Young Ho Seo / Профиль

Automatic Resizing your Stop Loss and Take Profit Level with Harmonic Pattern Plus (Harmonic Pattern Scenario Planner)

Having understood all the concept behind the Pattern Completion Interval, you might observe that sometime price can react outside the pattern completion interval. Sure, there is nothing perfect in the world. As long as you understand the pros and cons of using large stop loss size, it is still fine to control your own stop loss size.

However, we still prefer to express stop loss size in terms of pattern completion interval range for convenience. For example, if the original stop loss size was equal to 1 x pattern completion interval, you can certainly use 1.5 x pattern completion interval or 2 x pattern completion interval.

Another consideration before you are using pattern completion interval, if you can enter the market at the competitive price, then you can feel less guilty when you increase your stop loss size because you are still remaining good rewards/Risk ratio. On the other hands, if you have entered market at not so competitive price, then you might be cautious when you increase your stop loss size.

The same feature applies to X3 Chart Pattern Scanner (Non Repainting and Non Lagging Harmonic Pattern and Elliott Wave pattern scanner.)

In addition, you can watch the YouTube Video titled feel what is the automated harmonic pattern indicator like. For your information, we provides two YouTube videos with title and links below.

YouTube “Harmonic Pattern Indicator”: https://youtu.be/CzYUwk5qeCk

YouTube “Non Repainting Non Lagging Harmonic Pattern Indicator”: https://youtu.be/uMlmMquefGQ

Harmonic Pattern Plus

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/

Harmonic Pattern Scenario Planner

https://www.mql5.com/en/market/product/6101

https://www.mql5.com/en/market/product/6240

https://algotrading-investment.com/portfolio-item/harmonic-pattern-scenario-planner/

X3 Chart Pattern Scanner

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/

Volume Spread Analysis Indicator List

We provide three different Volume Spread Analysis indicators and volume based tools. Our volume spread analysis tools are the hybrid of volume spread analysis and signal processing theory.

These tools will help you to complete your trading decision with high precision. As long as you understand the concept of the Accumulation and Distribution area in the volume spread analysis, these tools will help you to predict the presence of Accumulation and Distribution area. Hence, you can predict the best trading opportunity.

Firstly, Volume Spread Pattern Indicator is the powerful volume spread analysis indicator that operated across multiple timeframe. Volume Spread Pattern Indicator will not only provide the bearish and bullish volume spread pattern in the current time frame but also it will detect the same patterns across all timeframe. You just need to open one chart and you will be notified bullish and bearish patterns in all timeframe in real time.

Here is the link to Volume Spread Pattern Indicator.

https://www.mql5.com/en/market/product/32961

https://www.mql5.com/en/market/product/32960

https://algotrading-investment.com/portfolio-item/volume-spread-pattern-indicator/

Secondly, Volume Spread Pattern Detector is the light version of Volume Spread Pattern Indicator above. This is free tool with some limited features. However, Volume Spread Pattern Detector is used by thousands of traders. Especially, it works great with the support and resistance to confirm the turning point. This is free tool. Just grab one.

https://www.mql5.com/en/market/product/28438

https://www.mql5.com/en/market/product/28439

https://algotrading-investment.com/portfolio-item/volume-spread-pattern-detector/

Both Volume Spread Pattern Indicator and Volume Spread Pattern Detector works well with Excessive Momentum indicator as Excessive Momentum indicator helps to detect the potential Accumulation and Distribution area automatically. Hence, if you are using Excessive Momentum Indicator, then you can use one between Volume Spread Pattern Indicator or Volume Spread Pattern Detector. In addition, we provide the YouTube video to accomplish the basic operations of Excessive Momentum Indicator.

YouTube Video (Excessive Momentum Indicator): https://youtu.be/oztARcXsAVA

YouTube Video (Excessive Momentum Indicator Explained): https://youtu.be/A4JcTcakOKw

Here is link to Excessive Momentum Indicator for MetaTrader 4 and MetaTrader 5.

https://algotrading-investment.com/portfolio-item/excessive-momentum-indicator/

https://www.mql5.com/en/market/product/30641

https://www.mql5.com/en/market/product/30621

Thirdly, we provide the volume Zone Oscillator. This is another useful free tool that utilizes the volume information for your trading. You can use these tools for volume spread analysis, Harmonic Pattern, Elliott Wave Pattern, X3 Price Pattern further. This is free tool. Just grab one.

https://algotrading-investment.com/portfolio-item/volume-zone-oscillator/

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.



Figure 2-5: Broken candlestick chart for NZDSGD currency pairs in 1-minute timeframe.



Figure 2-6: EURUSD Tick chat with 100 tick volume. On average, each bar was formed in 182.36 seconds.

Another popular visualization technique, which does not use the fixed time interval, is the Renko chart. The charting principle of the Renko Chart is quite different from the rest. For example, Renko chart is constructed by drawing bricks of fixed height in series. To illustrate the idea, consider Figure 2-7, if the price moved up by 5 points from the top of brick, then we will draw one white up brick. Likewise, if the price moved down by 5 points from the bottom of the brick, then we will draw one black down brick. The brick will be drawn either on the top or on the bottom of the other brick always.



Figure 2-7: Conceptual representation of Renko chart.

Figure 2-8 shows what happens when we transform about 100 candlesticks into Renko bricks with height of 20 pips in EURUSD 1 hour chart. As you can see, Renko bricks are much more concise and 100 candlesticks was transformed into only 52 Renko bricks. During this transformation, we are losing time information of our candlestick chart. Another important point you can observe here is that the Renko chart provide much smoother and readable visualization representation of trend. This is because the equal height of Renko brick reduces a lot of noise present in candlestick chart. With Renko Brick chart, it is much easier to identify trend and reversal patterns.



Figure 2-8: Daily EURUSD price series and Renko chart on the same period.

There are some drawbacks in Renko chart too. Because Renko chart lose all time information from our candlestick chart, you are no longer able to compare your normal candlestick chart to your Renko chart. In addition, unlike the candlestick chart, you have to select the sensible height of brick. Since there are many benefits using Renko chart, some traders are never worried about these disadvantages. Overall, Renko chart provide quite a lot of features which other chart does not provide.

About this Article

This article is the part taken from the draft version of the Book: Scientific Guide to Price Action and Pattern Trading (Wisdom of Trend, Cycle, and Fractal Wave). Full version of the book can be found from the link below:

https://algotrading-investment.com/portfolio-item/scientific-guide-to-price-action-and-pattern-trading/

Advanced Price Pattern Scanner uses highly sophisticated pattern detection algorithm. However, we have designed it in the easy to use and intuitive manner. Advanced Price Pattern Scanner will show all the patterns in your chart in the most efficient format for your trading. It is non repainting pattern detector. Below are the links to Advanced Price Pattern Scanner.

https://algotrading-investment.com/portfolio-item/advanced-price-pattern-scanner/

https://www.mql5.com/en/market/product/24679

https://www.mql5.com/en/market/product/24678

Below is the landing page for Optimum Chart (Standalone Charting and Analytical Platform).

https://algotrading-investment.com/2019/07/23/optimum-chart/

Advanced Harmonic Pattern Detection Indicator

Harmonic Pattern Scenario Planner is an advanced Harmonic Pattern Detection Indicator. This is probably the most sophisticated harmonic pattern detection indicator in the market.

Harmonic Pattern Scenario planner can be used like Harmonic Pattern Plus. Hence, it is easy and friendly to use. At the same time, it combines powerful Monte Carlos Simulation to provide you advanced harmonic pattern search capability.

Monte Carlo Simulation can help you to find future reversal points in advance.

Here is the product link to Harmonic Pattern Scenario Planner. You can find more about the features of this advanced Harmonic Pattern Scenario Planner.

https://algotrading-investment.com/portfolio-item/harmonic-pattern-scenario-planner/

https://www.mql5.com/en/market/product/6101

https://www.mql5.com/en/market/product/6240

Fibonacci Retracement and Expansion Patterns

A Fibonacci analysis is a popular tool among technical traders. It is based on the Fibonacci sequence numbers identified by Leonardo Fibonacci in the 13th century. Here are the Fibonacci sequence numbers:

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89,144, 233, 377, 610, 987, 1597, 2584, 4181, 6765, …………………

As the Fibonacci number become large, the constant relationship is established between neighbouring numbers. For example, every time, when we divide the former number by latter: Fn-1/Fn, we will get nearly 0.618 ratio. Likewise, when we divide the latter number by former: Fn/Fn-1, we will get nearly 1.618. These two Fibonacci ratio 0.618 and 1.618 are considered as the Golden Ratio. We can use these Golden ratios to start our Fibonacci analysis. However, many technical traders use additional Fibonacci ratios derived from the Golden ratio. Since the calculation of each Fibonacci ratio is well known, I have listed all the available Fibonacci ratio calculation in Table 1-1.

Type Ratio Calculation
Primary 0.618 Fn-1/Fn of Fibonacci numbers
Primary 1.618 Fn/Fn-1 of Fibonacci numbers
Primary 0.786
Primary 1.272
Secondary 0.382 0.382=0.618*0.618
Secondary 2.618 2.618=1.618*1.618
Secondary 4.236 4.236=1.618*1.618*1.618
Secondary 6.854 6.854=1.618*1.618*1.618*1.618
Secondary 11.089 11.089=1.618*1.618*1.618*1.618*1.618
Secondary 0.500 0.500=1.000/2.000
Secondary 1.000 Unity
Secondary 2.000 Fibonacci Prime Number
Secondary 3.000 Fibonacci Prime Number
Secondary 5.000 Fibonacci Prime Number
Secondary 13.000 Fibonacci Prime Number
Secondary 1.414
Secondary 1.732
Secondary 2.236
Secondary 3.610
Secondary 3.142 3.142 = Pi = circumference /diameter of the circle
Table 1-1: Fibonacci ratios and corresponding calculations to derive each ratio.

