Young Ho Seo / Perfil
- Informações
10+ anos
experiência
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62
produtos
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1178
versão demo
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4
trabalhos
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0
sinais
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0
assinantes
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Harmonic Pattern Indicator - Repainting + Japanese Candlestick Pattern Scanner + Automatic Channel + Many more
https://www.mql5.com/en/market/product/4488
https://www.mql5.com/en/market/product/4475
https://algotrading-investment.com/portfolio-item/harmonic-pattern-plus/
Non Repainting and Non Lagging Harmonic Pattern Indicator – Customizable Harmonic + Japanese Candlestic Pattern Scanner + Advanced Channel + Many more
https://www.mql5.com/en/market/product/41993
https://www.mql5.com/en/market/product/41992
https://algotrading-investment.com/portfolio-item/profitable-pattern-scanner/
Supply Demand Indicator – Multiple Timeframe Scanning Added + Non Repainting + Professional Indicator
https://www.mql5.com/en/market/product/40076
https://www.mql5.com/en/market/product/40075
https://algotrading-investment.com/portfolio-item/ace-supply-demand-zone/
Momentum Indicator – Path to Volume Spread Analysis
https://www.mql5.com/en/market/product/30641
https://www.mql5.com/en/market/product/30621
https://algotrading-investment.com/portfolio-item/excessive-momentum-indicator/
Elliott Wave Indicator for the Power User
https://www.mql5.com/en/market/product/16479
https://www.mql5.com/en/market/product/16472
https://algotrading-investment.com/portfolio-item/elliott-wave-trend/
Forex Prediction - Turn Support and Resistance to the Advanced Strategy
https://www.mql5.com/en/market/product/49170
https://www.mql5.com/en/market/product/49169
https://algotrading-investment.com/portfolio-item/fractal-pattern-scanner/
MetaTrader 4 and MetaTrader 5 Product Page: https://www.mql5.com/en/users/financeengineer/seller#products
Free Forex Prediction with Fibonacci Analysis: https://algotrading-investment.com/2020/10/23/forex-prediction-with-fibonacci-analysis/
Free Harmonic Pattern Signal: https://algotrading-investment.com/2020/12/17/harmonic-pattern-signal-for-forex-market/
============================================================================================================================
Here are the trading education books. We recommend reading these books if you are a trader or investor in Forex and Stock market. In the list below, we put the easy to read book on top. Try to read the easy to read book first and try to read the harder book later to improve your trading and investment.
First Link = amazon.com, Second Link = Google Play Books, Third Link = algotrading-investment.com, Fourth Link = Google Books
Technical Analysis in Forex and Stock Market (Supply Demand Analysis and Support Resistance)
https://www.amazon.com/dp/B09L55ZK4Z
https://play.google.com/store/books/details?id=pHlMEAAAQBAJ
https://algotrading-investment.com/portfolio-item/technical-analysis-in-forex-and-stock-market/
https://books.google.co.kr/books/about?id=pHlMEAAAQBAJ
Science Of Support, Resistance, Fibonacci Analysis, Harmonic Pattern, Elliott Wave and X3 Chart Pattern (In Forex and Stock Market Trading)
https://www.amazon.com/dp/B0993WZGZD
https://play.google.com/store/books/details?id=MME3EAAAQBAJ
https://algotrading-investment.com/portfolio-item/science-of-support-resistance-fibonacci-analysis-harmonic-pattern/
https://books.google.co.kr/books/about?id=MME3EAAAQBAJ
Profitable Chart Patterns in Forex and Stock Market (Fibonacci Analysis, Harmonic Pattern, Elliott Wave, and X3 Chart Pattern)
https://www.amazon.com/dp/B0B2KZH87K
https://play.google.com/store/books/details?id=7KrQDwAAQBAJ
https://algotrading-investment.com/portfolio-item/profitable-chart-patterns-in-forex-and-stock-market/
https://books.google.com/books/about?id=7KrQDwAAQBAJ
Guide to Precision Harmonic Pattern Trading (Mastering Turning Point Strategy for Financial Trading)
https://www.amazon.com/dp/B01MRI5LY6
https://play.google.com/store/books/details?id=8SbMDwAAQBAJ
http://algotrading-investment.com/portfolio-item/guide-precision-harmonic-pattern-trading/
https://books.google.com/books/about?id=8SbMDwAAQBAJ
Scientific Guide to Price Action and Pattern Trading (Wisdom of Trend, Cycle, and Fractal Wave)
https://www.amazon.com/dp/B073T3ZMBR
https://play.google.com/store/books/details?id=5prUDwAAQBAJ
https://algotrading-investment.com/portfolio-item/scientific-guide-to-price-action-and-pattern-trading/
https://books.google.com/books/about?id=5prUDwAAQBAJ
Predicting Forex and Stock Market with Fractal Pattern: Science of Price and Time
https://www.amazon.com/dp/B086YKM8BW
https://play.google.com/store/books/details?id=VJjiDwAAQBAJ
https://algotrading-investment.com/portfolio-item/predicting-forex-and-stock-market-with-fractal-pattern/
https://books.google.com/books/about?id=VJjiDwAAQBAJ
Trading Education Book 1 in Korean (Apple, Google Play Book, Google Book, Scribd, Kobo)
https://books.apple.com/us/book/id1565534211
https://play.google.com/store/books/details?id=HTgqEAAAQBAJ
https://books.google.co.kr/books/about?id=HTgqEAAAQBAJ
https://www.scribd.com/book/505583892
https://www.kobo.com/ww/en/ebook/8J-Eg58EDzKwlpUmADdp2g
Trading Education Book 2 in Korean (Apple, Google Play Book, Google Book, Scribd, Kobo)
https://books.apple.com/us/book/id1597112108
https://play.google.com/store/books/details?id=shRQEAAAQBAJ
https://books.google.co.kr/books/about?id=shRQEAAAQBAJ
https://www.scribd.com/book/542068528
https://www.kobo.com/ww/en/ebook/X8SmJdYCtDasOfQ1LQpCtg
About Young Ho Seo
Young Ho Seo is an Engineer, Financial Trader, and Quantitative Developer, working on Trading Science and Investment Engineering since 2011. He is the creator of many technical indicators, price patterns and trading strategies used in the financial market. He is also teaching the trading practice on how to use the Supply Demand Analysis, Support, Resistance, Trend line, Fibonacci Analysis, Harmonic Pattern, Elliott Wave Theory, Chart Patterns, and Probability for Forex and Stock Market. His works include developing scientific trading principle and mathematical algorithm in the work of Benjamin Graham, Everette S. Gardner, Benoit Mandelbrot, Ralph Nelson Elliott, Harold M. Gartley, Richard Shabacker, William Delbert Gann, Richard Wyckoff and Richard Dennis. You can find his dedicated works on www.algotrading-investment.com . His life mission is to connect financial traders and scientific community for better understanding of this world and crowd behaviour in the financial market. He wrote many books and articles, which are helpful for understanding the technology and application behind technical analysis, statistics, time series forecasting, fractal science, econometrics, and artificial intelligence in the financial market.
