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Human Behavioral Aspects of Support and Resistance


In the context of Forex, support and resistance have different meanings compared to their use in human geometry recognition. In Forex trading, these terms refer to price levels on a chart, but there might be some conceptual crossover when considering how traders react to these levels, which could potentially be analyzed through human behavior and geometry recognition. Here’s how these concepts apply:

1. Support and Resistance in Forex Trading
Support:
Definition: A support level in Forex is a price point where a currency pair tends to stop falling. It is often seen as a “floor” that price does not easily break below. Traders look for these levels to identify where buying interest is strong enough to prevent further declines.
Behavioral Aspect: When a currency reaches a support level, traders may react by buying, expecting the price to rebound.
Resistance:
Definition: A resistance level is a price point where a currency pair tends to stop rising. It acts like a “ceiling” that the price struggles to break above. Traders look at these levels to identify where selling pressure is strong enough to prevent further gains.
Behavioral Aspect: When a currency reaches a resistance level, traders might react by selling, expecting the price to fall back down.
2. Geometry Recognition of Human Behavior in Trading
Human Reactions to Support and Resistance:
The way traders react to these key price levels could potentially be analyzed using geometry recognition, which is more about understanding physical movements and emotional cues.
Facial and Posture Recognition: Analyzing the physical cues of traders, such as tension in facial muscles or body posture, might indicate their confidence or hesitation when prices approach support or resistance. For instance, traders may lean in or sit up straighter when a price reaches a critical level, signaling attention and anticipation.
Eye Movement: Traders’ eye movements could be tracked to see how closely they monitor price action near support and resistance. Rapid eye movements might indicate scanning for quick opportunities, while focused gazes may show intense analysis at these critical levels.
Use of Technology:
Machine Learning & AI: In trading firms, AI might be employed to recognize patterns not just on the charts but also in trader behavior, which could include reading physical cues. By identifying how traders physically react to key levels, algorithms might make predictions about market sentiment.
Behavioral Finance: This field studies how psychological factors influence trading decisions. Combining this with geometry recognition could lead to insights on how human emotions manifest during trading, especially around significant price points like support and resistance.
Practical Applications in Trading
Automated Trading Systems: Advanced trading algorithms could incorporate not just price data but also human behavioral data to make more accurate predictions. If physical cues suggest heightened anxiety or confidence, it could be an additional input for trading decisions.
Trader Performance Analysis: Geometry recognition of a trader’s movements and expressions could be used to understand how they handle stress and make decisions under pressure, especially when trading around key price levels. This could lead to improved training programs.
In conclusion, while support and resistance in Forex refer specifically to price action, there’s an interesting potential for combining these concepts with human geometry recognition. Understanding how traders physically react to these key levels could enhance trading strategies, risk management, and even automated trading systems.


https://algotrading-investment.com/2020/06/04/support-and-resistance/

Horizontal Support and Resistance


Support and resistance techniques are one of the most popular trading strategy for many day traders. Support is the price level at which buying is stronger than selling. Hence, the declining of the price below the support levels is often refused. Typically, support level is located below the current market price. Likewise, resistance is the price level at which selling is stronger than buying. Hence, the rising of the price above the resistance level is often refused. Typically, the resistance level is located above the current market price of the instrument. In fact, several support and resistance techniques are the direct pattern recognition techniques to deal with the equilibrium fractal waves in the price series. However, trader should note that not all the support resistance techniques are the valid tool to deal with the equilibrium fractal waves. For example, the pivot levels derived from the pivot analysis can be used as support and resistance for your trading. In fact, many textbook will introduce the pivot analysis as the kind of the support and resistance tool. However, consider how to derive the pivot levels from the standard pivot calculation equations below:

Pivot Point (P) = (High + Low + Close)/3
Support 1 (S1) = (P x 2) – High
Support 2 (S2) = P – (High – Low)
Resistance 1 (R1) = (P x 2) – Low
Resistance 2 (R2) = P + (High – Low)
, where High, Low and Close are the High, Low and Close of the previous candle bar.


As you can see, the median price, Pivot Point, of the previous candle bar is calculated first. Then the median price is used to derive the support and resistance 1 and 2. We can clearly see that this pivot analysis have nothing to do with any pattern recognition from your chart. It rather uses the concept of averaging and volatility from the centre of the pivot point. One can extend the standard pivot analysis using Fibonacci ratio. However, the extended pivot analysis is still not the direct pattern recognition either.


When we say the support and resistance as in the direct pattern recognition, we are talking about creating support and resistance levels by connecting peak to peak and by connecting trough to trough in your chart. For example, Figure 2-1 shows the support example on GBPUSD H4 timeframe. By connecting three troughs in the chart, we could identify the important support level and we can project the level for the next point for our trading. When the price was approaching to the support level fourth time, the price made a reversal (turning point) movement on the support level. This is what happened at least on the surface. However, what is exactly going on behind the scene? In fact, the support levels are the manifest of the propagation of the Equilibrium Fractal Wave through the price. To demonstrate the propagation of the Equilibrium Fractal Wave, we have added the Zig Zag line on each trough in Figure 2-1. When the price touches the support level each time, new triangle is added to the price wave. The price can continue like this making few more touches on the support level. Sometimes, it is common to see the support with five or more touches. In general, when the vertexes of several non-overlapping triangles are aligned through a straight line below the market price, the straight line becomes the support level.

In our first support example (Figure 2-1), we have visualized the reversal price action around the support. However, it is possible that we can have the support predicting the breakout movement instead of the reversal. For example, the USDJPY in Figure 2-2 penetrated through the support making the breakout on its fourth touch. When the price breakout below the support level, we can see that the size of the last triangle was transformed to be bigger. This is the typical price action when the new equilibrium source is introduced to the market.




Figure 2-1: Support example as in the direct pattern recognition on GBPUSD H4 timeframe.




Figure 2-2: Support Example as in the direct pattern recognition on USDJPY H4 timeframe.


Now let us have a look at the resistance example. As before, we can identify the important resistance levels by connecting peak to peak. In Figure 2-3, we have connected three peaks to identify the resistance level. The price made a reversal (turning point) in its fourth touch on the resistance level. As in the support level, the resistance levels are formed when the vertexes of the several non-overlapping triangles are aligned near the same horizontal level. In this time, the horizontal levels will be located above the market price. As in the support example, it is possible to have a breakout through the resistance too. For example, the EURUSD in Figure 2-4 made a clean breakout on its seventh touch on the resistance level. In this example, the last triangle was transformed in its size as in the support example of Figure 2-2. By summarizing both support and resistances examples, we can identify four different horizontal support and resistance patterns for your trading as shown in Table 2-1.




Figure 2-3: Resistance example as in the direct pattern recognition on GBPUSD H4 timeframe.




Figure 2-4: Resistance example as in the direct pattern recognition on EURUSD H4 timeframe.


Support and resistance Price Action Direction Example
Horizontal Support Reversal Buy Figure 2-1
Horizontal Support Breakout Sell Figure 2-2
Horizontal Resistance Reversal Sell Figure 2-3
Horizontal Resistance Breakout Buy Figure 2-4

Table 2-1: List of horizontal support and resistance patterns for your trading.



What is the main catchy behind the above support and resistance examples for our trading? In the practical trading with support and resistance levels, we are betting on the transformation of the last triangle, equilibrium fractal wave in fact. In another words, we are betting on the size of the last triangle. When you are trading with support and resistance levels, you are literally asking the questions like: Would the last triangle will transform in its size to make the breakout move? Or Would the last triangle will not transform in its size to make the reversal move? In our practical trading, how the size of the last triangle will end is the matter for our profit. If we are not using any other supplementary techniques to trade, then we can set a threshold level to trigger for buy and sell entry as shown in Figure 2-5. Y Buy and Y Sell in Figure 2-5 is the price level to trigger the buy and sell entry respectively. If the last triangle is transformed in its size, then the price will penetrate the threshold level for sell. If the last triangle is not transformed in its size, then the price will reverse back through the threshold level for buy. To measure the distance Y Buy and Y Sell, we can use few different methods. Firstly, we can define Y Buy and Y Sell in proportion of the height of the last triangle (Y Height). For example, Y Buy and Y Sell can be expressed using the following formula for Figure 2-5:

Y Buy = Proportion (%) x Y Height and

Y Sell = Proportion (%) x Y Height, where Y Height = the height of the last triangle and Proportion is fraction of the height of the last triangle expressed in percentage.


The typical proportion to calculate Y Buy and Y Sell can range from 5% to 20%. When you choose the proportion, you might have to consider few points. If you choose to use small proportion, then you might experience the false signal frequently. In addition, you might be suffering from the price pull back due to the tight stop loss. If you choose to use large proportion, then you might be reducing your reward/risk ratio. Therefore, you have to win more frequently to maintain your profits.

Another method to set the buy and sell threshold level is using the Fibonacci ratio. Again, the Fibonacci threshold level will be calculated in terms of the height of the last triangle. For example, Y Buy and Y Sell can be expressed using the following formula for Figure 2-5:

Y Buy = Fibonacci Ratio x Y Height and

Y Sell = Fibonacci Ratio x Y Height, where Y Height = the height of the last triangle and Fibonacci ratio include the typical Fibonacci ratios like 0.236, 0.382, 0.500, and 0.618, etc.