In fact, Fibonacci analysis in financial trading is extremely popular. It is popular on its own. At the same time, it is also basis for many other popular technical analyses like harmonic pattern, Elliott wave pattern, etc. As with support resistance analysis, Fibonacci analysis is probably the most popular technical analysis among traders. There are two important techniques in Fibonacci analysis. First technique is Fibonacci retracement. Second technique is Fibonacci expansion. If you are looking at some other books, you might find some confusing description about retracement, extension, expansion, and projection. For example, the book might give two different names for the ratio over 100% and for the ratio below 100%. We are not using the confusing name practice here but we will stick with just retracement and expansion because it is simple. Both retracement and expansion will need two significant peak and trough to pick up in your chart. If you want to use mechanical setup with Fibonacci analysis, the best way to start is to use the Peak Trough Transformation using ZigZag indicator. Let us start with retracement. For simple example, we use 61.8% Golden ratio. For retracement, we can have two cases including Trough-Peak retracement and Peak-Trough retracement. In Trough-Peak retracement, 61.8% retracement level will act as a support level. Price will reverse in the correction phase to follow the previous bullish movement.



Figure 1-1: Trough-Peak Retracement Example on EURUSD H4 timeframe.

Likewise, in Peak-Trough retracement, 61.8% will act as resistance. Price will reverse in the correction phase to follow the previous bearish movement. In both case, the 61.8% retracement will be measured from end of correction phase to previous peak or trough. We have used percentage in this example. Some technical traders prefer to use the ratios in decimal places like 0.618. It is just your preferences. Using ratio or percentage does not affect the accuracy of trading. You can use other Fibonacci ratios like 0.382 or 1.618 in the exactly same way as 0.618.



Figure 1-2: Peak-Trough Retracement Example on EURUSD H4 timeframe.

Fibonacci expansion is slightly more complicated than Fibonacci retracement. Still it is considered as the basic analysis among technical trader. As in retracement technique, we can have two cases including Trough-Peak expansion and Peak-Trough expansion. In Trough-Peak expansion, we will measure the expansion from where the correction ends to next peak. In the next peak, we will expect the bearish reversal in the same direction to the correction. In fact, the 100% Expansion level is act as the resistance in Figure 1-3. Likewise, in Peak-Trough expansion, we will expect the bullish reversal in the same direction to the correction. In Figure 1-4, 61.8% expansion level acts as the support.



Figure 1-3: Trough-Peak Expansion Example on EURUSD H4 timeframe.



Figure 1-4: Peak-Trough Expansion Example on EURUSD H4 timeframe.

We have just given the technical description of Fibonacci retracement and expansion. The next thing we need to ask is what is the scientific relevance or justification behind these techniques. Unfortunately, it is hard to tell. People just used them for many decades without questioning any scientific relevance. I think most of people will use them in the future without questioning too. As I have mentioned, the very purpose of this book is to connect common technical analysis and trading strategy to the existing science. We really want to break the lack of communication between them. Therefore, we will give an answer to the question.

Connecting Fibonacci ratio to science is not overly complicated. We have already covered that the building block of fractal geometry in financial market is triangle known as equilibrium fractal wave. By drawing a triangle from trough, peak, and trough, we can simply demonstrate that Fibonacci retracement is the technique that predicting the shape ratio of the triangle. In our 61.8% retracement example, we are predicting that the shape ratio of triangle is 61.8%. As we have discussed, the loose-self similarity of equilibrium fractal wave will allow us to have any shape ratio from 0.01 to above 3.0. Our prediction of 61.8% could be wrong and the shape ratio of triangle could end up 123% or 152%, etc. Do we have any justification to predict 61.8% of the triangle? Yes, the justification is how often the shape ratio of 61.8% is repeating in history. If we have 61.8% shape ratio repeating more times than other shape ratio, then we can certainly justify our prediction. To check them, we have already introduced the measurement called Shape ratio index. It is calculated by dividing number of particular shape ratio by total number of peaks and troughs in the price series. In Figure 1-7 and Figure 1-8, we show the distribution of this Shape Ratio index for both EURUSD and GBPUSD daily timeframe. By looking at the distribution in Figure 1-7 and Figure 1-8, we can confirm that 61.8% shape ratio found 27.8% and 23.3% respectively for EURUSD and GBPUSD among all found peaks and troughs. It is certainly much better than 0% or 5%. Over 20% repeating is significant outcome even in statistical sense. However, in GBPUSD, 61.8% shape ratio is not as significant as 50.0% shape ratio. This suggests that 61.8% retracement is not optimal for some currency pairs and stock prices. Another finding is that individual currency pairs or stock price has their own preferred shape ratios.

Shape ratio of equilibrium fractal wave = current move in price units (Y2)/ previous move in price units (Y1).

Shape Ratio index = number of the particular shape of equilibrium fractal wave / total number of peaks and troughs in the price series.



Figure 1-5: Trough-Peak retracement with a triangle drawn.



Figure 1-6: Structure of one triangle, equilibrium fractal wave. It is made up from two price movements (i.e. two legs).



Figure 1-7: EFW Shape Ratio Distribution for EURUSD Daily Timeframe from 2009 09 02 to 2018 02 20 (Label inside callout box, left: Ratio, right: EFW Index, vertical axis: EFW index, horizontal axis: ratio from 0.1 to 3.0).



Figure 1-8: EFW Shape Ratio Distribution for GBPUSD Daily Timeframe from 2009 09 02 to 2018 02 20 (Label inside callout box, left: Ratio, right: EFW Index, vertical axis: EFW index, horizontal axis: ratio from 0.1 to 3.0).

Of course, we can find the scientific relevance for Fibonacci expansion technique too. To do so, we just need to create two triangles by connecting peak, trough, peak, and trough. In our 61.8% expansion example, we are predicting that the Momentum ratio of two adjacent triangles is 61.8%. The loose-self similarity will allow us to have any Momentum ratio from 0.01 to above 3.0. We could be wrong or right with our Momentum ratio prediction. To justify our choice over 61.8% expansion ratio, we just need to calculate the distribution of Momentum ratio index. Unfortunately, I do not have the calculated distribution for the case of Momentum ratio. However, I have provided you the equations in this book. You might attempt it by yourself.

Momentum ratio of equilibrium fractal wave = latest price move of current wave in price units (Y3)/ first movement of previous wave in price units (Y1) where Y3 and Y1 are in the same direction.

Momentum Ratio index = number of the particular Momentum ratio / number of peaks and troughs in the price series.



Figure 1-9: Peak-Trough Expansion Example with two triangles drawn.



Figure 1-10: Momentum ratio for two ascending Equilibrium Fractal waves

Once again, we emphasize that the distribution of Shape Ratio index and Momentum Ratio index can reveal a lot about financial market. When I first created the distribution of Shape Ratio, I felt like that I found the oil reservoir in the Sahara Desert. There were many useful insights for both scientific and financial trading purpose. I do recommend further research on this in academic level too. Finally, it is important to note that Fibonacci ratio is the basis for many other advanced technical analyses including Shape Ratio trading, Harmonic pattern, and Elliott wave patterns. Therefore, it is important to understand how the Fibonacci analysis works before you proceeding to the next chapter of this book.

About this Article

This article is the part taken from the draft version of the Book: Scientific Guide to Price Action and Pattern Trading (Wisdom of Trend, Cycle, and Fractal Wave). Full version of the book can be found from the link below:

https://algotrading-investment.com/portfolio-item/scientific-guide-to-price-action-and-pattern-trading/

You can also use Harmonic Pattern Plus in MetaTrader to accomplish your technical analysis. Harmonic Pattern Plus is the advanced Fibonacci Analysis Indicator for your trading. Below are the Links to Harmonic Pattern Plus

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/

Below is the landing page for Optimum Chart (Standalone Charting and Analytical Platform).

https://algotrading-investment.com/2019/07/23/optimum-chart/

Fibonacci Price Patterns

A Fibonacci analysis is a popular tool among technical traders. It is based on the Fibonacci sequence numbers identified by Leonardo Fibonacci in the 13th century. The Fibonacci sequence numbers are:

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89,144, 233, 377, 610, 987, 1597, 2584, 4181, 6765, …………………

As the Fibonacci number become large, the constant relationship is established between neighbouring numbers. For example, every time, when we divide the former number by latter: Fn-1/Fn, we will get nearly 0.618 ratio. Likewise, when we divide the latter number by former: Fn/Fn-1, we will get nearly 1.618. These two Fibonacci ratio 0.618 and 1.618 are considered as the Golden Ratio. We can use these Golden ratios to start our Fibonacci analysis. However, many technical traders use additional Fibonacci ratios derived from the Golden ratio. Since the calculation of each Fibonacci ratio is well known, I have listed all the available Fibonacci ratio calculation in Table 6.1.



In fact, Fibonacci pattern analysis in financial trading is extremely popular. As with support and resistance analysis, Fibonacci analysis is probably the most popular technical analysis among traders. There are two important techniques in Fibonacci analysis. First technique is Fibonacci retracement. Second technique is Fibonacci expansion. In fact, former is just one triangle pattern and latter is two triangle patterns. Hence, you can consider these two as Fibonacci price patterns. These two price patterns share the identical concept to the retracement ratio and expansion ratio.

There are two important points in regards to Fibonacci patterns. Firstly, you need to spot swing high and swing low in price series to identify Fibonacci price patterns. The easiest way of doing this is just to apply Peak Trough Transformation using either ZigZag indicator or Renko chart. Therefore, you start with predefined swing points in your chart. Secondly, Fibonacci retracement technique will concern one triangle that is two price swings. Fibonacci expansion technique will concern two triangles that are three price swings. Most importantly, calculation of Fibonacci retracement and expansion is identical to the retracement ratio and expansion ratio calculation in RECF notation. Sometimes, we might use percentage format instead of decimal format. However, two quantities are the same. For example, the Golden ratio 0.618 is the same as 61.8%.

