part of the book I’m in now.

If wave 5 was at that projected completion point, [B]then[/B] I would consider shorts if the RSI in higher timeframe, say weekly, was in overbought territory and the RSI in daily time frame made a bearish reversal.

[mich]

@Sweet_Pip

Good questions There is a way to measure a potential end of wave point using fibonacci. That’s the part of the book I’m in now.

If wave 5 was at that projected completion point, then I would consider shorts if the RSI in higher timeframe, say weekly, was in overbought territory and the RSI in daily time frame made a bearish reversal.

Thanks for the tip.

Did a quick weekly EUR/USD as attached. Drew what I think is e-wave with 1-5 with Wave 5 seems to be extended. The RSI is above 70% for the first time since March 2009. Assuming that RSI on weekly is overboiught (> 70% NOT 80% as norm) and from previous daily chart where RSI was bearish, does this imply going short?

cheers

EURUSD_weekly_20091025.pdf (52.3 KB)

[Sweet_Pip]

Thanks for the tip.

Did a quick weekly EUR/USD as attached. Drew what I think is e-wave with 1-5 with Wave 5 seems to be extended. The RSI is above 70% for the first time since March 2009. Assuming that RSI on weekly is overboiught (> 70% NOT 80% as norm) and from previous daily chart where RSI was bearish, does this imply going short?

cheers

Patience grasshopper, Patience…lol…(coming from another grasshopper…me! ) You really seem to want to go short! When these patterns develop on the higher timeframe, it takes a long time to play out. It could imply going short, but we’re still missing a couple of pieces of the big picture to make it an implied high probability outcome.

[Sweet_Pip]

Good questions There is a way to measure a potential end of wave point using fibonacci. That’s the part of the book I’m in now.

If wave 5 was at that projected completion point, [B]then[/B] I would consider shorts if the RSI in higher timeframe, say weekly, was in overbought territory and the RSI in daily time frame made a bearish reversal.

Apparently if you apply the fib tool and measure from the high of wave 3 to the low of wave 4, the extended fib levels of 127.2% and 161.8% are the 2 most respected levels to find reversals. Currently, price on the daily EU has reached the 161.8% level, so yes it now has a high probability of reversing, into a corrective ABC wave pattern, or just totally reversing. Of course there is still the possibility that it may keep going higher, not all trends are 5 waves… some may be 4, some may be 6 or more…(ha ha, that rhymes…:D)

[mich]

Apparently if you apply the fib tool and measure from the high of wave 3 to the low of wave 4, the extended fib levels of 127.2% and 161.8% are the 2 most respected levels to find reversals. Currently, price on the daily EU has reached the 161.8% level, so yes it now has a high probability of reversing, into a corrective ABC wave pattern, or just totally reversing. Of course there is still the possibility that it may keep going higher, not all trends are 5 waves… some may be 4, some may be 6 or more…(ha ha, that rhymes…:D)

Agreed, thanks

If you recall on my daily plot I mentioned:

In our example Wave 5 = 1.61 x Wave 1., Wave 3 = 1.80 x Wave 1

That PDF file I attached earlier titled "Overview of Fibonacci and Elliot Wave relatioships " states

Wave 5 has two primary relationships. Wave 5 behavior has a direct correlation to the Fibonacci relationship of Wave 3.

Relationship #1- If Wave 3 is greater than 1.62 (i.e x Wave 1), or extended, Wave 5 ratios are as follows: Wave 5 either = Wave 1, or = 1.62 x Wave 1, or = 2.62 x Wave 1

Since we already have Wave 3 = 1.8 x Wave 1, I believe the condition is met.

cheers

[mich]

Yep Sweet Pip, patience is a virtue but we are not far from the close of business in London now and EUR/USD as expected has lost (as of now 4:22PM London time) 130 pips with a net loss of just under 1%. The daily plot seems to confirm the end of Wave 5. Weekly plot looks similar. I will post graphs later on.

Cheers,

Mich

[Sweet_Pip]

Yep Sweet Pip, patience is a virtue but we are not far from the close of business in London now and EUR/USD as expected has lost (as of now 4:22PM London time) 130 pips with a net loss of just under 1%. The daily plot seems to confirm the end of Wave 5. Weekly plot looks similar. I will post graphs later on.