Both the proportional threshold method and the Fibonacci threshold method are valid for your entry. You can pick up one between them according to your own preferences. Fibonacci threshold method tends to provide the entry with greater distance from the stop. Hence, it should be noted that the Fibonacci threshold method could reduce your rewards/risk ratio. However, if the size of the last triangle is too small, then you might prefer to use the Fibonacci threshold method because too tight stop loss can be hunted too easily. You can set your stop loss at the support or resistance level for your trading. However, it is possible that the price can come back to the support or resistance level for retesting. It is sensible to place your stop slightly greater than the support and resistance level. Hence, the support or resistance level can be only minimum stop for your trading. You should always set your stop loss slightly greater than the minimum stop level.


https://algotrading-investment.com/2020/06/04/horizontal-support-and-resistance/

Diagonal Support and Resistance


In the financial market, we can observe the diagonal price patterns frequently. Diagonal support and resistance are the typical price patterns we can observe as the results of the combined effect of Equilibrium and Fractal Wave process. Diagonal support and resistance are not different from the horizontal support and resistance. When the connected peaks and troughs provide the diagonal slope rather than the horizontal line, then that slope can be considered as the diagonal support and resistance. However, there can be more variations comparing to the horizontal case. Firstly, we can have the ascending diagonal support and resistance. Secondly, we can also have the descending diagonal support and resistance. For your convenience, we have listed all the possible diagonal support and resistance patterns in Table 2-2. We have also listed the corresponding example for each pattern from Figure 2-6 to Figure 2-13. How to trade diagonal support and resistance levels are the same as the horizontal support and resistance. You can apply the proportional threshold method and the Fibonacci threshold method for your entry for the case of diagonal support and resistance too. The trading example is shown in Figure 2-14. How to calculate the threshold level for Y Buy and Y Sell are identical to the case of horizontal support and resistance. As in the horizontal support and resistance, it is sensible to set your stop loss level greater than the minimum stop level.

Support and resistance Price Action Direction Example
Ascending Diagonal Support Reversal Buy Figure 2-6
Ascending Diagonal Support Breakout Sell Figure 2-7
Ascending Diagonal Resistance Reversal Sell Figure 2-8
Ascending Diagonal Resistance Breakout Buy Figure 2-9
Descending Diagonal Support Reversal Buy Figure 2-10
Descending Diagonal Support Breakout Sell Figure 2-11
Descending Diagonal Resistance Reversal Sell Figure 2-12
Descending Diagonal Resistance Breakout Buy Figure 2-13
Table 2-2: List of diagonal support and resistance patterns for your trading.



Figure 2-6: Support example as in the direct pattern recognition on EURUSD H4 timeframe.



Figure 2-7: Support example as in the direct pattern recognition on EURUSD H4 timeframe.



Figure 2-8: Resistance example as in the direct pattern recognition on EURUSD H4 timeframe.



Figure 2-9: Resistance example as in the direct pattern recognition on EURUSD D1 timeframe.



Figure 2-10: Support example as in the direct pattern recognition on EURUSD H4 Timeframe.



Figure 2-11: Support example as in the direct pattern recognition on EURUSD H4 Timeframe.



Figure 2-12: Resistance example as in the direct pattern recognition on EURUSD H4 timeframe.



Figure 2-13: Resistance example as in the direct pattern recognition on GBPUSD H4 timeframe.



Figure 2-14: Resistance Trading example as in the direct pattern recognition on GBPUSD H4 timeframe.


https://algotrading-investment.com/2020/06/04/diagonal-support-and-resistance/

Horizontal and Diagonal Support Resistance Explained


In Forex trading, understanding and correctly identifying support and resistance levels is crucial for making informed trading decisions. These levels help traders anticipate where the price might encounter obstacles and potentially reverse or break through, influencing entry and exit points in trades. Support and resistance can be either horizontal or diagonal, each type playing a significant role in technical analysis.


1. Horizontal Support and Resistance
Horizontal support and resistance levels are the most common types used by traders. These levels are drawn across historical price points that have repeatedly acted as a barrier to price movement, either on the downside (support) or the upside (resistance).

Horizontal Support:
Definition: A horizontal support level is a price level where the price tends to stop falling and reverse direction. It represents a concentration of buying interest strong enough to prevent the price from moving lower.
Characteristics:
Price Floor: Acts like a floor preventing the price from dropping further.
Multiple Touches: The more times a price level is tested without being breached, the stronger it is considered as support.
Psychological Levels: These are often found at round numbers (e.g., 1.2000 on the EUR/USD pair), which tend to be psychologically significant to traders.
Horizontal Resistance:
Definition: A horizontal resistance level is a price level where the price tends to stop rising and reverse direction. It represents a concentration of selling interest strong enough to prevent the price from moving higher.
Characteristics:
Price Ceiling: Acts like a ceiling preventing the price from moving higher.
Reversal Points: Like support, multiple touches at a resistance level without breaching it signify its strength.
Psychological Resistance: Resistance levels can also be at psychological round numbers, often where traders set sell orders or take profits.
Trading Strategies with Horizontal Support and Resistance:
Range Trading: In a ranging market where the price moves between horizontal support and resistance levels, traders can buy at support and sell at resistance.
Breakout Trading: When the price breaks above a resistance level or below a support level, it can signal the start of a new trend. Traders might enter a position in the direction of the breakout.
False Breakouts: Traders can also anticipate false breakouts where the price temporarily breaches support or resistance but then quickly returns, indicating a failed breakout and potential reversal.


2. Diagonal Support and Resistance

Diagonal support and resistance, often referred to as trendlines, are sloped lines that represent dynamic levels of support and resistance. Unlike horizontal levels that stay constant, diagonal lines move in the direction of the trend.

Diagonal Support (Uptrend Line):
Definition: A diagonal support level is a sloping line that is drawn along a series of ascending lows in an uptrend. It acts as a support level where the price tends to bounce higher.
Characteristics:
Trend Indicator: Diagonal support indicates an uptrend, with higher lows suggesting increased buying interest at higher price levels over time.
Line of Ascending Lows: Drawn by connecting at least two lows in an uptrend; more points of contact strengthen the trendline.
Dynamic Support: As it slopes upwards, the support level rises over time, indicating bullish momentum.
Diagonal Resistance (Downtrend Line):
Definition: A diagonal resistance level is a sloping line that is drawn along a series of descending highs in a downtrend. It acts as a resistance level where the price tends to reverse lower.
Characteristics:
Trend Indicator: Diagonal resistance indicates a downtrend, with lower highs suggesting decreased buying interest and increased selling pressure at lower price levels.
Line of Descending Highs: Drawn by connecting at least two highs in a downtrend; more points of contact strengthen the trendline.
Dynamic Resistance: As it slopes downwards, the resistance level falls over time, indicating bearish momentum.
Trading Strategies with Diagonal Support and Resistance:
Trend Following: Traders might enter long positions when the price bounces off a diagonal support line in an uptrend, or enter short positions when the price reverses down from a diagonal resistance line in a downtrend.
Breakout Strategy: A break above diagonal resistance in a downtrend or below diagonal support in an uptrend might indicate a trend reversal or acceleration.
Retest Strategy: After a breakout of a diagonal trendline, the price often retests the trendline, now acting as a support or resistance. This can provide a secondary entry point for traders.


3. Combining Horizontal and Diagonal Support and Resistance

Confluence Zones: When horizontal and diagonal support or resistance levels converge at a similar price point, it forms a confluence zone. These areas are considered stronger because they combine two different types of support/resistance, making them key levels to watch for potential reversals or breakouts.
Example Strategy: If the price is near a horizontal support level that aligns with a diagonal support line (uptrend line), this could be a strong buying signal as it suggests a stronger support zone.


https://algotrading-investment.com/2020/06/04/identification-of-support-and-resistance-with-the-template-and-pattern-approach/

Practical Trading with Equilibrium Fractal Wave (EFW) Channel


Trading with the EFW channel is almost identical to the support and resistance trading. The main trading principle is that we are betting on the potential size of the equilibrium fractal wave. If the equilibrium fractal wave does not extend, the price will make the reversal movement. If the equilibrium fractal wave extends due to any surprise in the market, then the price will likely to show the breakout movement. To catch either reversal or breakout move, we can apply the threshold approach again from the concept of support and resistance trading in the previous chapter as shown in Figure 3-17 and Figure 3-18. Figure 3-17 shows the trading setup for the bearish turning point. Figure 3-18 shows the trading setup for the strong bullish momentum with the upwards EFW Channel. Trader can use the proportional approach to execute buy and sell. Since we are dealing with angle, it is much easier to use the proportional approach. To calculate the trigger level for buy and sell, we can use the same formula as before:

Y Buy = Proportion (%) x Y Height and

Y Sell = Proportion (%) x Y Height, where Y Height = the height of the channel and Proportion is fraction of the height of the channel expressed in percentage.

Some proportions you can use include 20% and 30% for your trigger level. You can even use greater proportion like 50% if you wish. The upper and lower channel lines can be used as the minimum stop loss level. To avoid the tight stop loss, you should always have the greater stop loss size than the minimum stop loss level. You can set the take profit according to your preferred rewards/risk level. With the EFW channel, it is possible to achieve Reward/Risk ratio greater than 3. We also show some trading examples in Figure 3-19, 2-20, 2-21 and 2-22.

Figure 3-17: EFW Upwards Channel trading setup for the bearish turning point.

Figure 3-18: EFW Upwards Channel trading setup for strong bullish momentum.

Figure 3-19: EFW Upwards channel sell trading setup on EURUSD D1 timeframe.


Figure 3-20: EFW Upwards channel buy trading setup on EURUSD H4 timeframe.

Figure 3-21: EFW Downwards channel buy trading setup on EURUSD D1 timeframe.

Figure 3-22: EFW Downwards channel sell trading setup on EURUSD D1 timeframe.