Let us start with Fibonacci retracement example. For simple example, we use 61.8% Golden ratio. For retracement, we can have two cases including bullish (Trough-Peak) retracement and bearish (Peak-Trough) retracement. In bullish retracement, 61.8% retracement level will act as a support level. Price will reverse in the correction phase to follow the previous bullish movement. In RECF pattern definition, 61.8% bullish retracement can be expressed as below:

R0 = 0.618 = Right swing of first triangle / Left swing of first triangle



Likewise, in bearish retracement, 61.8% level will act as resistance. Price will reverse in the correction phase to follow the previous bearish movement. In both case, the 61.8% retracement will be measured from end of correction phase to previous peak or trough. We have used percentage in this example. Some technical traders prefer to use the ratios in decimal places like 0.618. It is just your preferences. Using ratio or percentage does not affect the accuracy of trading. In RECF pattern definition, 61.8% bearish retracement can be expressed as below:

R0 = 0.618 = Right swing of first triangle / Left swing of first triangle



You can use other Fibonacci ratios like 0.382 or 1.618 in the exactly same way as 0.618. Some traders use secondary Fibonacci ratios in addition to the primary ratios.

Fibonacci expansion is slightly more complicated than Fibonacci retracement because it concerns two triangle (i.e. three price swings). As in retracement technique, we can have two cases including bearish (Trough-Peak) expansion and bullish (Peak-Trough) expansion. In bearish expansion, we will measure the expansion from where the correction ends to next peak. In the next peak, we will expect the bearish reversal in the same direction to the correction. In fact, the 100% Expansion level is act as the resistance in Figure 6-3. Likewise, in bullish expansion, we will expect the bullish reversal in the same direction to the correction. In Figure 6-4, 61.8% expansion level acts as the support. In RECF pattern definition, 61.8% bearish and bullish retracement can be expressed as below:

E0 = 0.618 = Right swing of first triangle / Left swing of second triangle





About this Article

This article is the part taken from the draft version of the Book: Profitable Chart Patterns in Forex and Stock Market: Fibonacci Analysis, Harmonic Pattern, Elliott Wave, and X3 Chart Pattern. Full version of the book can be found from the link below:

https://algotrading-investment.com/portfolio-item/profitable-chart-patterns-in-forex-and-stock-market/

You can also use Harmonic Pattern Plus in MetaTrader to accomplish your technical analysis. Harmonic Pattern Plus is the advanced Fibonacci Analysis Indicator for your trading. Below are the Links to Harmonic Pattern Plus

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/

Below is the landing page for Optimum Chart (Standalone Charting and Analytical Platform).

https://algotrading-investment.com/2019/07/23/optimum-chart/

Japanese candlestick pattern is a popular pattern analysis used by many traders. It provides visual insight for buying and selling momentum present in the market. Japanese candlestick pattern can provide both entry and exit signal for traders. At the same time, many traders use them as the confirmation techniques. Japanese candlestick patterns provide both trend continuation and trend reversal patterns as shown in Figure 1-6 and Figure 1-7. The main advantage of Japanese candlestick is that they are simple and universal. Japanese candlestick pattern can be detected visually without need of the sophisticated tool. At the same time, the accuracy of the Japanese candlestick can be quite subjective to traders. Unless you want to hold your trade for one bar or two bar only, sometime Japanese candlestick pattern can predict the direction wrong against long-term price movement. So the caution must be made to use together with other technical indicator or other pattern analysis. From my experience, Japanese candlestick has more values as the confirmation technique rather than main signal for your trading.



Figure 1- 6: Trend reversal Japanese candlestick patterns.



Figure 1- 7: Trend continuation Japanese candlestick patterns.

Mathematical method is one form of the technical analysis even though they were not originally developed for the financial trading. The common statistical method like multiple regressions is often applied for trading and investment. Principal Component Analysis is the common techniques used to extract some meaningful information from the financial price series. In addition, the Vector autoregressive method or error correction model is popular mathematical trading tool among mathematician. Advantage of mathematical method is their ability to incorporate robust analytical methodology. For example, with Monte Carlos simulation method, one can develop rigorous trading strategy with precise statistical inference about the trading setup. For example, traders can illustrate the worst and best outcome of the trading setup for the given volatility of the price series. The disadvantage of the mathematical method is that they might be too complex for average traders. Even though modern trading software comes with the built in script language, implementation of serious mathematical model takes considerable amount of time and efforts for trading and investment. It is also important for the model builder to understand the operating principle and practical limitation of the methods. For example, the Generalized Autoregressive Conditional heteroscedasticity (GARCH) model can be used to model the volatility of the financial market. When they built well, they can offer the considerable insight about the current and future volatility of the financial market. However, some people mistakenly uses the least square estimation in the place of the maximum likelihood estimation because of the readily available source code for the least square curve fitting method on online. The wrongly applied mathematical model can do more harm than good for your trading. Therefore, you must carefully think if the mathematical method can provide sufficient benefit to overcome the complexity. Considering that many investment banks hires applied mathematicians and physicists, exploring mathematical trading model is worth for your future career when you can afford the time and cost for building such a model.



Figure 1-8: GARCH and EWMA Volatility for FTSE 100. (Alexander, 2008)

Artificial intelligence techniques are another alternative approach for technical analysis. In fact, the computer scientist had a long interest in using artificial intelligence for the financial market. They are often considered as more complex methods than the mathematical methods. For example, multilayer feedforward neural networks are one form of the nonlinear regression. The method extends the capability of multiple regression by connecting multiple of neurons, in which each neuron resembles multiple regression. Advantage of the artificial intelligence is that they are nonlinear method with the capability of capturing nonlinear patterns. The disadvantage of the artificial intelligence is that one requires quite a lot of data and high speed computing facility. Most of time, one requires impressive hardware to deal with the computation required for the artificial intelligence model. Apparently, the artificial intelligence has proven its ability for the real world application. For example, Google’s Alphago beat the world champion Lee Se-Dol and European champion Fan Hui at the board game GO with a best of five win. However, considering that Alphago used a larger network of computers that spanned about 1200 CPUs to match with Lee Se-Dol and Fan Hui, it is questionable if it was a fair match for one human to compete with 1200 CPUs. In addition, this also confirms that this technology is still rather expensive for the budget of the average traders. Applying artificial intelligence for making prediction for stock index and currency markets are not a new story any more. Artificial intelligence sounds so futuristic and promising. However, one caution must be made before you become a huge fan of artificial intelligence. Ability of artificial intelligence is limited by usefulness of the data feeding into the model. For example, artificial intelligence can deal with what is inside the data only. For the poor data, artificial intelligence can only predict with poor accuracy. Due to their complex internal structure, they are prone to noise in the data too. Artificial intelligence can produce non-reliable prediction for highly complex data sets sometimes. If the simple methods can produce more or less the same results in comparison to artificial intelligence, it is better to stick with the simple method. Simple method will provide you more reliable trading operation in long run.



Figure 1-9: Topology of feed forward neural network model with 3 input neurons, 5 hidden neurons and 1 output neuron (Left) and multiple regression model expressed using neural network topology (right).

About this Article

This article is the part taken from the draft version of the Book: Scientific Guide to Price Action and Pattern Trading (Wisdom of Trend, Cycle, and Fractal Wave). Full version of the book can be found from the link below:

https://algotrading-investment.com/portfolio-item/scientific-guide-to-price-action-and-pattern-trading/

Price Breakout Pattern Scanner is the powerful pattern scanner designed to solve the puzzle of the market geometry beyond the technical indicators. With built in Japanese candlestick patterns + Smart Renko features together, Price Breakout pattern scanner can help you to define the accurate market entry for your breakout trading. Here is some screenshots from Price Breakout Pattern Scanner.

Below are the links to Price breakout Pattern Scanner

https://www.mql5.com/en/market/product/4859

https://www.mql5.com/en/market/product/4858

https://algotrading-investment.com/portfolio-item/price-breakout-pattern-scanner/

Below is the landing page for Optimum Chart (Standalone Charting and Analytical Platform).

https://algotrading-investment.com/2019/07/23/optimum-chart/

Most advanced Elliott Wave Software for your Trading

Elliott Wave Trend is the most advanced Elliott Wave Trading software, which helps you to trade with various Elliott Wave patterns like Wave .12345 pattern and Wave .ABC and Wave .ABCDE, and so on. Elliott Wave Trend was built on the concept of Precision Trading with Elliott Wave Structure Score. Our Elliott Wave Trend is professional tool for professional trader. Elliott Wave Trend is available in both MetaTrader 4 and MetaTrader 5 platform.

In the following article, we explain some basics operation with Elliott Wave Trend in MetaTrader.

https://algotrading-investment.com/2018/10/25/how-elliott-wave-can-improve-your-trading-performance/

At the same time, you can watch YouTube video titled as “Elliott Wave Trend Intro to find out more about Elliott Wave Trend Indicator.

YouTube Link: https://youtu.be/Oftml-JKyKM

Our Elliott Wave Trend is available in both MetaTrader 4 and MetaTrader 5 version. Here are the links to Elliott Wave Trend.

https://algotrading-investment.com/portfolio-item/elliott-wave-trend/

https://www.mql5.com/en/market/product/16472

https://www.mql5.com/en/market/product/16479

Powerful Non Repainting Supply Demand Zone MetaTrader Indicator

Ace Supply Demand Zone is specially designed non-repainting Supply Demand indicator. Since you have an access to fresh supply and demand zone as well as archived supply demand zone, you can achieve much better profiling on price movement in Forex market.

With the Ability to trade the original supply demand zone trading, you can also perform highly accurate Angled Supply Demand zone trading as a bonus. With a lot of sophisticated gadgets built inside, Ace Supply Demand Zone indicator will provide you unmatched performance against other Supply Demand zone indicator out there.