Cheers,

Mich

Yes…I placed a short last night…beginning of London open…and as of when I left for work this morning almost an hour ago, I was up +75. I set my stop to b/e and now just going to let it ride out the wave…lol. If we are now getting into a corrective ABC pattern, there will be a lot of downside potential yet to come.

[mich]

@Sweet_Pip

Yes…I placed a short last night…beginning of London open…and as of when I left for work this morning almost an hour ago, I was up +75. I set my stop to b/e and now just going to let it ride out the wave…lol. If we are now getting into a corrective ABC pattern, there will be a lot of downside potential yet to come.

And that means hopefully more pips $$ in your pocket.

It always pays to try to work one’s way up through trial and error. I learned that since I was a University student. I agree that the greatest obstacle to knowledge is not ignorance or its dismissal, it is the illusion of knowledge (read: I know it all).

Anyway enough of that. Please check that EUR/USD hourly graph. It dropped like stone this afternoon (all time UK time).

Happy pipping.

EURUSD_hourly_20091026.pdf (34.8 KB)

[Sweet_Pip]

Amazing…lol…just checking the short eu trade now on my lunch hour and it’s +180…:eek:

[Sweet_Pip]

If anyone doesn’t understand Fibonacci, then they really need to go back to Grade 3 in the school of pipsology…Fibonacci Trading: Using Fibonacci Ratios for Forex Currency Trading

What we are going to try to do is pick the end of a trend to enter a trade, or pick the end of a correction to enter a trade. If you’re not sure what a 12345 trend or ABC corrective pattern looks like, as defined for this method, then go back a few pages, or check out Grade 10 in the school, or buy the book “High Probability Trading Strategies”…may it will explain it better than I.

Now, this part may seem like a lot of work. However, once you “see it”…lol…it is so easy. The Fib tools in a platform like MT4 takes a lot of the work out of it… all you have to do is draw a line from one point to another, and the platform will instantly calculate, & display lines at, all the prices by the fib ratios.

Ok, ok…Actually you will have to draw 3 or 4 lines for each pattern, which will give you 3-4 different sets of resulting price lines. You will find that these lines will kinda group closely together, even on top of each other. What you want to see is the tightest group that contains one key fib line from each set of fibs. This is referred to as confluence or convergence and indicates a very strong area of support or resistance.

[U]A tip to help see whether a grouping consists of lines from all the sets, I really suggest giving each set of fibs their own color.[/U]

Ok…let’s draw…

[mich]

@Sweet_Pip

If anyone doesn’t understand Fibonacci, then they really need to go back to Grade 3 in the school of pipsology…Fibonacci Trading: Using Fibonacci Ratios for Forex Currency Trading

What we are going to try to do is pick the end of a trend to enter a trade, or pick the end of a correction to enter a trade. If you’re not sure what a 12345 trend or ABC corrective pattern looks like, as defined for this method, then go back a few pages, or check out Grade 10 in the school, or buy the book “High Probability Trading Strategies”…may it will explain it better than I.

Now, this part may seem like a lot of work. However, once you “see it”…lol…it is so easy. The Fib tools in a platform like MT4 takes a lot of the work out of it… all you have to do is draw a line from one point to another, and the platform will instantly calculate, & display lines at, all the prices by the fib ratios.

Ok, ok…Actually you will have to draw 3 or 4 lines for each pattern, which will give you 3-4 different sets of resulting price lines. You will find that these lines will kinda group closely together, even on top of each other. What you want to see is the tightest group that contains one key fib line from each set of fibs. This is referred to as confluence or convergence and indicates a very strong area of support or resistance.

A tip to help see whether a grouping consists of lines from all the sets, I really suggest giving each set of fibs their own color.

Ok…let’s draw…

Hi Sweet Pip,

I try the weekly EUR/USD chart. I believe Wave 5 on this chart is complete. The Fib lines are drawn on Wave 5 as marked (1.3896 to 1.5062) and give the following Fib retracemts:

38.2% -> 1.4617
50.0% -> 1.4479
61.8% -> 1.4341

I don’t think there will be any extensions.