Some More Tips about Fractal Wave Channel

Using a Fractal Wave Channel in Forex trading involves applying the broader idea of fractals and wave analysis to identify and trade within price channels. This approach focuses on the fractal nature of market movements and the identification of wave patterns.

Key Concepts of Fractal Wave Channel
1. Understanding Market Fractality
Fractals in Nature: In the context of trading, fractals refer to the self-similar patterns that repeat at different scales within the market. These patterns can be seen on various timeframes and reflect the underlying market structure.
Wave Patterns: Price movements are composed of waves that can be analyzed at different levels or degrees. These waves are fractal in nature, meaning smaller waves are part of larger waves, and this repetition can be exploited to identify trends and trading opportunities.
2. Identifying Wave Patterns
Impulse Waves: Strong directional movements that typically consist of five sub-waves. These indicate the direction of the primary trend.
Corrective Waves: Counter-trend movements usually composed of three sub-waves. They represent pauses or corrections within the overall trend.
Connecting Waves: By identifying key turning points in these waves, traders can create channels that represent the boundaries of price movement.
3. Drawing the Fractal Wave Channel
Step 1: Identify Key Highs and Lows: Look for significant turning points in the market where price changes direction, forming peaks (highs) and troughs (lows). These points will help in constructing the channel.
Step 2: Connect Peaks and Troughs: Draw a line connecting the significant peaks (for the upper channel) and a line connecting the significant troughs (for the lower channel). This forms the Fractal Wave Channel.
Step 3: Extend the Channel: Project these lines forward to form a channel within which you expect the price to oscillate.


https://algotrading-investment.com/2020/06/04/practical-trading-with-equilibrium-fractal-wave-efw-channel/

Superimposed Equilibrium Fractal Waves


Third characteristic of equilibrium fractal wave is that smaller equilibrium fractal waves can combine to form a bigger equilibrium fractal wave (superimposed). This third characteristic is often used by a professional trader to improve the predictability of the financial market. For example, instead of puzzling with a set of small equilibrium fractal waves, it is much more accurate to puzzle with both small and big equilibrium fractal waves together to predict the market direction. Now we show some examples of our reversal prediction using this superimposed equilibrium fractal waves. In Figure 3-23 and Figure 3-24, a large Equilibrium fractal wave is overlapping with a small equilibrium fractal wave. We can make the bullish reversal prediction after the last candle is completed. Making the prediction based on the two Equilibrium fractal waves can increase the probability of winning marginally over just using one equilibrium fractal wave.



Figure 3-23: Superimposed Equilibrium fractal wave for bullish reversal trading setup (EURUSD D1).



Figure 3-24: Superimposed Equilibrium fractal wave for bullish reversal trading setup (EURUSD H1).

Likewise, we can use these superimposed equilibrium fractal waves to make the bearish reversal prediction too as shown in Figure 3-25 and Figure 3-26. You can even use three or four equilibrium fractal waves for your prediction. However, the superimposed patterns with three or four equilibrium fractal waves are rare. If they do appears then they can provide a good trading opportunity.



Figure 3-25: Superimposed Equilibrium fractal wave for bearish reversal trading setup (EURUSD H1).



Figure 3-26: Superimposed Equilibrium fractal wave for bearish reversal trading setup (EURUSD M15).

Trader should not assume that he could predict the reversal every time. Increased probability does not mean that you are guaranteed to be right every time. Based on the second characteristic of Equilibrium fractal wave, extension, the price can still penetrate these superimposed equilibrium fractal waves for the breakout opportunities. When they do, they can penetrate the superimposed level with even higher energy than the level projected by single equilibrium fractal wave. To trade with the superimposed level, you have to project the shape ratios from several equilibrium fractal waves in advance. Once you can identify the overlapping level between several Equilibrium fractal waves, you can trade for the breakout opportunity. When you trade the breakout opportunity, you can use the idea of trigger level we taught you before in the support and resistance trading.


https://algotrading-investment.com/2020/06/04/superimposed-equilibrium-fractal-waves/

Introduction to the Wave Principle


Ralph Nelson Elliott was one of very first person who believed that he could predict the stock market by studying the repeating price patterns in the price series. The Wave Principle from Elliott states that the wave patterns in different scales are repeating and superimposing on each other forming complex wave patterns. If harmonic pattern directly focuses on the short patterns made up from five points, the Wave Principle, developed by Ralph Nelson Elliott, describe how the financial market evolve to meet the equilibrium with the repeating wave patterns, equilibrium fractal waves. The advantage of Elliott Wave theory is that it is comprehensive as the theory provides multiple trading entries on different market conditions. With Elliott Wave theory, traders can perform both momentum trading and mean reversion trading. The disadvantage of Elliott Wave theory is that it is more complex comparing to other trading techniques. In addition, there are still some loose ends in detecting Elliott wave patterns. For this reason, many traders heavily criticize the lack of scientific methods of counting Elliott Waves.

Elliott Wave theory received good attention from many traders and investors for several decades. Elliott Wave theory is a useful technique to deal with the financial market with the dominating Equilibrium Fractal-Wave process. For the financial market with strong Equilibrium Wave process (2nd, 3rd and 4th columns in the Price Pattern Table), traders must use alternative methodology over Elliott Wave techniques because Elliott Wave Theory is not meant to deal with Wave process. Seasonality or other cyclic fluctuations can be dealt better with other techniques. For example, Seasonal Exponential Smoothing, Fourier Transform, Principal Component Analysis or Wavelet Transformation might do better job for such a case. Some literature review and empirical research can yield helpful insight on which market trader can trade better with Elliott Wave Theory. In our Book, we will introduce the fundamentals of the Wave Principle. At the same time, we will introduce the template and pattern approach towards more scientific wave counting for traders.

The Wave Principle states that the crowd or social behaviour follows a certain wave patterns repeating themselves. The Wave Principle identifies two wave patterns. They are impulse and corrective wave. Often, the term impulse wave is interchangeably used with the motive wave. Two terms are identical. Both motive and impulse wave progress during the main trend phase whereas the corrective wave progress during the corrective phase against the main trend. In general, the Impulse Wave has a five-wave structure, while the Corrective Wave have a three-wave structure (Figure 5-1). It is important to understand that these wave structures can override on smaller wave structure to form greater wave cycle (Figure 5-2). Elliott Wave theory is useful in identifying both trend market and correction market. As the Elliott Wave Theory already assumes that price progresses in the Fractal-Wave form, they do not suffer from lagging of price like the smoothing algorithm based technical indicators do.


https://algotrading-investment.com/2020/06/04/introduction-to-the-wave-principle/

Scientific Wave Counting with the Template and Pattern Approach


Elliott Wave theory can be beneficial to predict the market movement if they are used correctly. Junior traders are often fear to use Elliott Wave because their complexity. From my experience, Elliott wave is not a rocket science, anyone can probably learn how to use the technique with some commitment. However, not all the book and educational materials will teach them in the scientific way. If we are just looking at the three rules from the original Wave principle only, then there are definitely some rooms where subjective judgement can play in our wave counting. This makes starters to give up the Elliott Wave practice too quickly. Fortunately, there are some additional tools to overcome the subjectivity in our wave counting. First tool but the most important tool is definitely the three wave rules from the original Wave Principle. They can be used as the most important guideline for the wave counting. Below we describe the three rules:

Rule 1: Wave 2 can never retrace more than 100 percent of wave 1.

Rule 2: Wave 4 may never end in the price territory of wave 1.

Rule 3: Out of the three impulse waves (i.e. wave 1, 3 and 5), wave 3 can never the shortest.

Second tool is the Fibonacci ratio. As in the Harmonic pattern detection, Fibonacci ratio can play an important role in our wave counting because they describe the wavelength of each wave in regards to their neighbouring wave. For example, the following relationship is often found among the five wave of the impulse wave. Depending on which wave is extended among wave one, three and five, the Fibonacci ratios are different. Most of time, the extension of wave 3 is most frequently observed in the real world trading.



Figure 5-3: Fibonacci relationship of impulse wave structure.

Unless wave 1 is extended, wave 4 often divides five impulse waves into the Golden Section. If the wave 5 is not extended, the price range from the starting point of wave 1 to the ending point of wave 4 make up 61.8% of the overall height of the impulse wave. If wave 5 is extended, then the price range from the starting point of wave 1 to the ending point of wave 4 make up 38.2% of the overall height of the impulse wave. These two rules are rough guideline. Sometime, trader can observe some cases where these two rules are not hold true. Personally, I normally place the Fibonacci ratio relationship in Figure 5-3 before this Golden Section rule. However, the priority between these two rules might depend on the preference of traders.



Figure 5-4: Golden Section division rule with wave 4.

For the case of the three waves in the corrective wave, typical Fibonacci ratios are shown in Figure 5-5. The corrective wave is often retrace 61.8% or 32.8% against the size of previous impulse wave. In general, Elliott suggested that corrective wave 2 and wave 4 have the alternating relationship. If wave 2 is simple, then wave 4 is complex. Likewise, if wave 2 is complex, then wave 4 is simple. A “Simple” correction means only one wave structure whereas a “Complex” correction means three corrective wave structures. Furthermore, if wave 2 is sharp correction, then wave 4 can be sideways correction. Likewise, if wave 2 is sideways correction, then wave 4 can be sharp correction.


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Some More Tips about Impulse Wave Structural Score and Corrective Wave Structural Score


In Elliott Wave Theory, the Impulse Wave Structural Score (IWSS) and the Corrective Wave Structural Score (CWSS) are advanced analytical tools that help traders evaluate the quality and reliability of impulsive and corrective wave patterns. These scores aim to quantify the structural integrity of the waves, aiding in accurate wave identification and forecasting.