Here is the link to Ace Supply Demand Zone 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/

In addition, we provide the YouTube video for Ace Supply Demand Zone Indicator. In terms of indicator operation, both mean reversion supply demand and ace supply demand zone indicator are similar. Hence, you can watch this YouTube Video to accomplish the supply demand zone indicator.

YouTube “Supply Demand Zone Indicator”: https://youtu.be/lr0dthrU9jo

Harmonic Pattern Detection Indicator MT4

Trading Indicator is the realization of particular theory or trading strategy or trading ideas for real world trading. There is always gap between theory (i.e. ideas or strategy) and practice. This is the same for Harmonic Pattern trading too.

Hence, not all the harmonic pattern detection indicators are the same. The main variations of Harmonic pattern indicators can be categorized as following four types. Users should understand the pros and cons of each variation to maximize their trading performance with harmonic patterns.

Type 1: Non lagging (fast signal) but repainting

option to enter from turning point. Indicator does not show the failed pattern in chart and last pattern can repaint. This is almost considered as standard Harmonic Pattern Indicator. Even if they are repainting, harmonic pattern trader just accept it as it is. 99% of time, this is the harmonic pattern product you will get from the market whether they are free or paid one. You can trade live with this indicators but historical patterns can not be used to fine tune your strategy.

Type 2: Lagging (slow signal) but non repainting

no option to enter at turning point (i.e. early signal). This type of indicator turns harmonic pattern indicator as slow as moving average cross over. It might be not overly attractive option for your trading. Indicator does not show the failed pattern. Hence, you can not use historical patterns to tune your strategy but last pattern does not repaint. You can trade live with this indicators but historical patterns can not be used to fine tune your strategy. Probably about 1% of harmonic pattern indicator is this type.

Type 3: Detecting pattern at point C but repainting

option to enter at turning point. Indicator detect pattern too early and you have to wait quite bit of time until price move near the point D. In fact, price may not move near point D. You might just waste your time waiting for the pattern. Indicator does not show the failed pattern and last pattern can repaint. You can trade live with this indicators but historical patterns can not be used to fine tune your strategy. Probably about 1% of harmonic pattern indicator is this type.

Type 4: Non lagging (fast signal) and non repainting

option to enter from turning point. At the same time, the pattern is not repainting. This is hybrid of all above three system and can be considered as the most powerful harmonic pattern indicator. You can trade live with this indicators and you can also use historical patterns to fine tune your strategy. With this indicator, you are complying perfectly with the statement “Trade What you See”.

To accomplish this post, you can read the full blog article about the types of Harmonic Pattern Indicator from the link below.

https://algotrading-investment.com/2019/03/03/harmonic-pattern-indicator-explained/

In addition, you can watch the YouTube Video to feel what is the automated harmonic pattern indicator like. For your information, we provides two YouTube videos with title and links below.

YouTube “Harmonic Pattern Indicator”: https://youtu.be/CzYUwk5qeCk

YouTube “Non Repainting Non Lagging Harmonic Pattern Indicator”: https://youtu.be/uMlmMquefGQ

======================================================

MetaTrader 4 is one of the most popular trading platform since 2010. It is accessible for free of charge for any trader from all over the world. We provide a range of powerful harmonic pattern detection indicator particularly for MetaTrader 4 platform. Below is the list:

1. Harmonic Pattern Plus (2014)

Harmonic pattern plus is extremely good product for the price. With dozens of powerful features including Pattern Completion Interval, Potential Reversal Zone, Potential Continuation Zone, Automatic Stop loss and take profit sizing. This is type 1 harmonic pattern indicator.

Below are the Links to Harmonic Pattern Plus

https://www.mql5.com/en/market/product/4488

https://algotrading-investment.com/portfolio-item/harmonic-pattern-plus/

2. Harmonic Pattern Scenario Planner (2014)

With additional features of predicting future harmonic patterns, this is very tactical harmonic pattern indicator with advanced simulation capability on top of the powerful features of harmonic pattern plus. This is type 1 and type 3 harmonic pattern indicator.

Below are the Links to Harmonic Pattern Scenario Planner

https://www.mql5.com/en/market/product/6240

https://algotrading-investment.com/portfolio-item/harmonic-pattern-scenario-planner/

3. X3 Chart Pattern Scanner (2019)

X3 Chart Pattern Scanner is next generation tools to detect profitable patterns in Forex market. With non repainting and non lagging algorithm, this tool can detect advanced Harmonic Pattern, Elliott Wave Pattern, X3 Pattern structure for your trading. As a bonus, it provides your Japanese candlestick patterns too. This is type 4 harmonic pattern detection indicator, which means that you can fine tune your strategy using historical patterns while you are trading the same patterns on live trading.

https://www.mql5.com/en/market/product/41993

https://algotrading-investment.com/portfolio-item/profitable-pattern-scanner/

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During this Covid19 pandemic, we hope everyone is safe and well from this Corona Virus Crisis. We know this affect the whole world. Hence, we provide 50 USD discounts on the six MetaTrader 4 and six MetaTrader 5 products.

Discounted price is shown in the screenshot for the following six products.

Ace Supply Demand Zone indicator
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Wash, wash, wash your hands
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Insignificant, Minor and Major Turning Points

Profitable pattern is the technical tool in detecting turning point of the financial market. We have shown that fractal wave is our specialized microscope in studying the profitable patterns in the financial market. Then you might be curious why turning points or zigzag price patterns happen fundamentally. This is an important question in our trading. The short answer is that people do not like to see price deviated too far from the fundamentals. Too far might be not the precise word. Too far indicates the extreme deviation. In statistical sense, this often indicates the case outside 95% confidence interval or higher. Let us illustrate some fundamentals that can make up the turning point in general sense.

The first fundamental example is earning of the company. Earning is the one of the most important fundamental that investors use to make the perception of the financial performance of the company. Hence, many of us use earning to buy or sell the stocks. If a stock price is too high over the earnings of the company (i.e. Price to Earning), this can create a turning point due to some sell pressure against recent buy trend. Likewise, if a stock price is too low over the earnings of the company (i.e. Price to Earning), this can create a turning point due to some buy pressure against recent sell trend.

Another fundamental example is that individual stock price tends to follow the index of the stock market. For example, Stock price of Amazon will follow S&P 500 index up to some degree depending on its market beta. If Stock price of Amazon is deviated too high from S&P 500 index, then this can create a turning point due to some sell pressure against recent buy trend. Likewise, if stock price of Amazon is deviated too low from S&P 500 index, then this can create a turning point due to some buy pressure against recent sell trend.

Now let us take some example from Forex market. EURUSD and AUDUSD are highly correlated. High correlated means that this two currency pairs often move together in the same direction. However, there are the cases that these two currency pairs can move in opposite direction for some notable period. If EURUSD is deviated too high from AUDUSD, then this can create a turning point due to some sell pressure for EURUSD against its recent buy trend. Likewise, if EURUSD is deviated too low from AUDUSD, then this can create a turning point due to some buy pressure for EURUSD against its recent sell trend. In fact, this is the basis of the Pairs trading strategy or Statistical arbitrage strategy.

We can take the two highly correlated instruments example in stock market too. Say we have Apple and United Technology stock prices are highly correlated. If United Technology stock price is deviated too high from Apple’s stock price, then this can create a turning point due to some sell pressure against the recent buy trend. Likewise, if United Technology stock price is deviated too low from Apple’s stock price, then this can create a turning point due to some buy pressure against the recent sell trend.

Some other important fundamentals that can create turning points in stock and forex market are the macroeconomic fundamentals. For example, GDP, employment rate, unemployment rate and inflation rate can create turning points depending on their positive or negative correlation to stock and forex market.

For example, say that the US employment rate and S&P 500 index are positively correlated. If S&P 500 price is deviated too high from the employment rate, then this can create a turning point in S&P 500 index due to the sell pressure against the recent buy trend. Likewise, if S&P 500 price is deviated too low from the employment rate then this can create a turning point in S&P 500 index due to buy pressure against the recent sell trend. Now let us take the example of negative correlation case. Say that unemployment rate and S&P 500 index are negatively correlated. If S&P 500 price is deviated too high from the employment rate, then this can create a turning point in S&P 500 index due to buy pressure against the recent sell trend. Likewise, if S&P 500 price is deviated too high from the employment rate then this can create a turning point in S&P 500 index due to sell pressure against the recent buy trend.

The same analogy can be applied in Forex market too. Say that the GDP of Great Britain is positively correlated to GBPUSD. Hence, when Great Britain achieves good GDP, then GBPUSD tends to rise. However, if GBPUSD is rising too fast and deviated too high from the GDP value, then this can create a turning point due to some sell pressure against the recent buy trend. Likewise, if GBPUSD is falling too fast and deviated too low from the GDP value, then this can create a turning point due to some buy pressure against the recent sell trend.

Many people think that only economic variables can create turning points in stock and forex market. However, this is not true. In fact, non-economic variable can create turning points for stock and forex market too. What matter is how highly the variable is correlated to the stock price or the currency. For example, say that the stock price of Company XYZ is positively correlated to temperature. Hence, if temperature goes up, then stock price of Company XYZ goes up too. However, if stock price of company XYZ is rising too fast and it is deviated too high from current temperature, then this can create a turning point due to some sell pressure against the recent buy trend. Likewise, if stock price of company XYZ is falling too fast and it is deviated too low from current temperature, then this can create a turning point due to some buy pressure against the recent sell trend.

So far, we illustrated why we see the turning points and price must move in zigzag manner in Stock and Forex market. In fact, the list of fundamentals that can create turning point or influence in turning point creation is too many in real world. Trader and investors tends to use the most important variables only. Which fundamental is more influential in creating the turning point is depending on how highly they are correlated to the stock price or the currency. In real world, the effect of these variables will be cancelled each other to create less effect or add together to create bigger effect against current trend. When the resulting effect is strongly against the current trend, we can have major (i.e. global) turning point. Major turning point is the most wanted entry for our trading because it provides incredibly long profitable range for our trading. In fact, some professional traders are highly specialized in trading with this major turning point only.