If you are interested in our software and training, just visit our main website: www.algotrading-investment.com
https://www.mql5.com/en/market/product/4488
https://www.mql5.com/en/market/product/4475
https://algotrading-investment.com/portfolio-item/harmonic-pattern-plus/
Non Repainting and Non Lagging Harmonic Pattern Indicator – Customizable Harmonic + Japanese Candlestic Pattern Scanner + Advanced Channel + Many more
https://www.mql5.com/en/market/product/41993
https://www.mql5.com/en/market/product/41992
https://algotrading-investment.com/portfolio-item/profitable-pattern-scanner/
Supply Demand Indicator – Multiple Timeframe Scanning Added + Non Repainting + Professional Indicator
https://www.mql5.com/en/market/product/40076
https://www.mql5.com/en/market/product/40075
https://algotrading-investment.com/portfolio-item/ace-supply-demand-zone/
Momentum Indicator – Path to Volume Spread Analysis
https://www.mql5.com/en/market/product/30641
https://www.mql5.com/en/market/product/30621
https://algotrading-investment.com/portfolio-item/excessive-momentum-indicator/
Elliott Wave Indicator for the Power User
https://www.mql5.com/en/market/product/16479
https://www.mql5.com/en/market/product/16472
https://algotrading-investment.com/portfolio-item/elliott-wave-trend/
Forex Prediction - Turn Support and Resistance to the Advanced Strategy
https://www.mql5.com/en/market/product/49170
https://www.mql5.com/en/market/product/49169
https://algotrading-investment.com/portfolio-item/fractal-pattern-scanner/
MetaTrader 4 and MetaTrader 5 Product Page: https://www.mql5.com/en/users/financeengineer/seller#products
Free Forex Prediction with Fibonacci Analysis: https://algotrading-investment.com/2020/10/23/forex-prediction-with-fibonacci-analysis/
Free Harmonic Pattern Signal: https://algotrading-investment.com/2020/12/17/harmonic-pattern-signal-for-forex-market/
============================================================================================================================
Here are the trading education books. We recommend reading these books if you are a trader or investor in Forex and Stock market. In the list below, we put the easy to read book on top. Try to read the easy to read book first and try to read the harder book later to improve your trading and investment.
First Link = amazon.com, Second Link = Google Play Books, Third Link = algotrading-investment.com, Fourth Link = Google Books
Technical Analysis in Forex and Stock Market (Supply Demand Analysis and Support Resistance)
https://www.amazon.com/dp/B09L55ZK4Z
https://play.google.com/store/books/details?id=pHlMEAAAQBAJ
https://algotrading-investment.com/portfolio-item/technical-analysis-in-forex-and-stock-market/
https://books.google.co.kr/books/about?id=pHlMEAAAQBAJ
Science Of Support, Resistance, Fibonacci Analysis, Harmonic Pattern, Elliott Wave and X3 Chart Pattern (In Forex and Stock Market Trading)
https://www.amazon.com/dp/B0993WZGZD
https://play.google.com/store/books/details?id=MME3EAAAQBAJ
https://algotrading-investment.com/portfolio-item/science-of-support-resistance-fibonacci-analysis-harmonic-pattern/
https://books.google.co.kr/books/about?id=MME3EAAAQBAJ
Profitable Chart Patterns in Forex and Stock Market (Fibonacci Analysis, Harmonic Pattern, Elliott Wave, and X3 Chart Pattern)
https://www.amazon.com/dp/B0B2KZH87K
https://play.google.com/store/books/details?id=7KrQDwAAQBAJ
https://algotrading-investment.com/portfolio-item/profitable-chart-patterns-in-forex-and-stock-market/
https://books.google.com/books/about?id=7KrQDwAAQBAJ
Guide to Precision Harmonic Pattern Trading (Mastering Turning Point Strategy for Financial Trading)
https://www.amazon.com/dp/B01MRI5LY6
https://play.google.com/store/books/details?id=8SbMDwAAQBAJ
http://algotrading-investment.com/portfolio-item/guide-precision-harmonic-pattern-trading/
https://books.google.com/books/about?id=8SbMDwAAQBAJ
Scientific Guide to Price Action and Pattern Trading (Wisdom of Trend, Cycle, and Fractal Wave)
https://www.amazon.com/dp/B073T3ZMBR
https://play.google.com/store/books/details?id=5prUDwAAQBAJ
https://algotrading-investment.com/portfolio-item/scientific-guide-to-price-action-and-pattern-trading/
https://books.google.com/books/about?id=5prUDwAAQBAJ
Predicting Forex and Stock Market with Fractal Pattern: Science of Price and Time
https://www.amazon.com/dp/B086YKM8BW
https://play.google.com/store/books/details?id=VJjiDwAAQBAJ
https://algotrading-investment.com/portfolio-item/predicting-forex-and-stock-market-with-fractal-pattern/
https://books.google.com/books/about?id=VJjiDwAAQBAJ
Trading Education Book 1 in Korean (Apple, Google Play Book, Google Book, Scribd, Kobo)
https://books.apple.com/us/book/id1565534211
https://play.google.com/store/books/details?id=HTgqEAAAQBAJ
https://books.google.co.kr/books/about?id=HTgqEAAAQBAJ
https://www.scribd.com/book/505583892
https://www.kobo.com/ww/en/ebook/8J-Eg58EDzKwlpUmADdp2g
Trading Education Book 2 in Korean (Apple, Google Play Book, Google Book, Scribd, Kobo)
https://books.apple.com/us/book/id1597112108
https://play.google.com/store/books/details?id=shRQEAAAQBAJ
https://books.google.co.kr/books/about?id=shRQEAAAQBAJ
https://www.scribd.com/book/542068528
https://www.kobo.com/ww/en/ebook/X8SmJdYCtDasOfQ1LQpCtg
About Young Ho Seo
Young Ho Seo is an Engineer, Financial Trader, and Quantitative Developer, working on Trading Science and Investment Engineering since 2011. He is the creator of many technical indicators, price patterns and trading strategies used in the financial market. He is also teaching the trading practice on how to use the Supply Demand Analysis, Support, Resistance, Trend line, Fibonacci Analysis, Harmonic Pattern, Elliott Wave Theory, Chart Patterns, and Probability for Forex and Stock Market. His works include developing scientific trading principle and mathematical algorithm in the work of Benjamin Graham, Everette S. Gardner, Benoit Mandelbrot, Ralph Nelson Elliott, Harold M. Gartley, Richard Shabacker, William Delbert Gann, Richard Wyckoff and Richard Dennis. You can find his dedicated works on www.algotrading-investment.com . His life mission is to connect financial traders and scientific community for better understanding of this world and crowd behaviour in the financial market. He wrote many books and articles, which are helpful for understanding the technology and application behind technical analysis, statistics, time series forecasting, fractal science, econometrics, and artificial intelligence in the financial market.