Impulse Wave Structural Score (IWSS)


Concept
The IWSS measures the structural integrity and adherence of an impulsive wave (waves 1, 3, 5) to Elliott Wave principles. It assesses how well the wave sequence fits the characteristics of a typical impulsive wave.

Components
Wave Formation: Consistency with the 5-wave structure (1, 2, 3, 4, 5).
Wave Relationships: Fibonacci relationships between waves, especially between Wave 2 and Wave 4 retracements and Wave 1, 3, and 5 extensions.
Wave Proportions: Proportionality and symmetry among waves.
Wave Behavior: Price action and momentum characteristics typical of impulsive waves.
Calculation
The IWSS can be calculated by scoring each component on a scale (e.g., 0 to 10) and then combining these scores to derive a total score. Higher scores indicate a stronger and more reliable impulsive wave structure.

Example Scoring Criteria:

Wave Formation:

Perfect 5-wave structure
Minor deviations
Significant deviations

Wave Relationships:

Close adherence to Fibonacci levels
Moderate adherence
Poor adherence
Wave Proportions:
Well-proportioned waves
Moderately proportioned waves
Poorly proportioned waves
Wave Behavior:
Strong momentum and clear price action
Moderate momentum and price action
Weak momentum and unclear price action

Application

High IWSS: Indicates a strong and reliable impulsive wave, suitable for trading continuation strategies.
Low IWSS: Suggests potential wave misidentification or weak impulsive structure, warranting caution or re-evaluation.


Corrective Wave Structural Score (CWSS)

Concept

The CWSS measures the structural integrity of a corrective wave (waves A, B, C) within the Elliott Wave framework. It evaluates how well the wave sequence conforms to typical corrective wave patterns.

Components

Wave Formation: Adherence to the 3-wave structure (A, B, C).
Wave Relationships: Fibonacci relationships and retracement levels.
Wave Patterns: Common corrective patterns (e.g., zigzag, flat, triangle).
Wave Behavior: Price action and momentum characteristics typical of corrective waves.

Calculation

Similar to IWSS, the CWSS can be calculated by scoring each component and deriving a total score. Higher scores indicate a stronger and more reliable corrective wave structure.


Example Scoring Criteria:


Wave Formation:

Perfect 3-wave structure
Minor deviations
Significant deviations
Wave Relationships:
Close adherence to Fibonacci retracements
Moderate adherence
Poor adherence
Wave Patterns:
Well-defined corrective patterns
Moderately defined patterns
Poorly defined patterns


Wave Behavior:

Typical corrective behavior
Moderate corrective behavior
Atypical corrective behavior

Application

High CWSS: Indicates a strong and reliable corrective wave, suitable for trading reversal or continuation strategies.
Low CWSS: Suggests potential wave misidentification or weak corrective structure, warranting caution or re-evaluation.


https://algotrading-investment.com/2020/06/04/impulse-wave-structural-score-and-corrective-wave-structural-score/

Channelling Techniques with Elliott Wave


During the development of the Wave Principle, Elliott suggested that channelling technique could be useful devise to anticipate the future wave movement. Elliott developed the three channelling techniques when Wave 2, 3 and 4 is completed respectively. We explain the steps of drawing the channels from the case of wave 2 completion to wave 4 completion.

When wave 2 is completed, trader can draw the first upper channel line and base line to anticipate the location of wave 3 (Figure 5-14). Drawing upper channel line is simple. Firstly, draw the base line by connecting the starting point of wave 1 and the ending point of wave 2. Then draw the parallel line to the first base line passing through the ending point of wave 1. Elliott suggested that wave 3 can be completed near the first upper channel line. Practically speaking, this upper channel line provides only the rough guideline for the location of the wave 3. Wave 3 can be completed below or above this upper channel line.

When wave 3 is completed, we can draw second upper channel line and base line to anticipate wave 4 (Figure 5-15). Firstly, draw second upper channel line by connecting the ending point of wave 1 and the starting point of wave 3. Then draw second base line parallel to the new upper channel line passing through the ending point of wave 2. The second base line can be used to anticipate the rough location of wave 4.

When wave 4 is completed, we can draw the final base line and upper channel line to anticipate the rough location of wave 5 (Figure 5-16). Firstly, draw new base line by connecting the ending point of wave 2 and wave 4. Then draw the final upper channel line parallel to the final base line passing through the starting point of wave 3. With the new upper channel line, trader can anticipate the rough location of wave 5.



Figure 5-14: Drawing base line and upper channel line when wave 2 is completed.



Figure 5-15: Drawing base line and upper channel line when wave 3 is completed.



Figure 5-16: Drawing base line and upper channel line when wave 4 is completed.



Some More Tips about Channelling Techniques with Elliott Wave


Channelling techniques with Elliott Wave in forex trading involve using trend channels to help identify and confirm the wave structures, target potential price movements, and manage trades more effectively. This method enhances the understanding and application of Elliott Wave Theory by providing visual boundaries within which the waves operate.

Elliott Wave Theory Recap

Basic Structure
Impulsive Waves:
Consist of five sub-waves (labeled 1, 2, 3, 4, 5) that move in the direction of the primary trend.
Corrective Waves:
Consist of three sub-waves (labeled A, B, C) that move against the primary trend.
Principles
Wave 1, 3, and 5: Move in the direction of the trend.
Wave 2 and 4: Are corrective and move against the trend.
Wave A, B, and C: Form the corrective phase following the impulsive wave.
Channelling Techniques
Concept
Channelling techniques involve drawing parallel lines (channels) around price movements to help identify the boundaries within which Elliott Waves develop. These channels help traders visualize the wave structure and set potential targets and stop-loss levels.

Types of Channels
Standard Channels:
Drawn by connecting the ends of impulse waves and extending them forward.
Base Channels:
Constructed at the start of a new trend by connecting the beginning of Wave 1 and the end of Wave 2 and projecting a parallel line from the end of Wave 1.
Acceleration Channels:
Used when the trend accelerates, drawn by connecting the end of Wave 2 and Wave 4 and projecting a parallel line from the end of Wave 1.
Deceleration Channels:
Used when the trend decelerates, drawn by connecting the end of Wave 3 and Wave 5 and projecting a parallel line from the end of Wave 4.


https://algotrading-investment.com/2020/06/04/channelling-technique-elliott-wave/

Some Useful Articles about understanding Equilibrium Fractal Wave

If you want to become a successful trader, understanding Fractal Wave is a must. Below articles explains the general characteristics of Equilibrium Fractal Wave. In addition, these articles explains how to use the general characteristics of Fractal Wave for your trading.

● Introduction to EFW Index for trading

https://algotrading-investment.com/2020/06/04/introduction-to-efw-index-for-trading/

● Trading with the Shape ratio of Equilibrium Fractal Wave

https://algotrading-investment.com/2020/06/04/trading-with-the-shape-ratio-of-equilibrium-fractal-wave/

● Introduction to Equilibrium Fractal Wave (EFW) Channel

https://algotrading-investment.com/2020/06/04/introduction-to-equilibrium-fractal-wave-efw-channel/

● Practical Trading with Equilibrium Fractal Wave (EFW) Channel

https://algotrading-investment.com/2020/06/04/practical-trading-with-equilibrium-fractal-wave-efw-channel/

● Superimposed Equilibrium Fractal Waves

https://algotrading-investment.com/2020/06/04/superimposed-equilibrium-fractal-waves/

● Combining the Shape Ratio Trading and (EFW) Channel

Elliott Wave Trading

The purpose of Elliott Wave Trading is to use the patterns of price movements that reflect the psychology and sentiment of investors to forecast market trends and identify potential entry and exit points for trading. To use this sophisticated tools, you need to understand what Elliott Wave Theory is. Ralph Nelson Elliott was one of very first person who believed that he could predict the stock market by studying the repeating patterns in the price series. To prove this idea, he created the Wave Principle. Many years later, the Wave Principle was reintroduced in the Prechter’s Elliott Wave books to investors. The Wave Principle states that the wave patterns are repeating and superimposing on each other forming complex wave patterns. The advantage of Elliott Wave theory is that it is comprehensive as the theory can provide multiple trading entries on different market conditions. Elliott Wave theory can be used for both momentum trading and mean reversion trading. The disadvantage of Elliott Wave theory is that it is more complex comparing to other trading techniques. In addition, there are still some loose ends in detecting Elliott wave patterns. For this reason, many traders heavily criticize the lack of scientific methods of counting Elliott Waves.

The Wave Principle states that the crowd or social behaviour follows a certain wave patterns repeating themselves. The Wave Principle identifies two wave patterns. They are impulse and corrective wave. Often, the term impulse wave is interchangeably used with the motive wave. Two terms are identical. Both motive and impulse wave progress during the main trend phase whereas the corrective wave progress during the corrective phase against the main trend. In general, the Impulse Wave has a five-wave structure, while the Corrective Wave has a three-wave structure. It is important to understand that these wave structures can override on smaller wave structure to form greater wave cycle. Elliott Wave theory is useful in identifying both trend market and correction market.

Elliott Wave theory can be beneficial to predict the market movement if they are used correctly. Junior traders are often fear to use Elliott Wave because their complexity. From my experience, Elliott wave is not a rocket science, anyone can probably learn how to use the technique with some commitment. However, not all the book and educational materials will teach them in the scientific way. If we are just looking at the three rules from the original Wave principle only, there are definitely some rooms where subjective judgement can play in our wave counting. This makes the starters to give up the Elliott Wave Theory quickly. Fortunately, there are some additional tools to overcome the subjectivity in our wave counting. First tool but the most important tool is definitely the three wave rules from the original Wave Principle. They can be used as the most important guideline for the wave counting. Below we describe the three rules:

• Rule 1: Wave 2 can never retrace more than 100 percent of wave 1.
• Rule 2: Wave 4 may never end in the price territory of wave 1.
• Rule 3: Out of the three impulse waves (i.e. wave 1, 3 and 5), wave 3 can never the shortest.