When the resulting effect of all the fundamentals is moderate against the current trend, we can have minor (i.e. local) turning point. Minor turning point is still not bad as we have some room to take our profits. As long as you manage your risk, the minor turning point can still give us opportunity to grow our capital.

If the resulting effect is weak and insignificant, then we can have insignificant (i.e. failed) turning point. We cannot make money with this insignificant turning point because the turning point is almost not noticeable. The effect takes up only on one candle bar or even less. This sort of insignificant turning point can happen when the effect several fundamentals are cancelled off each other leaving almost zero effect against current trend. For example, we have excellent GDP but poor unemployment rate. Say their net effect of GDP and unemployment rate is zero. There is no reason that current trend need to be stopped.

As we have illustrated, many fundamental factors can influence creation of turning points. Pattern is the great technical tool in detecting turning points comparing to other technical indicators because it is not lagging. However, our success rate with patterns will be subject to probabilistic outcome. Hence, we need to have good risk management skills in place. To achieve good success rate with your trading, technically you will need to master how patterns work including Fibonacci price pattern, Harmonic Pattern, Elliott Wave Pattern and X3 patterns. On top of your technically skills, it is still important that you are aware of most influential fundamentals for the stock and currency that you are trading with. Typically, it is best to make the trading decision based on both patterns and the fundamentals together.



About this Article

This article is the part taken from the draft version of the Book: Profitable Chart Patterns in Forex and Stock Market: Fibonacci Analysis, Harmonic Pattern, Elliott Wave, and X3 Chart Pattern. Full version of the book can be found from the link below:

https://algotrading-investment.com/portfolio-item/profitable-chart-patterns-in-forex-and-stock-market/

You can also use Ace Supply Demand Zone Indicator in MetaTrader to accomplish your technical analysis. Ace Supply Demand Zone indicator is non repainting and non lagging supply demand zone indicator with a lot of powerful features built on.

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/

Below is the landing page for Optimum Chart (Standalone Charting and Analytical Platform).

https://algotrading-investment.com/2019/07/23/optimum-chart/

Repainting and Non Repainting Harmonic Pattern Indicator

Here is some quick guide on repainting and non repainting Harmonic Pattern indicators. Pattern Scanner based on Fractal Wave detection algorithm can be either repainting or non repainting one. In our products, we provide two choices between repainting and non repainting. Their capability and their price is different.

For Harmonic Pattern Scanner,

Harmonic Pattern Plus (and also Harmonic Pattern Scenario Planner) is the powerful but they are the repainting Harmonic Pattern Scanner. At the same time, they are cheaper. Below is links for them.

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/

X3 Chart Pattern Scanner is non repainting and non lagging Harmonic Pattern and X3 pattern Scanner. Below is links for them.

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/

Typically it is easier to trade with non repainting and non lagging Harmonic Pattern indicator. Of course, the signal will be reserved once they are detected. Hence, if you do not mind the cost, we recommend to use X3 Chart Pattern Scanner since it is non repainting Harmonic Pattern and X3 pattern indicator.

However, if you do not mind repainting Harmonic Pattern Indicator and you want to have something cheaper, then use Harmonic Pattern Plus (or Harmonic Pattern Scenario Planner). Many traders are still do not mind to use the repainting Harmonic Pattern Indicator. They are cheaper too.

If you are starter, we do recommend using non repainting Harmonic Pattern Scanner like X3 Chart Pattern Scanner. It is easier to trade with non repainting indicator. At the same time, there are a lot of bonus features inside X3 Chart Pattern Scanner too.

For your information, we are the only one who supply non repainting and non lagging Harmonic Pattern Indicator in the world. Of course, the first one in the world too.

In addition, you can watch the YouTube Video to feel what is the automated harmonic pattern indicator like. For your information, we provides two YouTube videos with title and links below.

YouTube “Harmonic Pattern Indicator (Repainting but non lagging)”: https://youtu.be/CzYUwk5qeCk

YouTube “Non Repainting Non Lagging Harmonic Pattern Indicator”: https://youtu.be/uMlmMquefGQ

Defining Profitable Patterns

To study profitable patterns, we start it by cutting out the specific size of patterns from long price series whether we are dealing with Forex or Stock market data. In doing so, we need to have ways of defining the structure of those specimen patterns. We introduce RECF Pattern Notation, as this is simple and intuitive for our trading. We can apply this notation to any patterns including Fibonacci Price patterns, Harmonic Patterns, Elliott Wave Patterns, X3 patterns, or any new patterns.

Once price series is transformed to fractal wave using Peak Trough Transformation. Price series will be transformed into series of small and large triangles. Easiest way to utilize this in your chart is to read the price from trough to peak in alternation or peak to trough in alternation. In defining each triangle, you need to know that one triangle represents two swings (i.e. right and left swings) and three points in price movement. Each triangle consists of one swing high and one swing low.

Defining Profitable Patterns 1

Each triangle can have two unique quantities to describe themselves. One is retracement ratio and the other one is expansion ratio. Retracement ratio concern only one triangle. The formula to calculate Retracement ratio is as below:

Retracement Ratio = right swing of first triangle (Y0)/ left swing of first triangle (Y1).

Sample Calculation: Let us say that Facebook have right swing (i.e. swing low) of 100 dollar and left swing (i.e. swing high) of 200 dollar. We can calculate the Retracement ratio as below:

R = 100/200 = 0.5

Defining Profitable Patterns 2

Expansion ratio is calculated over two successive triangles. The formula to calculate Expansion ratio is as below:

Expansion ratio = right swing of first triangle (Y0)/ left swing of second triangle (Y2)

Sample Calculation: Let us say that Apple stock price has right swing (i.e. swing high) of 50 dollar in first triangle and left swing (i.e. swing high) of 50 dollar in second triangle. We can calculate the Expansion ratio as below:

E = 50/50 = 1.000

During calculation, you might be wondering what the right swing of the second triangle is. In fact, the right swing of the second triangle is identical to the left swing of first triangle. Hence, two neighboring triangles always share middle swing in between them.

Defining Profitable Patterns 3

After checking out retracement ratio and expansion ratio, you might be wondering why we use ratios to study patterns instead of some other quantities. Because ratio is scale independent, it is suitable to study fractal wave patterns. For example, in our ratio study, if price goes up 50 dollar and then goes down 25 dollar, then this triangle pattern has the retracement ratio 0.5 (R=0.5). Likewise, if price goes up 100 dollar and then goes down 50 dollar, then this triangle pattern has the retracement ratio 0.5 (R= 0.5). Even though the size of triangle is different, these two are the same pattern with retracement ratio 0.5. We say this as being independent to scale. Many other mathematical tools are not independent to scale. For example, assume that you are trying to study fractal wave patterns with sine and cosine wave. In sine and cosine wave, you have two basic quantities including the fixed time interval and price height.

With these two quantities, the two previous triangles would be defined as different structure because price height is different in the two triangles. In fractal wave, we have to deal with many repeating patterns in different size. For this reason, it is hard or almost impossible to study fractal waves using sine and cosine wave if they are depending on scale.

Defining Profitable Patterns 4

Profitable patterns can be jagged triangles and Jagged triangles can serve as good entries and exits for our trading. For example, several harmonic patterns with five points are in fact one big jagged triangle made from three small triangles.

If we have one big triangle made up from small three triangles, we can still calculate the retracement ratio for big triangle in the same way as in the individual triangle. However, it is useful to make note that this retracement was made up from three small triangles. Regardless of how many triangles inside big triangle, the formula to calculate retracement ratio is the same as before. You will divide the price height of right swing by the price height of left swing.

Closing Retracement Ratio = Right swing in first three triangles (Y0) / left swing in first three triangles (Y1)

Sample Calculation: Let us say that Facebook have right swing of 26 dollar over three small triangles and left swing of 41.2 dollar over three small triangles.

C = 26/41.2 = 0.631 (from triangle 0 to 2 or T0:3 using short notation)

Defining Profitable Patterns 5

Defining Profitable Patterns 6

In fact, we can have any number of small triangles inside big triangle. Let us say that we have five small triangles inside one big triangle. Then we will calculate the closing retracement ratio as below:

Closing Retracement Ratio = Right swing in first five triangles (Y0) / left swing in first five triangles (Y1)

Sample Calculation: Let us say that Facebook has right swing of 50 dollar over five small triangles and left swing of 42.67 dollar over five small triangles.

C = 50/42.67 = 1.173 (from Triangle 0 to 4 or T0: 5 using short notation)

Defining Profitable Patterns 7

Defining Profitable Patterns 8

As in the closing retracement ratio, we might need the expansion ratio for multiple of triangles too instead of two successive triangles. In fact, this sort of relationship is found often in Elliott Wave patterns. I call this quantity as Factored expansion ratio. The way we calculate the factored expansion ratio is identical to the previous expansion ratio formula. However, we need to specify which triangle is in consideration when we calculate this Factored expansion ratio.

For example, let us say that we have eight successive triangles in price series. We want to measure the expansion ratio of first triangle and last triangle.

Factored Expansion ratio = right swing in first triangle / left swing in eighth triangle.

Sample Calculation: Let us say that the right swing of the first triangle is 100 dollar and left swing of the last triangle was 100 dollar, then our Factored expansion ratio can be calculated as below:

F = 100/100 = 1.000 (triangle 0 by triangle 7 or T0: 1 by T7: 1 using short notation)

Defining Profitable Patterns 9

There are cases that are more complex too. For example, we might want to calculate the expansion ratio of first four triangles against last two triangles. Sounds complicated but the way we calculate the expansion ratio is as simple as right swing of first four triangles / left swing of last two triangle.