If you are interested in our software and training, just visit our main website: www.algotrading-investment.com
![Young Ho Seo](https://c.mql5.com/avatar/2014/1/52E29441-6BDD.jpg)
Young Ho Seo
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/
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/
![Young Ho Seo](https://c.mql5.com/avatar/2014/1/52E29441-6BDD.jpg)
Young Ho Seo
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/
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/
![Young Ho Seo](https://c.mql5.com/avatar/2014/1/52E29441-6BDD.jpg)
Young Ho Seo
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/
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/
![Young Ho Seo](https://c.mql5.com/avatar/2014/1/52E29441-6BDD.jpg)
Young Ho Seo
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.
https://algotrading-investment.com/2020/06/04/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.
https://algotrading-investment.com/2020/06/04/scientific-wave-counting-with-the-template-and-pattern-approach/
![Young Ho Seo](https://c.mql5.com/avatar/2014/1/52E29441-6BDD.jpg)
Young Ho Seo
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/
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/
![Young Ho Seo](https://c.mql5.com/avatar/2014/1/52E29441-6BDD.jpg)
Young Ho Seo
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/
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/
![Young Ho Seo](https://c.mql5.com/avatar/2014/1/52E29441-6BDD.jpg)
Young Ho Seo
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
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
![Young Ho Seo](https://c.mql5.com/avatar/2014/1/52E29441-6BDD.jpg)
Young Ho Seo
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/
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/
![Young Ho Seo](https://c.mql5.com/avatar/2014/1/52E29441-6BDD.jpg)
Young Ho Seo
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/
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/
![Young Ho Seo](https://c.mql5.com/avatar/2014/1/52E29441-6BDD.jpg)
Young Ho Seo
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/
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/
![Young Ho Seo](https://c.mql5.com/avatar/2014/1/52E29441-6BDD.jpg)
Young Ho Seo
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/
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/
![Young Ho Seo](https://c.mql5.com/avatar/2014/1/52E29441-6BDD.jpg)
Young Ho Seo
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/
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/
![Young Ho Seo](https://c.mql5.com/avatar/2014/1/52E29441-6BDD.jpg)
Young Ho Seo
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/
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/
![Young Ho Seo](https://c.mql5.com/avatar/2014/1/52E29441-6BDD.jpg)
Young Ho Seo
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/
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/
![Young Ho Seo](https://c.mql5.com/avatar/2014/1/52E29441-6BDD.jpg)
Young Ho Seo
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/
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/
![Young Ho Seo](https://c.mql5.com/avatar/2014/1/52E29441-6BDD.jpg)
Young Ho Seo
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/
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/
![Young Ho Seo](https://c.mql5.com/avatar/2014/1/52E29441-6BDD.jpg)
Young Ho Seo
The Five Regularities in the Financial Market
The Financial Market is the place where different investors are trading securities like equities, bonds, currencies, and derivatives. It is the market place to facilitate the exchange of securities between buyers and sellers. Loosely speaking, the financial market works like the auction market where buyers enter competitive bids and where sellers enter competitive offers at the same time. However, unlike auction market, in the financial market securities are often traded without delivering actual physical goods. Although some companies can use financial market to hedge their physical positions, in this book, we will assume that you are more of speculator who wants to profit from the market dynamics. Various buyers and sellers with different attributes, different geographic location, different purchasing power and different financial goals, forms the daily transactions of the financial market. Therefore, the dynamics of financial market can be represented as the crowd behaviour. It is not necessarily perfectly rational place but the fundamentals play some important role behind the market dynamics up to some degree.
For traders and investors, it is important to develop the right trading strategy for specific market. Good trading strategy never comes blindly. Understanding the underlying dynamics for the financial market is the key requirement to build a solid trading strategy. Then, what is the underlying dynamics for the financial market and how can we study them to benefit our trading and investment? Scientists had a strong interest in the dynamics of the financial market for many decades. They have extensively studied the dynamics of the price series in the Stocks and Forex market. The simplest but most effective way to study the dynamics might be the decomposition approach. In decomposition, literarily we are breaking down some complex system into the simple and digestible bits. Then we use this decomposed bits to predict the behaviour of the complex system.