Second tool is the Fibonacci ratio. As in the Harmonic pattern detection, Fibonacci ratio can play an important role in our wave counting because they describe the wavelength of each wave in regards to their neighbouring wave. For example, the following relationship is often found among the five wave of the impulse wave. Depending on which wave is extended among wave one, three and five, the Fibonacci ratios are different. Most of time, the extension of wave 3 is most frequently observed in the real world trading.

Unless wave 1 is extended, wave 4 often divides five impulse waves into the Golden Section. If the wave 5 is not extended, the price range from the starting point of wave 1 to the ending point of wave 4 make up 61.8% of the overall height of the impulse wave. If wave 5 is extended, then the price range from the starting point of wave 1 to the ending point of wave 4 make up 38.2% of the overall height of the impulse wave. These two rules are rough guideline. Sometime, trader can observe some cases where these two rules are not hold true. Personally, I normally place the Fibonacci ratio relationship before this Golden Section rule. However, the priority between these two rules might depend on the preference of traders.

The corrective wave is often retrace 61.8% or 32.8% against the size of previous impulse wave. In general, Elliott suggested that corrective wave 2 and wave 4 have the alternating relationship. If wave 2 is simple, then wave 4 is complex. Likewise, if wave 2 is complex, then wave 4 is simple. A “Simple” correction means only one wave structure whereas a “Complex” correction means three corrective wave structures. Furthermore, if wave 2 is sharp correction, then wave 4 can be sideways correction. Likewise, if wave 2 is sideways correction, then wave 4 can be sharp correction.

Below articles will provide a guide to count Elliott Wave using scientific approach. Applying the scientific approach helps to reduce the subjectivity involved in Elliott Wave counting. Hence, you can reproduce your trading outcome over and over.

● Introduction to the Wave Principle

https://algotrading-investment.com/2020/06/04/introduction-to-the-wave-principle/

● Scientific Wave Counting with the Template and Pattern Approach

https://algotrading-investment.com/2020/06/04/scientific-wave-counting-with-the-template-and-pattern-approach/

● Impulse Wave Structural Score and Corrective Wave Structural Score

https://algotrading-investment.com/2020/06/04/impulse-wave-structural-score-and-corrective-wave-structural-score/

● Channelling Techniques

https://algotrading-investment.com/2020/06/04/channelling-technique-elliott-wave/

Breakout Trading with Fractal Wave and Stochastic Cycles


Statistical regularity is useful to set the basic rational for our trading. Turning point probability is the good statistical regularity detection tool to go with most of the price action strategies. First reason for this is simply that turning point probability was invented for the financial trading. Second reason is that turning point probability was invented for predicting Fractal wave in their original purpose. In the previous chapter, we have shown how to use this statistical regularity to predict the reversal movement in your trading. As you might guess, it is possible to use the same trading idea for the case of the breakout. This idea is hardly not surprising if you just understand how the probability works. For example, in the reversal trading, we were looking for the mother wave at its mature development stage. The mature mother wave is often found in the high probability area.

In case of breakout trading, we just need to reverse this logic. For example, we just need to look for the mother wave at its early formation stage. The young and fresh mother wave is likely to be found in the low probability area in the probability graph. To help your understanding on this, we provide some examples in Figure 4.9-1 and Figure 4.9-2. Figure 4.9-1 shows the probability graph drawn from the trough. When the turning point probability graph is drawn from the trough, we will look for bullish breakout in the low probability area. Then we can look for bearish turning point (i.e. reversal) in the high probability area.



Figure 4.9-1: Bullish breakout and bearish reversal example

Figure 4.9-2 shows the probability graph drawn from the peak. When the turning point probability graph is drawn from the peak, we will look for bearish breakout in the low probability area. Then, we can look for bullish turning point (i.e. reversal) in the high probability area.



Figure 4.9-2: Bearish breakout and bullish reversal example

The key point to detect the good breakout opportunity is to detect the young and fresh mother wave with reasonably low turning point probability. Although it is not easy to pin point the exact cut-off, the probability should be below 50%. I guess the 60% probability could be the maximum to detect the mother wave at its early formation stage.

As in the case of the reversal trading, we will be making the trading decision using two steps below for breakout trading:

Step 1: Detect statistical regularity in price series

Step 2: Confirm the statistical regularity with geometric regularity

In step 1, we will be detecting the mother wave with relatively low probability. In step 2, we could apply several different methods to detect the geometric regularity. For example, some candidate methods for step 2 can include support and resistance, Fibonacci retracement, Elliott Wave theory, Triangle and other price action strategies. In fact, your knowledge of Elliott wave trading could be useful in this case because detecting the breakout point after the first child wave is very similar to riding the Wave 3 during the Elliott Wave 123 pattern formation. However, Elliott wave theory could be complex for some audience. Hence, we will not use them in this book. For the demonstration purpose, we will be using the simple support and resistance to detect geometric regularity in step 2. Support and resistance method is an effective tool to detect geometric regularity.

Let us begin with some bullish example first. When we detect the mother wave for the breakout, it should have the first child wave identified in the low probability region. In Figure 4.9-3, we show an example of mother wave detected at 32.8%. You can tell that amplitude of the first child wave is 32.8%. We can draw the breakout line on top of the first child wave. This is step 1.



Figure 4.9-3: Bullish breakout trading example in USDJPY H1 timeframe (Step 1)

Now in step 2, we will be looking for some valid resistance line. To find the resistance line, we need to look back to find a higher peak. With the higher peak, the peak of first child wave can form a resistance line. The important point here is that to look at the gap between the breakout line and resistance line. The gap indicates the angle of resistance line in regards to the breakout line.



Figure 4.9-4: Bullish breakout trading example in USDJPY H1 timeframe (Step 2)

If you inspect the chart carefully, you will find that the resistance line provides the upper outline of triangle pattern. Hence, the breakout is in fact identical to the triangle breakout. In classic triangle breakout, your entry might start after the price moved outside the triangle. However, we recommend using the breakout line drawn from the first child wave for your entry. Additionally, watch out the angle of the resistance line. It is better if the resistance line is close to the peak of the first child wave rather than the trough of the first child wave. This is only rule of thumb though.

https://algotrading-investment.com/2020/05/29/breakout-trading-with-fractal-wave-and-stochastic-cycles/

The Concept behind the Pattern Completion Zone (PCZ)


Pattern Completion Zone or Pattern Completion Interval is the emerging concept first introduced from this book. The concept was born after the extensive computerized research in tradable patterns in the financial market conducted by myself. Therefore, not many traders are aware of its existence yet. As you read this book, you will find out that it is extremely useful concept for your harmonic pattern trading. At the same time, the concept is not a rocket science. The concept is simple enough for any average trader for their practical trading. To understand the concept of the Pattern Completion Interval, we shall understand the term approximation first. Of course, everyone know the literal meaning of approximation. However, technically speaking, approximation make quite big influence every day in our life, but many people will not notice its impact unless you are the math geek crunching numbers all day in your job.

Whether you agree or not, approximation arises naturally every day in our life. There can be plenty of examples but we shall start with most intuitive one. Let us use the sprint record of Usain Bolt to learn about approximation. The record-breaking sprint of Usain Bolt was the popular coverage in many Newspapers during the 2016 Olympics since he was winning his third gold medal in 100 meter sprint. Here is simple but interesting three numbers about Usain Bolt, the fastest man in the world.

Height: 1.96 meters (6 foot 5 inches)

Distance: 100 meters

Time: 9.58 seconds

These three numbers can be true but maybe not. I am not suspecting about legitimacy of Usain Bolt’s record like the drug test results in the Olympics. I am pointing out that the measuring instrument, whoever measured, can only approximately measure these numbers up to certain degree. It is not because the measuring person did his job poorly but just because the instrument have own limitation to measure these numbers. For example, the sprint time might be 9.5823 seconds instead of 9.58 seconds. Maybe expressing it into 9582.3 milliseconds, we can be slightly more precise. However, still we are not dead accurate. To be dead accurate, we need infinite number of decimals to describe these numbers. This is impossible. Most of time, we will always approximate regardless of what measurement unit we are using. Likewise, the height of Usain Bolt is only the approximation too. Precisely speaking it is impossible to tell if he is 1.963 meter tall or 1.962 meter tall. Besides the height and time approximation, you can probably find many other approximation examples in our daily life like weight, speed, calories, etc.

Here is another example. From your High School, you will probably remember pi, the ratio of a circle’s circumference to its diameter up to 2 decimal places as 3.14. Once again, this is only approximation. Some scientists remember it up to five decimal places as 3.14159 if they work frequently with pi. In fact, even if we use 50 decimal places to describe it as:

pi = 3.14159265358979323846264338327950288419716939937510,

we are only approximating it. By now, you should realize that countless approximation influence in and out of your life. One negative example might be that my classmate in my old university in the United Kingdom, failed to achieve the First Class honor since his overall score was only 69.4. In British degree system, First Class honor is granted to the students achieving the overall score over 70. First class honor is the highest grade they can achieve under the British degree system. At the same time, the other mate scored 69.6 earned First Class honor. Apparently, the academic satisfaction for these two friends were very different. Even after graduate, when they find jobs or when they get married, when they do business, these Second Class and First Class label will definitely stick with them. Now you can probably imagine that our world is not as pretty and square as you think. Well the same thing goes to scanning of Harmonic Patterns from your chart too.