Sample Calculation: Let us say that the right swing of the first four triangles is 16.18 dollar and left swing of the last triangle was 10 dollar, then our Factored expansion ratio can be calculated as below:

F = 16.18/10 = 1.618 (triangle 0 to 3 by triangle 6 to 7 or T0: 4 by T6: 2 using short notation)

Defining Profitable Patterns 10

So far, we have introduced four quantities including retracement ratio, expansion ratio, closing retracement ratio and factored expansion ratio. Sometimes, to describe profitable patterns, we need to have multiple of these quantities in combinations. When you have to use multiple of these quantities, then you can just introduce lag operator. Set the latest quantity to Lag operator 0 and then set Lag1, 2, 3, etc to older quantities. For example, if you have two triangles and you want to describe the retracement ratio of these two successive triangles, then you can calculate retracement ratio as below:

R0 = Y0/Y1

R1 = Y1/Y2

Defining Profitable Patterns 11

Figure 5-10: Graphical representation of two successive retracement ratio

For example, if you have three triangles and you want to describe the retracement ratio of these three successive triangles, then you can calculate retracement ratio as below:

R0 = Y0/Y1

R1 = Y1/Y2

R2 = Y2/Y3

Defining Profitable Patterns 12

In summary, we can describe any profitable patterns using Retracement ratio (R), Expansion ratio (E), Closing Retracement ratio (C), and Factored expansion ratio (F). All the four quantities share the same formula:

R, E, C, and F = Price Height of Right Swing / Price Height of Left Swing

To understand these quantities, you do not need to understand a rocket science. As long as you understand that each triangle consists of right and left swing, rest of the calculation will be just followed. You just need to think about which triangle’s left and right swing you need to input for the calculation. Most of time profitable patterns including simple and complex one can be defined in using these four quantities.

After you have defined your patterns, you need to know which direction you need to trade. Recognizing the trading direction is simple with patterns. If the level of final point is above previous point, then the pattern tells you the bearish turning point that is sell opportunity. If the level of final point is below previous point, then the pattern is the bullish turning point that is buy opportunity. This rule applies to Fibonacci Price Patterns, Harmonic Patterns, Elliott Wave Patterns, and X3 Patterns in common.



About this Article

This article is the part taken from the draft version of the Book: Profitable Chart Patterns in Forex and Stock Market: Fibonacci Analysis, Harmonic Pattern, Elliott Wave, and X3 Chart Pattern.

https://algotrading-investment.com/portfolio-item/profitable-chart-patterns-in-forex-and-stock-market/

You can also use X3 Chart Pattern Scanner in MetaTrader to accomplish your technical analysis. Here is the product page for the X3 Chart Pattern Scanner. Enjoy the powerful non repainting and non lagging Harmonic Pattern, X3 Pattern and Elliott Wave Pattern indicator.

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Below is the landing page for Optimum Chart (Standalone Charting and Analytical Platform).

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Patterns are the Good Predictor of Market Turning Point

To have the good skills in predicting turning point, it is important to understand why turning point occurs in the financial market. Now let us question backwards “Do we have any stock price in smooth growth curve or smooth declining curve?” Smooth curve or straight line is good because it is easy to predict their next movement. Unfortunately, we will never have this sort of easy situation for our trading.



Even though some company’s stock price grown up for last 10 years like Google (Alphabet Inc.), we will continuously see down price move (i.e. swing low) after up price move (i.e. swing high) and vice versa. To the chartist, this sort of move is defined as price swings or zigzag movement. The zigzag price path is due to both fundamental reason and psychological reason. People do not like if the stock price is over-valued or under-valued under the given fundamental of the stock. For example, if the company has the surprise earnings, then stock price can go up high. However, once people think it went too much, price would start to come down. People do not see attractive price if the stock price is going up too quickly in the short period. In this case, without too much valid reason, stock price can just come down. We are just scared to see anything goes too extreme psychologically. Likewise, if stock price is going down fast due to some bad fundamental news, in theory, we should not buy the stock. In practice there are some people think that stocks are cheap to buy. Hence, price start to make its own correction. Like this, financial market has the endless feedback loop ensuring the price is not moving in one direction. Instead, price will move down after bullish rally and price will move up after bearish rally. This mechanism forms the zigzag price path. Hence, stock and currency price series will continuously show turning point, either high to low or low to high. Financial trader will face much tougher choice between these alternating turning points.



So what are the good ways of handling the buy and sell decision in stock and currency market? Fortunately, you are not the only one suffering from this decision problem. Many pioneer traders visited the same question before. In their conclusion, to study this sort of zigzag price path, the best way is to look at the patterns that are made up from zigzag price path. Hence, we will be cutting out some of the patterns from the long price series and then we will exam the cut out patterns with a special microscope designed for this purpose. Many legendary traders opened up ways to study these patterns. Focus in the pattern study is to find repeating patterns that are able to capture the profit in good success rate. Fortunately, we have over 100 years of established methods to deal with this sort of complex price patterns.

Firstly, the simple and easiest method is the Fibonacci price patterns. In Fibonacci price patterns, we cut out the patterns made up from three or four zigzag points to predict the potential turning point, respectively for retracement and for expansion. The peculiar point to the Fibonacci price patterns is that we use Fibonacci ratios derived from Fibonacci sequence numbers. Common Fibonacci ratios used by traders include 0.382, 0.500, 0.618, 0.782, 1.000, 1.272, 1.618, etc.



The second method to study the patterns that are made up from zigzag price path is Harmonic Pattern. In harmonic pattern, we will cut out the patterns made up from four to five zigzag points to predict market turning point. The history of the harmonic pattern goes back to the Gartley’s book “Profits in the Stock Market” in 1935. At that time, Gartley described the trend reversal pattern, made up from five points, on page 222 of his book. The pattern become popular in 1990s (Pesavento and Shapiro, 1997). Since then, many traders developed the common interest in looking for the similar patterns described by Gartley’s book. Since harmonic pattern uses Fibonacci ratios, you can also consider Harmonic patter as an advanced Fibonacci price patterns loosely speaking.



The third method to study the patterns that are made up from zigzag price path is Elliott Wave theory. Unlike previous two methods exam the cut out patterns from the long price series, Elliott created the more general theory in studying zigzag patterns. This general theory is called Wave principle. The advantage of Elliott Wave theory is that it is comprehensive as the theory provides multiple trading entries on different market conditions. Disadvantage of Elliott Wave theory is that it is more complex comparing to other trading techniques.



The fourth method to study the patterns that are made up from zigzag price path is X3 Pattern framework. X3 Pattern framework is the latest pattern detection methodology. It lands on “RECF” pattern notation to define various profitable patterns in simple and intuitive manner. X3 Pattern framework allow you to define the patterns that are made up from zigzag price path in one unified pattern framework. In addition, X3 pattern framework allow you to explore the classic patterns and non-classic patterns that are not described in the Fibonacci price patterns, Harmonic patterns and Elliott Wave patterns. Once you have learned the basic logic of defining profitable patterns using X3 Pattern framework, you would be able to customize the existing patterns and to create new patterns to improve their trading performance.



About this Article

This article is the part taken from the draft version of the Book: Profitable Chart Patterns in Forex and Stock Market: Fibonacci Analysis, Harmonic Pattern, Elliott Wave, and X3 Chart Pattern.

https://algotrading-investment.com/portfolio-item/profitable-chart-patterns-in-forex-and-stock-market/

You can also use Harmonic Pattern Scenario Planner in MetaTrader to accomplish your technical analysis. Here is a link to the Harmonic Pattern Scenario Planner.

https://algotrading-investment.com/portfolio-item/harmonic-pattern-scenario-planner/

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Profitable Patterns in Financial Market

Price is the data recorded by financial exchange. The financial exchange distributes this real time price to trader electronically during market hours. Then trader will make buy or sell decision depending on their perception of the latest price. If they feel the price is low, then they will buy the currency or stock. If they feel price is too high, then they will sell the currency or stock. Once thing we need to know is that diversified reactions exists about good buying and selling price. We can have millions of different opinions about 200 dollar stock price for Facebook today. Some people will think that 200 dollar is good price to buy and some people will think the opposite. Some people might be neutral. Next price of Facebook will be determined by trading volume of buy and sell orders. If buy-trading volume is dominating over the sell-trading volume, then price will go up. If sell-trading volume is dominating over the buy-trading volume, then price will go down. You can think that each price recorded is in fact the record of the crowd reaction.

For our analysis, financial exchange also records the series of price in regular time interval like hourly, daily, or weekly, etc. Sometimes they record tick-by-tick data. They electronically store these historical data and distribute them to traders. Then trader uses these historical data to draw chart for further analysis of the price. In modern electronic trading environment, it is very rare to make buy and sell decision without looking at chart. Price series contain complex information. If we want to find out any useful information from price series, then we need to work backwards from price series into whatever information we need to seek. Extracting useful information from price series typically requires some mathematical tools.

Depending on what is our question, we need to apply different tools to exam price series. For example, if you want to know the common statistics for Facebook stock price, then you can calculate the mean, median, and standard deviation of the price series. If you want to find out good cycles to trade, then you need to apply Fourier transformation or some sort, to extract the cycles of Facebook price series. Likewise, if we want to find out profitable patterns, then we need to apply Peak Trough transformation or some sort to the price series. When we apply Peak Trough Transformation, we turn price series into the infinitely repeating triangles, which are called Fractal wave. Typically, Zig Zag indicator and Renko chart are used to turn price series into fractal wave.