When we apply the decomposing technique, the price series can be decomposed into several sub price patterns. In fact, the sub price patterns are the regularities that constitute the dynamics of the financial price series (Figure 3-1). For trading and investment, we make use of the knowledge of these regularities to predict up or down movement of the financial market. All the known trading strategies, including simple and complex ones, are based on some of these regularities existing in the price series. Remember that none of trading strategies is merely created to offer you just some luck or based on some random theory.
Figure 3-1: The concept of the decomposition for the financial price series.
In Figure 3-1, what could be the pattern 1, pattern 2, pattern 3 and pattern N making up the real world financial price series? Yet, many different version of explanations exist to describe the price patterns in the financial market. Among them, Gardner’s version considers the trend and seasonality as the main patterns of the price series (Gardner, 1987, p175). Many traders are already familiar with trend in the financial markets. For example, many technical indicators like exponential moving average and MACD were developed to visualize trend. Seasonality is literally seasonal fluctuations in the market. It is also used by many traders. For example, because the sales of Ice Creams increase during summer, stock price for Ice Creams Company can go up due to the increased profits during summer. This sort of patterns will make up the seasonal fluctuations. The Gardner’s framework is intuitive and easy to understand because trend and seasonality are the backbone of many techniques used for the univariate price series in many scientific fields. Although Gardner’s framework does not mention about random process explicitly, his framework already assumed that any price series include some random process.
Depending on their underlying dynamics, the price series can show the multitude of behaviours because real world price series are made up from different magnitude of each price pattern. For example, sometimes, the price series can exhibit strong trend without seasonality and vice versa. Sometimes the price series can exhibit some trend with some seasonality. In the Gardner’s trend-seasonality framework, we can generate twelve different behaviour of the price series by combining the basic trend and seasonal patterns as shown in Figure 3-2. Scientist uses this framework to categorize many real world price series for prediction purpose. Then, what is the real value of the Price Pattern Table in Figure 3-2 for traders? As a trader, we can develop trading strategies to capture these price patterns for profiting purpose. These patterns in price series are regularities, which help us to predict the price series into the future. Financial trading is based on our prediction for the future market. We buy EURUSD because we predict that EURUSD have the high chance to go up. We sell EURUSD because we predict that EURUSD have the high chance to go down. If we understand the regularities of the financial market better, then we can make better trading and investment decision too.
https://algotrading-investment.com/2020/06/03/the-five-regularities-in-the-financial-market/
The Financial Market is the place where different investors are trading securities like equities, bonds, currencies, and derivatives. It is the market place to facilitate the exchange of securities between buyers and sellers. Loosely speaking, the financial market works like the auction market where buyers enter competitive bids and where sellers enter competitive offers at the same time. However, unlike auction market, in the financial market securities are often traded without delivering actual physical goods. Although some companies can use financial market to hedge their physical positions, in this book, we will assume that you are more of speculator who wants to profit from the market dynamics. Various buyers and sellers with different attributes, different geographic location, different purchasing power and different financial goals, forms the daily transactions of the financial market. Therefore, the dynamics of financial market can be represented as the crowd behaviour. It is not necessarily perfectly rational place but the fundamentals play some important role behind the market dynamics up to some degree.
For traders and investors, it is important to develop the right trading strategy for specific market. Good trading strategy never comes blindly. Understanding the underlying dynamics for the financial market is the key requirement to build a solid trading strategy. Then, what is the underlying dynamics for the financial market and how can we study them to benefit our trading and investment? Scientists had a strong interest in the dynamics of the financial market for many decades. They have extensively studied the dynamics of the price series in the Stocks and Forex market. The simplest but most effective way to study the dynamics might be the decomposition approach. In decomposition, literarily we are breaking down some complex system into the simple and digestible bits. Then we use this decomposed bits to predict the behaviour of the complex system.
When we apply the decomposing technique, the price series can be decomposed into several sub price patterns. In fact, the sub price patterns are the regularities that constitute the dynamics of the financial price series (Figure 3-1). For trading and investment, we make use of the knowledge of these regularities to predict up or down movement of the financial market. All the known trading strategies, including simple and complex ones, are based on some of these regularities existing in the price series. Remember that none of trading strategies is merely created to offer you just some luck or based on some random theory.
Figure 3-1: The concept of the decomposition for the financial price series.
In Figure 3-1, what could be the pattern 1, pattern 2, pattern 3 and pattern N making up the real world financial price series? Yet, many different version of explanations exist to describe the price patterns in the financial market. Among them, Gardner’s version considers the trend and seasonality as the main patterns of the price series (Gardner, 1987, p175). Many traders are already familiar with trend in the financial markets. For example, many technical indicators like exponential moving average and MACD were developed to visualize trend. Seasonality is literally seasonal fluctuations in the market. It is also used by many traders. For example, because the sales of Ice Creams increase during summer, stock price for Ice Creams Company can go up due to the increased profits during summer. This sort of patterns will make up the seasonal fluctuations. The Gardner’s framework is intuitive and easy to understand because trend and seasonality are the backbone of many techniques used for the univariate price series in many scientific fields. Although Gardner’s framework does not mention about random process explicitly, his framework already assumed that any price series include some random process.