Pattern Completion interval build its concept over the approximation but nothing else. It is in fact based on the assumption that the measured ratio in the harmonic patterns are only an approximation. Ideally, the popular Gartley Pattern should consist of the ratios shown in Figure 2-1. It is because we assume that harmonic pattern should have the exact Fibonacci ratio in theory. However, when the Gartley pattern is detected by the pattern scanner, most of time the pattern will possess the approximated ratios, which closely match to the ideal Gartley pattern but not dead accurate. Well, one day you can be very lucky to find the perfect Gartly pattern with perfect ratio in your chart. This is very rare event. Even in this very rare event, the chance that your pattern will be truly perfect is very thin because the pattern scanner might round up the ratio AB/XA for 0.618 instead of 0.6181 or CD/BC for 1.272 instead of 1.2723. Approximation error is always there in our pattern detection task. We will never be able to get rid of them since we have only limited memories inside both human brains and computers.



Figure 2-1: Structure of Gartley Pattern for Bullish and Bearish Pattern.

Since this approximation exists every time in detecting harmonic pattern, we know that, we are less accurate every time when our pattern scanner measure the ratio 0.618 or 0.382 or other Fibonacci ratio from our chart. Well, this is very common facts in the scientific world. On the other hands, as this is so common, the scientist already gave a lot of thought in overcoming this approximation error rather than using infinite number of decimals to describe the measurement.

So how can we be overcome this approximation error? Typically, in practical application like engineering and statistics, people use tolerance as one possible way of describing the measurement. In technical term, tolerance is the total amount by which a specific dimension is permitted to vary. The tolerance is the difference between the maximum and minimum limits. Going back to our Usain Bolt’s sprint record. Instead of writing 9.58 seconds, we can write 9.58 seconds 0.005. This means that Usain Bolt’s record will not be greater than 9.585 seconds and it will not be smaller than 9.575 seconds. His record will fall somewhere in between 9.585 and 9.575. By assigning maximum and minimum tolerance limit, we can be more precise in recording his records. We can also avoid using the infinite decimal places to describe his record. Using infinite decimal places is impractical. Likewise, we can describe his height as 1.96 0.005. This means that his height will fall in between 1.965 and 1.955 meters.

How this tolerance can be related to the Pattern Completion Interval in our Harmonic Pattern trading? Well, Pattern Completion Interval is in fact no more than just the tolerance limit described above. It is indeed the upper and lower limit permitted to vary in detecting Harmonic Pattern. Since detecting Harmonic Pattern is quit visual task, it might be a good idea to show the pattern completion interval using a box like in Figure 2-2. In the AB=CD Bearish reversal Pattern in Figure 2-2, the upper limit is the maximum price level permitted for this pattern to be qualified as AB=CD Harmonic Pattern. If EURUSD goes beyond this Upper Limit, then the Pattern can not be qualified as the AB=CD pattern since the pattern is breaching the tolerance limit for the given Fibonacci ratio.

In general, the tolerance limit in many practical applications are specified in symmetric manner like 1.96 meters 0.005. Technically, we can assign symmetric Upper and Lower Limit for Pattern Completion Interval too. However, either one limit between Lower Limit and Upper Limit is relevant for our trading depending our trading direction. For example, for Bearish Reversal Pattern, we only need to concern about Upper Limit since we want to know when the Harmonic Pattern will fail to form from the price moving too high. Likewise, for Bullish Reversal Pattern, we only need to concern about Lower Limit.


https://algotrading-investment.com/2020/06/01/the-concept-behind-the-pattern-completion-interval/

Trading Setup with Pattern Completion Interval


We covered sufficient details about Pattern Completion Interval (aka Pattern Completion Zone) in the previous chapters. For your information, pattern completion zone and pattern completion interval is the same thing. In short, Pattern Completion Interval is the tolerance limit at the final point D. Figure 4-1 illustrates Pattern Completion Interval visually in the chart. In Figure 4-1 below, if the price at pattern detection candle went below the lower tolerance limit 1.30173, then the pattern would be not qualified as a valid Harmonic Pattern. Since the price stayed within the Pattern Completion Interval, the pattern formation was successful and so it was for your trading too if you trade with this pattern. We are currently using our Tolerance Limit 5%. This gave us 19 pips range between upper and lower limit. You can see that the low at pattern detection candle just touched 1.30173 and in fact the low can touch anywhere inside our Pattern Completion Interval as long as they do not move below 1.30173. Now let us do some experiment with tolerance limit 10%.



Figure 4-1: Pattern Completion Interval for EURUSD with tolerance limit 5% (Box Range = 19 pips).

You will expect that the increase in tolerance limit will widen the range between upper and lower limit. With tolerance limit 10%, the range become doubled to 38 pips. In Figure 4-2, we can see that low at pattern detection candle is in fact pretty inside our Pattern Completion Interval.



Figure 4-2: Pattern Completion Interval with tolerance limit 10% (Box Range = 38 pips).

At this point, you might wonder what the good tolerance limit is for Pattern Completion Interval. Since the Pattern Completion Interval is a new concept, google search is not that useful. We will not find any useful literature for this from our public library either. The best approach is probably to seek some reference from some other industries. Many industries including engineering, finance, business like to use 90%, 95% and 99% or 1%, 5% and 10% criteria. For example, in statistics, 1%, 5% and 10% are the common probability limit to reject the null hypothesis over some statement. This might be good reference point to start with. Since we need our tolerance limit to reject the ugly patterns, whose ratios does not match the ideal Fibonacci ratio well, statistical tolerance limit have some close proximity to our application. However, these statistical probabilities assume the normal probability distribution of data. In our pattern matching exercise, it is difficult to assume any normality for our tolerance limit. Since we are traders, we will not drill down much of these theories. However, it is still good to know that other industry make good use of tolerance limit in their application.



Figure 4-3: Tolerance limit example in statistical application.

Another good reference point we can count about tolerance limit is the mechanical engineering industry. In the mechanical engineering industry, tolerance limit is heavily used for design and engineering purpose. Often tolerance means that the physical tolerance limit for the dimension of the object. The main purpose of this type of tolerance limit is that the object must fit precisely to another object. For example, gear must fit precisely to shaft so they can function properly for engine. Otherwise, the design fails and waste the materials. The safety cannot be guaranteed for your car. Most of time, the tolerance limit in the mechanical engineering industry is measured in meters, centimeters and millimeters. Since we are using ratio instead of dimension unit, our mechanical engineering example is not the perfect match for our application either.


https://algotrading-investment.com/2020/06/01/trading-setup-with-pattern-completion-interval/

Insignificant Turning Point, Local Turning Point and Global Turning Point


If harmonic pattern could predict the potential turning point, we can choose to materialize this opportunity or not. We covered that this prediction is subject to probabilistic nature. Harmonic Pattern is not a bulletproof predictor of the future. If you find someone mentioning 95% or 96% or even 90% prediction accuracy whatsoever, you could just step away from those bullshit. Most of time, its two things, that person does not know what he is talking about or that person might want to cheat on you. Simply let us not involved on that time wasting activities. We have already shown you how to calculate your profits in previous chapter. There is certainly no need to talk about 95% prediction accuracy in our trading.

Harmonic Pattern Trader needs to understand that our turning point prediction can end up few distinctive scenarios. Our turning point prediction can spot the global turning point as shown in Figure 7-1. This is the best outcome you can achieve with harmonic pattern trading. Since we can ride the big trend from the start to an end, we can materialize almost the entire trend range for our profits. Considering our stop loss was just 10 to 20 pips, for example, our Reward can be something like 500 or 1000 pips sometimes. Reward/Risk ratio like 30 or 50 is a mega deal to traders. Of course, this is very rare opportunity in real world trading. However, at least, it is not difficult to hear that someone hit the turning point dead accurately and his investment is running almost without any drawdown. To meet such a mega opportunity, we need both luck and discipline for our trading. The good news is that Harmonic Pattern can spot one of these opportunities because it is turning point predictor. In general, many trend based trading strategies will likely enter the market much later after the turning point happens.

Since the global turning point formation requires huge trading volumes to push the price forwards, we are less likely to catch this movement in the probabilistic sense. Instead, our turning point prediction can spot the local turning point more often as shown in Figure 7-2. In that case, we will only catch correction against the trend. In fact, more often, we will end up with local turning point or we can be wrong with our prediction. If your trading plan involves waiting for the global trend, statistically speaking, you are likely to lose more often. Especially if your stop loss is tight, then you will lose more. This is even true to many seasoned traders. Luckily, in trading, the size of trend does not matter for our profit if we can manage our order in proportion to our trading capital. For example, if your risk is set to 1% of your trading balance and Reward/Risk ratio =5, then it does not matter whether the market moves 200 pips (i.e. global turning point scenario) or 20 pips (i.e. local turning point scenario). As long as the market hits the take profit, we will bank the same amount of profit into our accounts, which is 5% of our trading capital in our example. With some help of fundamental analysis and long term technical analysis, it is not impossible to predict on the global turning point prediction. In addition, it is also possible to catch both local and global turning point by opening multiple of positions for your trading. For example, by sending one order with Reward/Risk ratio = 3 and sending second order with Reward/Risk ratio = 12, you can increase your potential to catch both local and global turning point.