It is worthwhile noting the RSI that sharply pointing downwards. To make an upturn immerdiately it will need a Summersault. The current price is at 1.4867 and until the nearest Feb retracement we are talking about another 250 pips

HTH,

Mich

EURUSD_weekly_20091026.pdf (57.8 KB)

[Sweet_Pip]

There is something I’d like to clarify that may be confusing for some when reading Chapter 3 on the fib studies…and actually I’ve asked them to consider changing it because it confused me for the past 2 years I’ve been here!..

Babypips makes mention of 2 types of Fib studies…Retracements and Extensions. However, the example they give for an Extension, is what MT4 considers an Expansion. And we do too for this method.

Whether they change it or not, we will define them as this:

[B]Fib Retracements:[/B] are the [B]internal[/B] fib levels of a swing being .382, .5, .618, and 78.6.

[B]Fib Extensions: [/B] are the [B]external [/B]fib levels of a swing being 1.272, 1.618, 2,618.

[B]Fib Expansions[/B]: are both the [B]Internal and external [/B] levels of one swing, projected from another swing that goes in the same direction as the one that was measured. Actually, in the book they call these the Alternate Price Projections…APP.

[mich]

@mich

Hi Sweet Pip,

I try the weekly EUR/USD chart. I believe Wave 5 on this chart is complete. The Fib lines are drawn on Wave 5 as marked (1.3896 to 1.5062) and give the following Fib retracemts:

38.2% -> 1.4617
50.0% -> 1.4479
61.8% -> 1.4341

I don’t think there will be any extensions.

It is worthwhile noting the RSI that sharply pointing downwards. To make an upturn immerdiately it will need a Summersault. The current price is at 1.4867 and until the nearest Feb retracement we are talking about another 250 pips

HTH,

Mich

On the daily chart I see Wave 5 as depicted with 1.4838, 1.4770 and 1.4701 for Fib ratios. Now an interesting part here is the way RSI has managed to break through 63.4…% and if my assesment is correct it will go until it reaches 48.24… line. My view is (assuming that what I am saying is correct), 48.24…% should be the end of corrective Wave A when RSI is expected to turn back as uptrend for the beginning of corrective Wave B?

Cheers

EURUSD_daily_20091026.pdf (57.5 KB)

[mich]

There is something I’d like to clarify that may be confusing for some when reading Chapter 3 on the fib studies…and actually I’ve asked them to consider changing it because it confused me for the past 2 years I’ve been here!..

Babypips makes mention of 2 types of Fib studies…Retracements and Extensions. However, the example they give for an Extension, is what MT4 considers an Expansion. And we do too for this method.

Whether they change it or not, we will define them as this:

[B]Fib Retracements:[/B] are the [B]internal[/B] fib levels of a swing being .382, .5, .618, and 78.6.

[B]Fib Extensions: [/B] are the [B]external [/B]fib levels of a swing being 1.272, 1.618, 2,618.

[B]Fib Expansions[/B]: are both the [B]Internal and external [/B] levels of one swing, projected from another swing that goes in the same direction as the one that was measured. Actually, in the book they call these the Alternate Price Projections…APP.

Thanks Sweet Pip,

Actually DealBook 360 (GFT) does not also have any Extension as well. I use the software called "Forex Fibonacci Claculator V2.0 from www<DOT>forexfibonacci<DOT>com to work out the extensions.

HTH,

Mich

[wrtm_19]

Thanks Sweet Pip,

Actually DealBook 360 (GFT) does not also have any Extension as well. I use the software called "Forex Fibonacci Claculator V2.0 from www<DOT>forexfibonacci<DOT>com to work out the extensions.

HTH,

Mich

Mich, you can configure your fib extension on dealbook so you can have all these set ups set as default for every time you draw your fibs.

Just right click on your fib, select configure fib levels, and there you go, you can add as many numbers as you want.

Hope that helps.

[wrtm_19]

Sweet Pip I’m catching up with all that good stuff you’re sharing! Thanks for that.

HOpe to trade along with you guys soon!