Depending on their underlying dynamics, the price series can show the multitude of behaviours because real world price series are made up from different magnitude of each price pattern. For example, sometimes, the price series can exhibit strong trend without seasonality and vice versa. Sometimes the price series can exhibit some trend with some seasonality. In the Gardner’s trend-seasonality framework, we can generate twelve different behaviour of the price series by combining the basic trend and seasonal patterns as shown in Figure 3-2. Scientist uses this framework to categorize many real world price series for prediction purpose. Then, what is the real value of the Price Pattern Table in Figure 3-2 for traders? As a trader, we can develop trading strategies to capture these price patterns for profiting purpose. These patterns in price series are regularities, which help us to predict the price series into the future. Financial trading is based on our prediction for the future market. We buy EURUSD because we predict that EURUSD have the high chance to go up. We sell EURUSD because we predict that EURUSD have the high chance to go down. If we understand the regularities of the financial market better, then we can make better trading and investment decision too.
https://algotrading-investment.com/2020/06/03/the-five-regularities-in-the-financial-market/
![Young Ho Seo](https://c.mql5.com/avatar/2014/1/52E29441-6BDD.jpg)
Young Ho Seo
Random Process
Most of time, the financial price series will exhibit some Random fluctuations. Therefore, you have to assume that some random process exists in the real world financial price series always. Random fluctuation is literarily independent from any causality and therefore they are not the predictable component in the price series. Randomness is an opposite component to the regularities we are looking to capture in the price series. Therefore, if the price series have strong randomness, it is bad for us. It is always better for traders to assume that any real world price series possess some randomness because they really do. Such a random process in the financial market data might be either white noise or something else. When the random process exists on their own, they are simple in terms of modelling and analysing because you can only describe the random series with mean and standard deviation. In real world, the financial market data possess the mixed price patterns between randomness and regularities. For simplicity, just imagine that we have isolated the randomness from our price series into a container in our laboratory. Then they will look like as in Figure 4-1.
Figure 4-1: White Noise series with fixed mean and average.
In fact, the best predictive model or trading strategy is those separating randomness perfectly from regularities. However, the perfect isolating of randomness from the regularities is almost impossible because the perfect quantification of randomness is not possible. Normally the daily return series for Stocks and Forex market data is considered as white noise random process. If they are white noise process, then the return series will have the fixed mean and standard deviation. The mean of the return series for a particular stock can be positive or negative rather than zero. If the mean of the return series is positive, you can buy and hold the stock for long run. If the mean of the return series is negative, you can sell and hold.
If the return series have zero mean, then you will lose money either buying or selling because of the commission you have to pay for. Buy and hold or sell and hold strategies are the typical long run passive strategies and this type of passive strategy need to be reinforced with modern portfolio theory. Otherwise, the long run strategy might suffer from the long period of drawdown.
If we synthetically generate a random price series by summing up the value of the previous random price series, this series is called the Random Walk series. In contrast to the White noise series, we cannot recognize the fluctuation around the fixed mean any more for Random Walk series (Figure 4-2). Instead, they look like they are moving upwards or downwards. Sometimes, the Random Walk series move as if they will never come back to their origin any more. Since the Random Walk series are generated from summing unpredictable white noise series, the Random Walk series are also unpredictable too. In general, Random Walk series look like real world stocks and forex market price series but it will not show any regularities like trend or cyclic behaviour. Many people blindly assume that the price series are the perfect random walk series and they are not predictable. However, remember that there are the fundamentals moving the market. Traders and investors are not perfectly rational but they will also make their trading and investment decision based on the market fundamentals. For example, if USA increases the interest rate, then US dollar will be appreciated by pushing US dollar high against Euro. If the company director is involved with some serious sex scandals risking his director’s position, then the share price can be depreciated or this might cause the increased volatility of that share price at least. Of course, you might find many instances where fundamentals did not move the market. Even in such a case, it is better to assume that some unknown factors cancelled out the fundamental effect rather than assuming the market is totally Random Walk. You should assume the random walk process only if you have gathered strong evidence with the price series.
Figure 4-2: Synthetic Random Walk series.
Trading Strategy Note
If the price series is the pure Random Walk series, traders and investors have a very few choices for his strategy. If the return of the price series has the mean of zero, then there is no point to trade. However, with some positive return, you can construct portfolio of many assets according to the Modern Portfolio theory (Harry Markowitz, 1952). This is a systematic approach to reduce the risk dramatically across many different assets. However, this strategy is limited to the investors with large capitals since one has to split his investment over the reasonable number of assets. In addition, this strategy requires to solve the optimization problem to calculate weights for the capital allocation for the given correlation matrix between assets. Therefore, one will require a specialized software package to construct the optimal portfolio using this methodology. In addition, there are some fund management company make use of skewness in the return series for their investment strategy. This information is probably worth to note for your strategy development. Skewness can be readily obtained in many analytical tools like MS-Excel and MatLab.
Analytical Note
ARIMA (Autoregressive Integrated Moving Average) model is a popular econometric model used to study the different properties of the price series data in Finance and Economics. A white noise series can be modelled using ARIMA (0, 0, 0) since white noise is assumed to be stationary. At the same time, Random walk can be modelled using ARIMA (0, 1, 0) involving one order of the difference term. Therefore, we can clearly see that the difference between White Noise and Random Walk process is the presence of stationary process. To confirm the white noise process, the price series must be free from the serial correlation in the data. The distribution is assumed as the normal Gaussian distribution too.
https://algotrading-investment.com/2020/06/04/random-process/
Most of time, the financial price series will exhibit some Random fluctuations. Therefore, you have to assume that some random process exists in the real world financial price series always. Random fluctuation is literarily independent from any causality and therefore they are not the predictable component in the price series. Randomness is an opposite component to the regularities we are looking to capture in the price series. Therefore, if the price series have strong randomness, it is bad for us. It is always better for traders to assume that any real world price series possess some randomness because they really do. Such a random process in the financial market data might be either white noise or something else. When the random process exists on their own, they are simple in terms of modelling and analysing because you can only describe the random series with mean and standard deviation. In real world, the financial market data possess the mixed price patterns between randomness and regularities. For simplicity, just imagine that we have isolated the randomness from our price series into a container in our laboratory. Then they will look like as in Figure 4-1.
Figure 4-1: White Noise series with fixed mean and average.
In fact, the best predictive model or trading strategy is those separating randomness perfectly from regularities. However, the perfect isolating of randomness from the regularities is almost impossible because the perfect quantification of randomness is not possible. Normally the daily return series for Stocks and Forex market data is considered as white noise random process. If they are white noise process, then the return series will have the fixed mean and standard deviation. The mean of the return series for a particular stock can be positive or negative rather than zero. If the mean of the return series is positive, you can buy and hold the stock for long run. If the mean of the return series is negative, you can sell and hold.