Regardless of the turning point scenarios, the risk formulation with the Pattern completion Interval can help traders to precisely form stop loss and take profit levels within the confined price and time space in your chart. At the same time, the price can move much quicker within the confined price and time space. Some discipline must be accomplished to master the Harmonic Pattern trading in practice. Harmonic pattern trading is not a bulletproof technique. Practically, many times, you will observe that harmonic pattern can predict the insignificant turning point. This means that the reaction at final point D is not significantly large for us to take the profits out. Sometimes, the final point D can be totally ignored by the market and price can just pass through the final point D without making any turning point. For this reason, you have to try to enter the market when there is higher chance of success. In general, you should not rely on harmonic pattern alone to make your trading decision. You have to make use of secondary confirmation with other technical analysis. It is advantageous if you can read the fundamentals of the market but it is not compulsory though. However, for the healthy growth of your trading capital, the right risk management should be in place without exception.


https://algotrading-investment.com/2020/06/01/insignificant-turning-point-local-turning-point-and-global-turning-point/

Some More Tips about Rolling Ball Effect in Forex Trading


Momentum in Price Movements

Building Momentum:
Description: Just like a ball rolling down a hill gains speed and momentum, a currency pair can show increasing momentum when it moves in a particular direction. This momentum can be due to several factors, such as market sentiment, economic indicators, or geopolitical events.
Application: Traders look for signs of increasing momentum to enter trades in the direction of the trend. This can be done using technical indicators like the Moving Average Convergence Divergence (MACD) or the Relative Strength Index (RSI).
Continuation Patterns:
Description: The rolling ball effect can also be seen in continuation patterns, where the market consolidates before continuing its previous trend. Examples include flags, pennants, and wedges.
Application: Identifying these patterns can help traders anticipate the resumption of a trend, allowing them to position themselves accordingly.
Trend Dynamics
Trend Reversals:
Description: A rolling ball eventually slows down and changes direction due to external forces. Similarly, currency pairs can reverse their trends after periods of sustained movement.
Application: Traders look for reversal signals such as double tops/bottoms, head and shoulders patterns, or divergences in technical indicators to predict and capitalize on trend reversals.
Support and Resistance:
Description: Like a rolling ball that might encounter obstacles, currency prices often meet support (a price floor) and resistance (a price ceiling) levels. These levels can temporarily halt or reverse price movements.
Application: Identifying key support and resistance levels helps traders set entry and exit points, as well as manage risk through stop-loss and take-profit orders.
Risk Management
Volatility Considerations:
Description: The speed and trajectory of a rolling ball can be unpredictable, much like the volatility in forex markets. Sharp movements can pose significant risks to traders.
Application: Implementing risk management strategies, such as proper position sizing, stop-loss orders, and using volatility indicators (e.g., Bollinger Bands, Average True Range) can help manage this risk.
Market Sentiment:
Description: Market sentiment can drive momentum in currency pairs, similar to how external forces can influence the direction of a rolling ball.
Application: Staying attuned to market sentiment through news analysis, economic reports, and sentiment indicators (like the Commitment of Traders report) can provide insights into potential market movements.


https://algotrading-investment.com/2020/06/01/rolling-ball-effect-and-harmonic-pattern-trading/

Various Risks in Trading and Investment


Trading and investment carry risk. The opportunities in trading and investment without risk rarely exits except some arbitrage opportunities, which will not be discussed in this book. In theory, you could develop several classes of risks for trading and investment. For example, risk in trading and investment can be classified as Macro and Micro risks depending on where they are originated. Macro and Micro risks can be subdivided further into smaller categories like the market risk, operational risk, liquidity risk, credit risk, political risk, etc. Since this book is not the theoretical textbook, we only describe some examples of Macro and Micro risks in Table 10-1 for your trading. However, this list is definitely not the exhausted one.

Risk Factors Description Examples Exposure on
Trader/broker

Nature
Market Risk Risk of changing the fundamentals of the underlying security due to the competitive market environment. Microsoft Window is losing its market share due to the wide popularity of android OS developed by Google. Trader: Yes
Broker: No

Marco
Political risk Risk associated with the possibility of unfavourable government action or social changes resulting in a loss of the security value. Large change in the currency value and stock prices after the presidential election. Trader: Yes
Broker: Yes

Macro
Interest rate risk Risk that an investment’s value will change due to a change in the absolute level of interest rate. If interest rate increase, bond prices fall. When interest rates fall, then bon price rise. In addition, interest rate change cause huge spikes on Forex market too. Trader: Yes
Broker: Yes

Macro
Operational Risk Risk that originates from the mistake of the operator or the company during its trading and investment process. You have executed your order with wrong stop loss size or wrong contract size. Trader: Yes
Broker: Yes

Micro
Liquidity risk Risk that refers to the difficulty of converting the assets to cash at the fair value. You want to sell your 10 million shares of Google but your broker cannot find buyer of your shares because of the large volume. Trader: Yes
Broker: Yes

Micro
Credit risk Risk or possibility that the operator or company can go bankrupt. Your broker gone bankrupt so your trading account is suspended from trading. Trader: Yes
Broker: Yes

Micro
Table 10-1: Common risks for your trading and investment.

Trader and investor are exposed on both Marco risks and Micro risks every day. Macro risks like the market risk, political risk and interest rate risk are caused by the external factors outside your trading operation. Most of time, these external factors are not controllable by us. In fact, some of the technical and fundamental analysis might be used to protect traders from these Macro risks. However, some of the risky event can not be warned at all even using any technical or fundamental analysis. For example, trader can make some educated guess on the possible depreciation or appreciation of the currency by looking at some Macro-economic data and technical analysis. Likewise, by studying the company balance sheets and by applying many technical analyses, we can guess that if the company is increasing their market share from its competitors. On the other hands, guessing when the government will increase or decrease the corporation tax is impossible with any technical or fundamental analysis. Macro risks can contribute to the predictable and non-predictable parts of the market. In fact, many technical and fundamental analyses are there for you to reduce the Macro risks for your trading. Charting techniques and technical indicators can help you to identify the short-term or long-term price movement up to some degree. Besides the technical analysis, monitoring the important news can reduce the market risks too. For example, trader need to watch out any news about the taxes or labour laws, trade tariff change, environmental regulation or reformation in the national economy because they can change the entire market dynamics.

Some Micro risks like operational risk and credit risk can be originated from trader or from broker internally. In 2009, trader at UBS, the Swiss banking giant, placed a $22 billion of Capcom bonds in mistake while trying to buy just £220,000. In 2012, Knight Capital lost nearly $440 million in just 30 minutes because their trading software sent erroneous orders. These types of fat finger mistakes are the typical operational risk in trading. Operational risk can be made by anyone or by any algorithm. Sometimes, some trading platforms have many protective systems to prevent some common operational risk but not all of them can be prevented. You can still send wrong contract size or wrong stop loss size to your broker anytime. Especially the erroneous automated trading system can send the erroneous orders at high speed. The penalty from the mistake is always 100% yours. If a book was accidently dropped on your keyboard and hit the enter key sending the market order with 10 million contracts to your forex broker, you will lose a lot of money on commission even if you close the order immediately. You can not blame other people for this accident. To prevent the operational risk, trader needs to be highly cautious in their trading. It is better to avoid trading when you are not set for the trading. If you are working in a team, it is important to monitor each other to prevent such silly mistake. If you have to build the automated trading algorithm, the operation of the algorithm must be fully tested in the paper account first.

Credit risk is another Micro risk, on which both trader and broker are heavily exposed. Simply speaking, credit risk is the chance of experiencing the bankruptcy for the business organization. Any business organization can go bankrupt. Trader, broker or any liquidity provider can face the bankruptcy. The insolvency of the Alpari UK, currency broker, due to the Swiss franc turmoil in 2015 was a good example of the credit risk exposed by the currency brokers. From the trader’s point of view, trader can always lose their entire capital or nearly entire capital from their trading. If the operational risk can be considered as a mistake, credit risk often happens because traders are not educated or not experienced. Except that your account blowing was experimentally carried out on the small account for some educational purpose, this experience can cause serious damage to your finance. For traders, the credit risk is normally originated from the lack of understanding on the market volatility and position sizing.

Consider the aggressive trading example in Table 10-2, where the credit risk is amplified to blow your account. Your starting balance is 10,000 US dollar and pip value for EURUSD is 10 dollar per pip in this example. In this trading example, a trader used the aggressive trading volume for each trade. Luckily, he got the two winning trades increasing his account to 30,000 US dollar initially. Then his luck was run out losing all his account in next three trades. Can you imagine how he would feel in his first two trades? Can you imagine how he would feel after he lost all his account? In this trading example, his obvious mistake is to use the excessively large trading volume. This sort of mistake typically happens to starters who ignore to learn how the pip value and contract size relate the market movement to the profit and loss on his holding positions.


https://algotrading-investment.com/2020/06/01/various-risks-in-trading-and-investment/

Introduction to Technical Analysis


Designing a successful strategy is an intellectually challenging process. It requires extensive research and testing. The research in trading is always followed by the immediate real world outcome. The trading strategy based on the bad system or methodology will be falsified extremely fast in the real world trading. Naturally, a trader with the scientific mind set can learn the great deal of knowledge about this world from testing various trading methodology with the financial market. Science or scientific methodology plays an important role in trading and investment.

Technical and fundamental analyses are the two main schools of thoughts for financial trading and investment. Technical analysis assumes that price discounts for everything. For example, technical analyst believe that at a given time a stock’s price reflects everything that could affect the company including company’s fundamental factors, economic factors and market psychological factors. Technical analyst also believes that history tends to repeat itself. Therefore, they can predict the future. Technical analysis only leaves the price as the main subject to study. For fundamental analysis, traders study the intrinsic value of the company. For example, they make their trading decision based on growth potential of the security. They are more concerned with basis like sales, earnings and management of the company. In general, fundamental traders are considered as the long term investors whereas the technical traders are considered as the short term investors. However, there are short-term fundamental traders too. For example, some news traders do not hold their position too long. On the other hands, there are technical traders basing their trading decision on monthly timeframe. Those technical traders can hold their position for several months to few years too.