Fractal or Fractal wave is commonly observable in nature like snowflake, in tree leaves, in heartbeat rate, in coastal line. Hence, many traders believe that the identifying profitable patterns in price series are the same as spotting natural order. By definition, Fractal wave is infinitely repeating self-similar patterns in time domain. The main regularity in Fractal wave is the shape of the pattern. Typically, this shape of pattern is referenced for some geometric shapes like triangle, circle, square, etc. In Fractal wave, we can have both strict self-similar and loose self-similar patterns. If the repeating patterns have the same geometric shape and all individual patterns have matching parameters in that shape, we call this as strict self-similarity. If repeating patterns have the same geometric shape but majority of individual patterns have non-matching parameters in that shape, then we call this as loose self-similarity. Fractal wave in Forex and Stock market price series have triangle as the geometric shape. However, individual triangle can be wider, narrower, longer, and shorter than other triangles. Hence, Fractal Wave in Forex and Stock market data possess the loose self–similarity. Loose self-similarity does not mean that all the triangles are non-identical in shape. Even in loose self-similarity, we can have some triangles in identical shape or at least within allowed range in precision.



First important characteristic of fractal wave is the infinite scales. In theory, repeating triangles in forex and stock market can have infinite variation of scales from very small to extremely large triangles. For example, one day we can observe one triangle formed in thirty seconds but another triangle can be formed in thirty days. In our pattern study, scale is an independent factor from geometric shape. As long as triangles are identical in shape, or within allowed range in precision, triangle formed in thirty seconds is treated as identical to the triangle formed in thirty days, regardless of their size. For some practical example, Fibonacci price pattern with 61.8% retracement formed in twenty-candle bar in hourly timeframe is an identical pattern to the other 61.8% retracement pattern formed in thirty six candle bar in daily timeframe.



Second important characteristic about Fractal wave pattern is that many small pattern are jagged together to make bigger patterns. For example, in triangular fractal wave as in financial market, bigger triangle will be made from many small triangles. In our pattern study, we often seek this sort of jagged patterns for our trading opportunity. Especially, in Harmonic pattern, Elliott Wave patterns, and X3 patterns, this sort of jagged pattern are commonly utilized to find the profitable patterns with good success rate.



About this Article

This article is the part taken from the draft version of the Book: Profitable Chart Patterns in Forex and Stock Market: Fibonacci Analysis, Harmonic Pattern, Elliott Wave, and X3 Chart Pattern.

https://algotrading-investment.com/portfolio-item/profitable-chart-patterns-in-forex-and-stock-market/

You can also use Ace Supply Demand Zone Indicator in MetaTrader to accomplish your technical analysis. Ace Supply Demand Zone indicator is non repainting and non lagging supply demand zone indicator with a lot of powerful features built on.

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Turning Point and Trend

If you want to become profitable trader, the first thing you need to understand is turning point and trend in the financial market. If you read many trading articles and books, you will find the diverse opinion over turning point and trend. Many people view turning point and trend as two separate subjects. However, it might be better to understand turning point and trend as two parts inside one body. Let us try to understand the trend. To do so, let us take human as an analogical example. We are born, we grow up, we become mature, and then we die. During this process, we can observe that there are four main stages. These four stages are universal across many creatures and objects observable in the earth.

Birth – Growth – Maturity – Death

Trend also goes through these four stages. Let us take an example in the financial market. For example, if we hear that Apple has some temporary problem in their smartphone supply line, this could stir up the Samsung’s Stock price because the demand for Samsung’s smart phone will be increased. Once this news is spread on the financial market, the upward trend will be born for Samsung’s stock price. At the beginning, this news could be known by few people. Later, more and more people could hear this news. Hence, Samsung’s stock price can build up upward momentum. However, this momentum will not last forever. Once people start to recognize that price rallied too high and some people start taking the profit by selling the stocks, the upward momentum can slow down. Especially, if we hear that Apple recovered the temporary problem in their smartphone supply line, the trend could die completely. As shown in this example, Birth, Growth, Maturity, and Death are the life cycle of trend.



Now let us revisit the definition of turning point and trend. Turning point is the beginning of new trend after the old trend died off. Hence, turning point strategy refers to the strategy that tries to pick up this new trend as early as possible. This sometimes involves picking up the turning point at the birth stage of the trend. In financial trading, trend strategy typically refers to the strategy that tries to pick up established trend during the growth stage. Most of trend strategy is in fact momentum strategy. When the growth of trend is strong, many technical indicators are designed to react on this strong growth. For example, if you trade on the buy signal when 20 moving average line crosses over the 50 moving average line, you do need strong upwards movement to lift the 20 moving average line over the 50 moving average line.



In contrast to this, in turning point strategy like Fibonacci price patterns, Harmonic patterns and Elliott wave patterns, we are looking for the newly born trend instead of the trend in growth stage. Hence, the main difference in turning point and trend strategy is when to enter during the life cycle of trend. Typically, we are seeking to enter near the birth of trend in the turning point strategy. In trend strategy, we are seeking to enter at the growth strategy of trend.



In our example, we considered only one trend. In practice, situation is tougher because we will have many financial, economical and political news released in 24/7 days. Hence, we will deal with the collection of trends instead of one trend. Some trends will be cancelled off each other and some trends will be adding up to form bigger trend. As a result, sometimes, this collective trend can have a clear direction. However, sometimes, we may not see clear direction from this collective trend but just ranging movement. At the same time, we could have many short-lived trends confusing our entries. Therefore, our trading strategy is subjective to probability of success rate regardless of you are using turning point strategy or trend strategy.

In trend strategy, your entry will be at the strong trend movement during the growth phase. This might be good if our entry is not too late. However, if we are late, then we will encounter the loss from early enterers starting to materialize their profits. In turning point strategy, we are trying to pick up the new trend as early as possible in their birth stage. Therefore, it gives you the opportunity to become early enterer. Hence, the profitable range is longer than typical trend strategy.

This longer profitable range means that we need fewer trades to achieve good profits. At the same time, there are some weaknesses of the turning point strategy too. For example, turning point strategy might signal buy or sell entry too early while the ongoing trend was not finished. Since both trend and turning point strategy have their own strength and weakness, it is possible that you can compromise between turning point strategy and trend strategy too. For example, you do not immediately trade at the turning point signal but you can wait until you observe that some price movement is following the new trend direction. Therefore, this becomes semi-turning point strategy. Many of good traders use semi-turning point strategy since they are the hybrid of turning point strategy and trend strategy. The fact is that skills to predict the turning point is necessary for successful trading regardless of you are trading with turning point strategy or semi-turning point strategy. Even though you are trading with trend strategy, it is still advantageous to have good skills of predicting turning point. Hence, the methodology of predicting turning point was sought after by many legendary traders in the financial market nearly 100 years.



About this Article

This article is the part taken from the draft version of the Book: Profitable Chart Patterns in Forex and Stock Market: Fibonacci Analysis, Harmonic Pattern, Elliott Wave, and X3 Chart Pattern.

https://algotrading-investment.com/portfolio-item/profitable-chart-patterns-in-forex-and-stock-market/

You can also use Excessive Momentum Indicator in MetaTrader to accomplish your technical analysis. Here is link to Excessive Momentum Indicator.

https://algotrading-investment.com/portfolio-item/excessive-momentum-indicator/

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Pioneers in the Scientific Trading

Charles Dow

Charles Dow co-founded Dow Jones & Company with Edward Jones and Charles Bergstresser. He also co-founded The Wall Street Journal. He created the Dow Jones Industrial Average Index. In 1896, he calculated Dow Jones Industrial Average Index using the stock price of the twelve companies. Until 1902, he studied the price movement in chart and created the Dow Theory, the groundwork for the technical analysis. Dow Theory suggests that price shows a particular patterns before bullish market and bearish market proceed. In fact, Dow Theory was published much later by his colleague, William P. Hamilton in 1922.

Richard Wyckoff

Richard Wyckoff was one of the earliest scientific trader, who tried to identify underlying trends or logic behind market action. He worked with many legendary traders like Jesse Livermore, E. H. Harriman, James R. Keene, Otto Kahn, and, J.P. Morgan throughout his career. He is also famously known for the creator of the Wyckoff volume spread analysis. In 1922, he was publishing educational articles for stock market, which were run in New York’s The Saturday Evening Post starting in 1922. Throughout the trading history, his volume spread analysis made some influence on other technical analysis like the supply and demand analysis.

Richard Shabacker

He is one of the earliest technical analyst in the stock market. In 1932, he published “Technical Analysis and Stock Market Profits”. In the book, he taught many price patterns, which are still used by the trading community nearly after 90 years. In his book, you can find the trace of triangle, wedge patterns, double top, double bottom, triple top and triple bottom, head and shoulder patterns. His book is one of the oldest book in the technical analysis.

Harold M. Gartley

Like Richard Shabacker, he is one of the oldest technical analyst in the stock market. He published “Profits in the Stock Market” in 1935. In his book, you can find the description of triangle, wedge patterns, double top, double bottom, triple top and triple bottom, head and shoulder patterns. He is also the creator of the Gartley pattern, which is one of the first harmonic pattern. In addition, in his book, you can find some other price patterns like the diamond pattern, circular top and square top.

Ralph Nelson Elliott

He was one of the oldest technical analyst like Richard Shabacker and Harold M. Gartley in the stock market. He is famous after his “Elliott Wave Theory”. In 1938, he published “The Wave Principle”. In his book, he showed how to apply the Fibonacci analysis to the Wave analysis. Impulse wave and corrective wave described in his book are still used by many technical analyst in the Wall Street. In his book, he tried to explain the triangle, rising wedge and falling wedge patterns using “Elliott Wave Theory”.

Benoit Mandelbrot

Benoit Mandelbrot was a Polish-born French-American mathematician. He is also known as the father of “Fractal” and “Self-Similarity”. He established the core theory behind the “Fractal” and “Self-Similarity”. His research in “Fractal” and “Self-Similarity” influenced many scientific fields including Statistics, Financial engineering, Economics, and Computer Science. He is also one of the influencer to Nassim Nicholas Taleb, the author of “the Black Swan”. In “The Misbehavior of Markets: A Fractal View of Financial Turbulence”, Benoit Mandelbrot and Richard L. Hudson applied the fractal theory to understand the financial market. They explained that the financial market can impose a greater risk than it can be explained by the modern mathematical assumption. In fact, in the Black Monday in 19 October 1987, the stock market declined largely unexpected. As it was pointed by Benoit Mandelbrot, this was something could not be explained by the modern financial mathematics.