If the return series have zero mean, then you will lose money either buying or selling because of the commission you have to pay for. Buy and hold or sell and hold strategies are the typical long run passive strategies and this type of passive strategy need to be reinforced with modern portfolio theory. Otherwise, the long run strategy might suffer from the long period of drawdown.
If we synthetically generate a random price series by summing up the value of the previous random price series, this series is called the Random Walk series. In contrast to the White noise series, we cannot recognize the fluctuation around the fixed mean any more for Random Walk series (Figure 4-2). Instead, they look like they are moving upwards or downwards. Sometimes, the Random Walk series move as if they will never come back to their origin any more. Since the Random Walk series are generated from summing unpredictable white noise series, the Random Walk series are also unpredictable too. In general, Random Walk series look like real world stocks and forex market price series but it will not show any regularities like trend or cyclic behaviour. Many people blindly assume that the price series are the perfect random walk series and they are not predictable. However, remember that there are the fundamentals moving the market. Traders and investors are not perfectly rational but they will also make their trading and investment decision based on the market fundamentals. For example, if USA increases the interest rate, then US dollar will be appreciated by pushing US dollar high against Euro. If the company director is involved with some serious sex scandals risking his director’s position, then the share price can be depreciated or this might cause the increased volatility of that share price at least. Of course, you might find many instances where fundamentals did not move the market. Even in such a case, it is better to assume that some unknown factors cancelled out the fundamental effect rather than assuming the market is totally Random Walk. You should assume the random walk process only if you have gathered strong evidence with the price series.
Figure 4-2: Synthetic Random Walk series.
Trading Strategy Note
If the price series is the pure Random Walk series, traders and investors have a very few choices for his strategy. If the return of the price series has the mean of zero, then there is no point to trade. However, with some positive return, you can construct portfolio of many assets according to the Modern Portfolio theory (Harry Markowitz, 1952). This is a systematic approach to reduce the risk dramatically across many different assets. However, this strategy is limited to the investors with large capitals since one has to split his investment over the reasonable number of assets. In addition, this strategy requires to solve the optimization problem to calculate weights for the capital allocation for the given correlation matrix between assets. Therefore, one will require a specialized software package to construct the optimal portfolio using this methodology. In addition, there are some fund management company make use of skewness in the return series for their investment strategy. This information is probably worth to note for your strategy development. Skewness can be readily obtained in many analytical tools like MS-Excel and MatLab.
Analytical Note
ARIMA (Autoregressive Integrated Moving Average) model is a popular econometric model used to study the different properties of the price series data in Finance and Economics. A white noise series can be modelled using ARIMA (0, 0, 0) since white noise is assumed to be stationary. At the same time, Random walk can be modelled using ARIMA (0, 1, 0) involving one order of the difference term. Therefore, we can clearly see that the difference between White Noise and Random Walk process is the presence of stationary process. To confirm the white noise process, the price series must be free from the serial correlation in the data. The distribution is assumed as the normal Gaussian distribution too.
https://algotrading-investment.com/2020/06/04/random-process/
![Young Ho Seo](https://c.mql5.com/avatar/2014/1/52E29441-6BDD.jpg)
Young Ho Seo
Some More Tips about Stationary Process in Forex Trading
In Forex trading, a stationary process refers to a time series whose statistical properties, such as mean, variance, and autocorrelation, remain constant over time. Understanding and identifying stationary processes is crucial because many statistical and machine learning models used for forecasting and analysis assume that the underlying data is stationary. When a time series is not stationary, it can lead to inaccurate predictions and misinterpretations of market behavior.
Key Concepts of Stationary Processes
Definition of Stationarity :
A time series is stationary if its statistical properties do not change over time. This means the mean, variance, and autocorrelation structure are constant.
Types of Stationarity :
Strict Stationarity : The joint distribution of any set of observations is identical regardless of time shifts.
Weak (or Second-Order) Stationarity : Only the first two moments (mean and variance) and autocovariance structure are constant over time.
Non-Stationary Processes :
A non-stationary time series has properties that change over time. Common examples include trends, seasonality, and varying volatility.
Importance in Forex Trading
Model Assumptions :
Many predictive models, such as ARIMA (AutoRegressive Integrated Moving Average), assume the data is stationary. Using non-stationary data with these models can lead to unreliable forecasts.
Statistical Inference :
Stationary processes allow for consistent and reliable statistical inference, making it easier to identify underlying patterns and relationships in the data.
Identifying Stationarity
Visual Inspection :
Plot the time series and look for constant mean and variance. Trends or patterns indicate non-stationarity.
Statistical Tests :
Augmented Dickey-Fuller (ADF) Test : Tests the null hypothesis that a unit root is present in the time series (i.e., the series is non-stationary).
Phillips-Perron (PP) Test : Similar to ADF but accounts for serial correlation and heteroskedasticity in the error terms.
Kwiatkowski-Phillips-Schmidt-Shin (KPSS) Test : Tests the null hypothesis that the series is stationary.
Autocorrelation Function (ACF) and Partial Autocorrelation Function (PACF) :
Examine the ACF and PACF plots. A slow decay indicates non-stationarity, while a quick drop suggests stationarity.
Transforming Non-Stationary Data to Stationary
Differencing :
Subtract the previous observation from the current observation. This process can be repeated (first difference, second difference) until stationarity is achieved.
Log Transformation :
Apply a logarithm to stabilize the variance.
De-trending :
Remove the trend component from the series.
Seasonal Adjustment :
Remove seasonal effects using methods like Seasonal Decomposition of Time Series (STL).
Practical Application in Forex Trading
Forecasting Models :
ARIMA Model : Combines autoregression, differencing, and moving average components. It requires the time series to be stationary. The ARIMA model is commonly used for predicting future currency prices.