The origin of technical analysis could be traced back to the trading of Japanese rice in Osaka in late 1600. This is the period when the Japanese candlestick technique was developed. With the development of high capacity computers and internet, the development of technical analysis has been accelerated even fast. In this book, we are only interested in the technical analysis in terms of the methodological point of view. Do not confuse the technical analysis with technical indicators. Technical analysis is the comprehensive methodology that covers broad scientific and mathematical methods. Technical indicator is the mathematical transformation of the price series to extract smoothed price trajectory or oscillating motion of the price like Simple Moving average or Relative Strength Index. Of course, technical indicator is a part of technical analysis but it is much smaller concept comparing to technical analysis. To give you some ideas about technical analysis, we will present five important categories for technical analysis. The five categories include charting, pattern analysis, technical indicator, mathematical method and artificial intelligence. We list some of the sub elements of the five categories in Table 1-1.

Table 1-1: Five main categories of Technical Analysis.

Charting techniques are the first requirement for trading. Simply speaking traders cannot trade without any chart. The value for good visualization technique is a prime importance for traders. Important attributes in the modern charting technique is that they must allow the instant recognition of important patterns and trend from the price series. In addition, market volatility should be also easily gleaned from the chart too. Some commonly used charting techniques are line chart, OHLC bar char and candlestick chart. In modern trading software, these three types of charts are essentially provided in their basic package. Some more sophisticated software offers Renko chart, Point & Figure chart and Tick chart for advanced users. Traders tend to have their preferences for the choice of the charts. For traders using Japanese candlestick patterns, they will stick with candlestick chart over OHLC bar chart. If traders are looking for breakout patterns, then they will prefer Renko chart or Point & Figure chart.



Figure 1-1: Candlestick chart of EURUSD Daily series with tick volume.

The objective of the technical indicator is to measure the strength of trend, volatility and momentum of the price series. Technical indicators are mostly derived from the price series. Sometime technical indicator uses open, high, low and close price. Sometimes the technical indicator only uses close price for computation. The advantage of technical indicators is ease of use. For example, most of technical indicators can be displayed simultaneously together with the original price series in a convenient way. Therefore, traders can easily incorporate alerting system for his trading. The disadvantage is that most of time technical indicators are lagging behind the actual price series. In modern trading platform, technical indicators and charting facilities are the basic requirements for trading. Many of the software vendors provide over 100 technical indicators with their trading platform. There are some of the vendors claiming that they are offering over 3000 different technical indicators unofficially. Most common mistake for traders is that they tend to apply the same technical indicator across every market. The different market can have different market dynamics. Therefore, before blindly applying any technical indicators, you should ask the question like “Is this technical indicator right one for this market?”. For example, for the stock exhibiting strong growth patterns, it is not good idea to look for the trend reversal opportunities using the relative strength indicator.



Figure 1-2: Candlestick chart of EURUSD Daily series (top) with Relative Strength Indicator (middle) and Average Directional Movement Index (bottom).

Besides technical indicators, pattern analysis is another important tool for traders. Pattern analysis concerns about the price levels and the geometry of the price series. Support & resistance, Japanese candlestick pattern and Fibonacci retracement are the popular pattern recognition techniques for traders. Support and Resistance represents key price levels where the force of supply and demand meets (Figure 1-3). Normally support and resistance levels are detected by connecting frequently tested level from your chart. Support is the price level at which demand is strong to prevent the price from declining further. Resistance is the price level at which selling is strong to prevent the price from rising further. Some textbook might teach you the support and resistance level as the reversal level but this may be not true. Practically speaking, support and resistance level can act as the breakout level too. For example, when the price penetrates through resistance level, more buying momentum can build up for strong bullish movement. Likewise, when the price penetrates the supply level, more selling momentum can build up for strong bearish movement. However, what is always true is that there are strong volatility around the support and resistance area. Price will either penetrate hard or bounce back hard at support and resistance level. When the resistance level is penetrated, then the resistance level becomes support level. Likewise, when the support level is penetrated, the support level becomes resistance level. Traders should get habit of making note for the important levels always for their trading.


https://algotrading-investment.com/2020/06/02/introduction-to-technical-analysis/

Introduction to Charting Techniques


For the Price Action and Pattern Analysis, it is important to have good visualization tools. Since we want to find important patterns for our trading, we will need a good size monitor and good visualization software. Of course, you should invest on them as much as you can afford. No single visualization techniques are perfect. They always possess some advantages as well as some disadvantages. Firstly, line chart is the most basic visualization technique for traders. Line is simply drawn by connecting each session’s closing price. For example, 1-hour line chart is simply drawn by connecting the closing price of 1-hour candle. As line chart are produced by connecting two points at the fixed time interval, they can provide a great insight about some regularities in the price series. For this reason, not only traders use the line chart but also many mathematicians use them to visualize the price series data. Line chart is useful when we want to exam some cyclic behaviour like seasonality or any cyclic patterns made up from sine or cosine function. Line chart is also useful when you want to compare multiple price series in one chart. On the other hands, the disadvantage of the line chart is that it does not provide the trading range of each session. In addition, due to the continuously drawn line, it is difficult to see any gap between sessions. In addition, line chart miss some important attributes like highest and lowest prices of each session.



Figure 2-1: Line chart for EURUSD from 1 September 2016 to 16 January 2017

Candlestick chart provides some additional attributes, which line chart misses. Figure 2-2 presents the anatomy of the candlestick chart. Candlestick chart provides three important information. Firstly, the bottom and top of the box represents the opening and closing price of the session. Secondly, each candlestick shows the trading range between high and low for each session. Thirdly, candlestick shows the direction of movement for each session. In Figure 2-2, the green candle reveals the upward movement for the session immediately whereas the red candle shows the downward movement. From Figure 2-3, we can feel how richer information candlestick chart provide for each session comparing to the Line chart. As shown in Figure 2-3, Candlestick chart is useful to spot the gaps in between sessions. This is very useful property of the candlestick chart since Line chart or any other chart is difficult to spot the gaps. One of the drawbacks of the candlestick chart is that it does not provide the sequence of high and low price but this is the common problem for other visualization techniques too. It is simply because the sequence of high and low price was not collected traditionally by the Financial Institutions. If anyone starts to provide the historical sequence of high and low prices for each session, then this would reveal a lot of information on the psychology of the financial market. All they have to put some simple identifier which price comes first between high and low prices during the session. For example, one can put the letter “h” to highlight that high price comes first before low price. Therefore, storing cost is no more than just a letter for this crucial information. This might be cheap but useful alternative to the expensive tick history data, which often require enormous hard drive space. In addition, the candlestick chart is the basis for the popular Japanese candlestick patterns. Although the Japanese candlestick pattern alone does not provide the perfect trading entry, many traders uses them as the confirming tool for their entry or exit.



Figure 2-2: Anatomy of the Candlestick chart.



Figure 2-3: Candlestick chart for EURUSD from 1 September 2016 to 16 January 2017.

OHLC Bar chart is another popular form of visualization techniques. The OHLC bar chart has some improvement over the line chart. It provides all of the same data including open, close, range and direction to the candlestick chart. However, OHLC bar chart is not visually easy to follow like candlestick chart. In addition, spotting the gap between sessions is not easy with the OHLC bar chart. However, many traders still not given up to use OHLC bar chart over the candlestick and line chart.



Figure 2-4: Anatomy of the Range Bar.

So far, we have introduced the visualization techniques with the fixed time interval. For example, line chart, candlestick chart and the OHLC bar chart uses the information collected in each session. The common time interval for the session is 1 hour, 4 hour, 1 day, 1 week and 1 month. Instead of using the fixed time interval, several techniques do not use the fixed time interval to construct the chart. For example, tick chart record the open, high, low and close prices during the fixed tick arrival intervals. Therefore, all the bars in the Tick chart have the same tick volumes. For example, 100 Tick chart will record the open, high, low and close price during 100 tick arrivals. All the bars in 100 Tick chart will have 100 tick volumes. One can construct line, candlestick chart and OHLC bar chart with Tick chart too. Tick chart will look like normal chart except that every bar has the identical tick volume. In Tick chart, during busy market hours, one candlestick can be formed fast but during slow market hours, one candlestick can be formed slowly. The tick chart is useful to replace the normal candlestick chart with lower timeframe when the candlestick chart produces the poor visual representation of the market with standard time interval. This is not always the case but when there is low interest in the market, this can happen. For example, Figure 2-5 shows the broken 1-minute candlestick chart for NZDSGD currency pairs. In this case, instead of using the candlestick chart with 1-minute chart, trader can use 100 tick chart. Because each candle is completed with 100 tick arrivals every time (Figure 2-6), we naturally have smoother looking chart in comparison to the broken chart in Figure 2-5. Once traders become familiar with tick chart, they tend to stick with them even for the higher timeframe. For example, you can use 500 tick chart or 1000 tick chart for your trading. Disadvantage of the tick chart is that tick is generally much heavier to store in the hard drive in terms of size. Therefore, not many trading package offer the capability of using tick chart for the time of writing this book. Just for your information, one-year worth of tick data can take up over some serous gigabytes of the space on your hard drives. In addition, Tick chart does not provide volatility information since every bar has identical tick volume. However, if programmatically doable, one can store time duration it takes to form the bar in the place of the tick volume. This would provide different insight, which the fixed time interval chart can’t provide.


https://algotrading-investment.com/2020/06/03/introduction-to-charting-techniques/