GARCH Model : Generalized Autoregressive Conditional Heteroskedasticity model is used for modeling volatility. It also assumes stationarity in the variance of the time series.
Technical Analysis :
Stationary processes are used in various technical indicators. For example, moving averages and Bollinger Bands assume some form of stationarity to provide meaningful insights.
Algorithmic Trading :
Algorithms rely on stationary data for backtesting and optimization. Ensuring stationarity improves the robustness of trading strategies.
Examples
Stationary Series :
A currency pair's daily returns might exhibit stationarity if the returns' mean and variance are constant over time.
Non-Stationary Series :
The actual price level of a currency pair is often non-stationary due to trends and changing economic conditions.
Advantages and Limitations
Advantages :
Reliable Predictions : Stationary series provide a stable basis for forecasting models, leading to more accurate predictions.
Statistical Validity : Ensures the validity of statistical tests and inferences.
Limitations :
Data Transformation : Converting non-stationary data to stationary can sometimes lead to loss of information or added complexity.
Assumption Constraints : Some market behaviors might be inherently non-stationary, challenging the applicability of certain models.
Conclusion
Understanding stationary processes in Forex trading is crucial for building reliable predictive models and making informed trading decisions. By identifying and transforming non-stationary data, traders can ensure their analysis and models are robust, leading to more accurate forecasts and better risk management. Tools like the ADF test, differencing, and log transformation are essential for working with time series data in the dynamic Forex market. https://algotrading-investment.com/2020/06/04/stationary-process-no-trend/
Some More Tips about Stationary Process in Forex Trading
In Forex trading, a stationary process refers to a time series whose statistical properties, such as mean, variance, and autocorrelation, remain constant over time. Understanding and identifying stationary processes is crucial because many statistical and machine learning models used for forecasting and analysis assume that the underlying data is stationary. When a time series is not stationary, it can lead to inaccurate predictions and misinterpretations of market behavior.
Key Concepts of Stationary Processes
Definition of Stationarity :
A time series is stationary if its statistical properties do not change over time. This means the mean, variance, and autocorrelation structure are constant.
Types of Stationarity :
Strict Stationarity : The joint distribution of any set of observations is identical regardless of time shifts.
Weak (or Second-Order) Stationarity : Only the first two moments (mean and variance) and autocovariance structure are constant over time.
Non-Stationary Processes :
A non-stationary time series has properties that change over time. Common examples include trends, seasonality, and varying volatility.
Importance in Forex Trading
Model Assumptions :
Many predictive models, such as ARIMA (AutoRegressive Integrated Moving Average), assume the data is stationary. Using non-stationary data with these models can lead to unreliable forecasts.
Statistical Inference :
Stationary processes allow for consistent and reliable statistical inference, making it easier to identify underlying patterns and relationships in the data.
Identifying Stationarity
Visual Inspection :
Plot the time series and look for constant mean and variance. Trends or patterns indicate non-stationarity.
Statistical Tests :
Augmented Dickey-Fuller (ADF) Test : Tests the null hypothesis that a unit root is present in the time series (i.e., the series is non-stationary).
Phillips-Perron (PP) Test : Similar to ADF but accounts for serial correlation and heteroskedasticity in the error terms.
Kwiatkowski-Phillips-Schmidt-Shin (KPSS) Test : Tests the null hypothesis that the series is stationary.
Autocorrelation Function (ACF) and Partial Autocorrelation Function (PACF) :
Examine the ACF and PACF plots. A slow decay indicates non-stationarity, while a quick drop suggests stationarity.
Transforming Non-Stationary Data to Stationary
Differencing :
Subtract the previous observation from the current observation. This process can be repeated (first difference, second difference) until stationarity is achieved.
Log Transformation :
Apply a logarithm to stabilize the variance.
De-trending :
Remove the trend component from the series.
Seasonal Adjustment :
Remove seasonal effects using methods like Seasonal Decomposition of Time Series (STL).
Practical Application in Forex Trading
Forecasting Models :
ARIMA Model : Combines autoregression, differencing, and moving average components. It requires the time series to be stationary. The ARIMA model is commonly used for predicting future currency prices.
GARCH Model : Generalized Autoregressive Conditional Heteroskedasticity model is used for modeling volatility. It also assumes stationarity in the variance of the time series.
Technical Analysis :
Stationary processes are used in various technical indicators. For example, moving averages and Bollinger Bands assume some form of stationarity to provide meaningful insights.
Algorithmic Trading :
Algorithms rely on stationary data for backtesting and optimization. Ensuring stationarity improves the robustness of trading strategies.
Examples
Stationary Series :
A currency pair's daily returns might exhibit stationarity if the returns' mean and variance are constant over time.
Non-Stationary Series :
The actual price level of a currency pair is often non-stationary due to trends and changing economic conditions.
Advantages and Limitations
Advantages :
Reliable Predictions : Stationary series provide a stable basis for forecasting models, leading to more accurate predictions.
Statistical Validity : Ensures the validity of statistical tests and inferences.
Limitations :
Data Transformation : Converting non-stationary data to stationary can sometimes lead to loss of information or added complexity.
Assumption Constraints : Some market behaviors might be inherently non-stationary, challenging the applicability of certain models.
Conclusion
Understanding stationary processes in Forex trading is crucial for building reliable predictive models and making informed trading decisions. By identifying and transforming non-stationary data, traders can ensure their analysis and models are robust, leading to more accurate forecasts and better risk management. Tools like the ADF test, differencing, and log transformation are essential for working with time series data in the dynamic Forex market. https://algotrading-investment.com/2020/06/04/stationary-process-no-trend/
![Young Ho Seo](https://c.mql5.com/avatar/2014/1/52E29441-6BDD.jpg)
Young Ho Seo
Equilibrium Process (Trend)
Figure 6-1: Equilibrium process is corresponding to price pattern (2, 1), (3, 1) and (4, 1) in the table.
Simply speaking, Equilibrium process is conceptually similar to trend. It is the market force moving the price series in one direction. Equilibrium process is not different from the equilibrium concept found in the classic supply-demand economic theory. Literally, it is the force to move price to release the unbalance between supply and demand. There are many types of Equilibrium process (trend). They might be linear trend like Pattern (2, 1) in Figure 6-2 or they might be nonlinear trend like Pattern (3, 1) and (4, 1) in Figure 6-2. The three trend patterns, that are linear, exponential and damped, are common. Exponential trend (3, 1) represents the strong trend with increasing momentum. Damped trend (4, 1) represents the trend with reducing momentum. Figure 6-2 presents the six trend patterns for both bullish and bearish markets. These six trend patterns are found most frequently in the financial market comparing to other trend patterns.
Figure 6-2: Trend Patterns for bullish and bearish market.
Equilibrium process is highly related to market fundamentals. Equilibrium process is the direct representation of the supply demand balance in the financial market. Assuming there is the fixed number of shares for Google, if more people want to buy a stock than sell it, then the share price for Google will move up. We call this as a bullish trend. Likewise, if more people want to sell a stock than buy it, there would be greater supply than demand and the price would fall. We call this as a bearish trend. When there is the imbalance in supply and demand force, then the price will try to move towards equilibrium to release the imbalance. The supply demand imbalance is often caused by the fundamental change in the market. For example, change in the taxation or interest rate can change the quantity of supply and demand force dramatically. Natural disasters like Earthquake or Hurricanes or other serious transmissible diseases can influence the dynamics of supply demand too in the financial markets. War, terror, or other political corruption can reduce the demand of the financial assets affected by them.
Figure 6-3: Economic Supply Demand curve.
If the Equilibrium process (trend) is overwhelmingly dominating in the price series, prediction is easier. However, the strength of Equilibrium process differs for different financial price series. It is also not easy to quantify or to isolate the portion of Equilibrium process from rest of regularities perfectly. In reality, Equilibrium process can be caused by multiple information sources introduced in different time (Figure 6-4). Each information source will be diffusing across the market in time. Some of them are slowly and some of them are quickly. Some information source will introduce bullish Equilibrium process, which increase demand and reduce supply. Some other information source will introduce bearish Equilibrium process, which reduce demand and increase supply. Since each trader and investor will react differently to different information sources, the diffusion process of each information source can vary dramatically. Modelling or visualization of diffusion process of multiple information sources is complex. If there are many bullish and bearish Equilibrium process acts together in the price series, the simplest way of guessing the market direction is calculating the net of bullish and bearish equilibrium process in the market. However, with simple netting, you will still miss the time factor because each information source will be diffused in different speed. Another difficulty comes from quantifying bullish and bearish strength of each source. Typically, to quantify them correctly, we need good amount of historical data. Especially if you need the accuracy for trading quality, you will need much more data than just doing some academic research. To most of average trader, this is not accessible.
https://algotrading-investment.com/2020/06/04/equilibrium-process-trend/
Figure 6-1: Equilibrium process is corresponding to price pattern (2, 1), (3, 1) and (4, 1) in the table.
Simply speaking, Equilibrium process is conceptually similar to trend. It is the market force moving the price series in one direction. Equilibrium process is not different from the equilibrium concept found in the classic supply-demand economic theory. Literally, it is the force to move price to release the unbalance between supply and demand. There are many types of Equilibrium process (trend). They might be linear trend like Pattern (2, 1) in Figure 6-2 or they might be nonlinear trend like Pattern (3, 1) and (4, 1) in Figure 6-2. The three trend patterns, that are linear, exponential and damped, are common. Exponential trend (3, 1) represents the strong trend with increasing momentum. Damped trend (4, 1) represents the trend with reducing momentum. Figure 6-2 presents the six trend patterns for both bullish and bearish markets. These six trend patterns are found most frequently in the financial market comparing to other trend patterns.
Figure 6-2: Trend Patterns for bullish and bearish market.
Equilibrium process is highly related to market fundamentals. Equilibrium process is the direct representation of the supply demand balance in the financial market. Assuming there is the fixed number of shares for Google, if more people want to buy a stock than sell it, then the share price for Google will move up. We call this as a bullish trend. Likewise, if more people want to sell a stock than buy it, there would be greater supply than demand and the price would fall. We call this as a bearish trend. When there is the imbalance in supply and demand force, then the price will try to move towards equilibrium to release the imbalance. The supply demand imbalance is often caused by the fundamental change in the market. For example, change in the taxation or interest rate can change the quantity of supply and demand force dramatically. Natural disasters like Earthquake or Hurricanes or other serious transmissible diseases can influence the dynamics of supply demand too in the financial markets. War, terror, or other political corruption can reduce the demand of the financial assets affected by them.
Figure 6-3: Economic Supply Demand curve.
If the Equilibrium process (trend) is overwhelmingly dominating in the price series, prediction is easier. However, the strength of Equilibrium process differs for different financial price series. It is also not easy to quantify or to isolate the portion of Equilibrium process from rest of regularities perfectly. In reality, Equilibrium process can be caused by multiple information sources introduced in different time (Figure 6-4). Each information source will be diffusing across the market in time. Some of them are slowly and some of them are quickly. Some information source will introduce bullish Equilibrium process, which increase demand and reduce supply. Some other information source will introduce bearish Equilibrium process, which reduce demand and increase supply. Since each trader and investor will react differently to different information sources, the diffusion process of each information source can vary dramatically. Modelling or visualization of diffusion process of multiple information sources is complex. If there are many bullish and bearish Equilibrium process acts together in the price series, the simplest way of guessing the market direction is calculating the net of bullish and bearish equilibrium process in the market. However, with simple netting, you will still miss the time factor because each information source will be diffused in different speed. Another difficulty comes from quantifying bullish and bearish strength of each source. Typically, to quantify them correctly, we need good amount of historical data. Especially if you need the accuracy for trading quality, you will need much more data than just doing some academic research. To most of average trader, this is not accessible.
https://algotrading-investment.com/2020/06/04/equilibrium-process-trend/
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