Benjamin Graham

Benjamin Graham was a British-born American economist, and investor. He is widely known as the “father of value investing”. He published two books “Security Analysis” (1934) with David Dodd, and “The Intelligent Investor” (1949). “The Intelligence Investor” is one of the most popular book for the stock market trader. The margin of safety described in his book is considered as one of the most important trading principle. He is also the great influencer in the trading community. Warrnet Buffet, Charles Brandes, William J. Ruane, Bert Olden, Irving Kahn and Walter J. Schloss are some of the famous investors influenced by Benjamin Graham.

Richard Dennis

Richard Dennis is a commodities speculator. He is the pioneer of the trend following strategy. In the early 1970s, he started trading with $1,600 and made $350 million in about six years. Although his fund incurred significant losses in the stock market crash of 1987, he is still considered as the legendary trader. He created the method called “Turtle Trading”. He emphasized that price analysis is important for practical trading, sometimes he put more weight on the technical analysis than fundamental analysis. Since he used ATR indicator mechanically, created by J. Wells Wilder, he is also considered as the pioneer in the mechanical or algorithmic trading.

About this Article

This article is the part taken from the draft version of the Book: Science Of Support, Resistance, Fibonacci Analysis, Harmonic Pattern, Elliott Wave and X3 Chart Pattern.

https://algotrading-investment.com/portfolio-item/science-of-support-resistance-fibonacci-analysis-harmonic-pattern/

You can also use Fractal Pattern Scanner in MetaTrader to accomplish your technical analysis. Turning Point Probability (and also trend probability) can be used for the scientific trading. Here is the landing page for Fractal Pattern Scanner in MetaTrader 4 and MetaTrader5.

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Below is the landing page for Optimum Chart

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Using Japanese Candlestick Patterns with Harmonic Pattern Plus

Harmonic Pattern Plus is the powerful harmonic pattern trading system with highly engineered functionality. Properly used, this tool can yield excellent trading results. One of the trading system built inside Harmonic Pattern Plus is the Japanese candlestick patterns. Japanese Candlestick Pattern provides visual insight for buying and selling momentum present in the market. Japanese candlestick pattern can provide both entry and exit signal for traders. Hence, many traders use them as the secondary confirmation techniques.

In the trading community, Japanese candlestick patterns were the favorite trading tool of many traders. Hence, Harmonic Pattern Plus provides you the opportunity to combine the Japanese candlestick pattern with Harmonic Pattern Trading setup. Harmonic Pattern Plus can detect 52 different Japanese candlestick patterns. These Japanese candlestick patterns include “Hammer”, “Doji Star”, “Harami”, “Inverted Hammer”, “Break away” and so on. They are categorized under five categories including one, two, three, four and five candlestick patterns in Harmonic Pattern Plus.

To use Japanese candlestick patterns, you have to enable the candlestick pattern from Harmonic Pattern Plus. See the attached screenshot firstly. You can enable this function from the inputs tab in your MetaTrader after the Harmonic Pattern Plus is attached to any of your chart. Then you can switch on and off the individual category of patterns according to your preferences. For example, you can only use two or three candlestick patterns if you wish. From our observation, the Japanese candlestick patterns made up from two or three bars are more accurate than the Japanese candlestick pattern made up from one bar. Since you can check the historical pattern, you should be able to test your strategy with these Japanese candlestick patterns if you wish. In addition, you can also receive sound alert, email and push notification when new Japanese candlestick patterns are detected.

Although the Harmonic Pattern Plus is the repainting indicator, it is still at the affordable price with tons of features for your Forex trading. At the same time, it is non lagging indicator too. If you do not mind the repainting, then you can choose the Harmonic Pattern Plus. You will find the many additional features inside Harmonic Pattern Plus beside the Harmonic Pattern and Japanese Candlestick Pattern detection. For example, pattern completion interval can be used for the trading risk management and automatic channel can be used to find better reversal and trend following opportunity and many more. We hope this short article was helpful for you to understand how to unlock the Japanese Candlestick patterns from Harmonic Pattern Plus. We wish you the best trading experience in Forex market.

Below is the landing page for Harmonic Pattern Plus with Japanese Candlestick Pattern Features.

https://algotrading-investment.com/portfolio-item/harmonic-pattern-plus/

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You can also watch our YouTube Video titled “Japanese Candlestick Patterns Versus Harmonic Pattern” to understand more about the joint use of Japanese Candlestick Pattern and Harmonic Pattern.

YouTube: https://youtu.be/VICCXRhkXEg

Turning Point in Pairs Trading

Pairs trading is a market-neutral strategy that involves buying one asset and shorting another. Pairs trading or the similar trading principle is often employed by the hedge funds and institutional investors. Like value investing and the economic data, the pairs trading explains the occurrence of the turning point well. Therefore, if you have the working knowledge of the pairs trading, it could help you to use price pattern better. At the same time, with pairs trading, we can still apply the margin of safety and spread we have learnt from the value investing strategy. Hence, it is the good trading strategy to be covered in this book.

Pairs trading starts with identifying a pair of assets that are believed to have some long-run equilibrium relationship. When the spread has diverged sufficiently, the strategy will buy the undervalued asset and sell the overvalued asset. The strategy achieves a hedging or risk neutral state by taking two assets at the same time in different direction. Pairs trading strategy is applicable to both Forex and Stock market. The process of the pairs trading can be summarized into the following four steps.

Identify two assets whose prices have moved together historically in long term.
Calculate the correlation, co-integration, historical spread between two assets.
When the spread between two assets are diverged excessively high, then buy the undervalued asset and sell the overvalued asset.
When the spread is reverting back to normal range, close the positions of the two assets to take the profit.


Figure 2-3: Normalized AUDUSD vs EURUSD on the top and spread chart on the bottom (Chart: www.algotrading-investment.com, Optimum Chart)

Except the spread is measured between two assets, the trading principle of the pairs trading is similar to the value investing. For example, the pairs trading involves to recognize the unusual high spread between the two highly correlated assets whereas the value investing involves to recognize the unusual high spread between the intrinsic value and the stock price. Hence, the unusual high spread provides the margin of safety in the pairs trading. In another words, if the spread is higher, then it favours our positions more but with less risk. Typically, the trader applies the statistical knowledge in picking the spread limit to trigger the entry. For example, as in the standard deviation, the spread 3 might be the bottom line to consider the entry. However, the choice of the spread limit to trigger trading could be varying for different assets. Sometimes the historical spread of some assets shows that the spread 4 is the appropriate choice for the spread limit. Sometimes, the historical spread of some assets shows that the spread 3 is the appropriate choice for the spread limit. To choose the right spread limit, it is best to inspect the historical spread first in the chart. However, to provide you some rule of thumb guideline, for the stock market, spread 4 or over might be considered to trigger the entry. For the Forex market, the spread 3.5 or over might be considered to trigger the entry. As the pairs trading shares common ground with statistics, some people call the pairs trading as the statistical arbitrage. As in the margin of safety in the value investing, the higher spread between two assets, the absolute spread in fact, can be considered as the higher margin of safety.

Since the pairs trading involves to take the positions for two assets, this provides some of its own properties, which is different from other strategy. For example, we could provide two illustrative examples when the positions are closed with profits. These two illustrative examples are not necessarily the exhaust list of scenarios for the movements of two assets. However, we have selected them as they can visualize the process of the formation of the turning point better than other scenarios.

For the first example, consider that we bought the one asset with low price and sold another asset with high price when the spread was diverged sufficiently high. In this example, the asset with low price (=Symbol B) could make the bullish turning point to reach the price level of another asset because they are supposed to move together in long run. We are in profit due to the sharp rise in the asset with low price (=Symbol B) after the bullish turning point.



Figure 2-4: Normalized EURUSD vs GBPUSD on the top and spread chart on the bottom (Chart: www.algotrading-investment.com, Optimum Chart)

In the second example, the asset with high price (=Symbol B) could make the bearish turning point to reach the price level of another asset because they are supposed to move together in long run. We are in profit due to the sharp fall in the asset with high price (=Symbol B) after the bearish turning point.



Figure 2-5: Normalized CADJPY vs EURJPY on the top and spread chart on the bottom (Chart: www.algotrading-investment.com, Optimum Chart)

From the two illustrative examples, we could draw two useful trading principle. Firstly, when the spread is sufficiently high, it is possible to have a turning point between two assets. The bullish turning point could happen to the asset with low price or the bearish turning point could happen to the asset with high price. As in value investing, the pairs trading provides an explanation to the formation of the turning point in the financial market. Secondly, taking the opposite positions on two assets reduce the risk of the market volatility. This is considered as the hedging or the risk neural strategy. Since we are holding one position in opposite direction to other position, we are exposed less on the market volatility. Although hedging is an optional practice only, you never know if you like or dislike such a trading principle. If you do not understand the hedging effect, you might open a Forex demo or simulation account for an educational purpose. Search two highly correlated assets. Then buy one and sell the other. Monitor the profits and loss of the two assets for some time.

In the Forex market, since you can enter the sell position as well as the buy position, the pairs trading can be applicable. The pairs trading can be applicable to the stock trading too. If the pairs trading strategy provides the high spread between two stocks in your portfolio, then you can sell the stock in your portfolio and buy more on the other stock in your portfolio. If the pairs trading strategy provides the high spread between one stock in your portfolio and the other stock outside your portfolio, then you can sell the stock in your portfolio and buy the new stock for your portfolio. Since the spread in the pairs trading is calculated in real time, it can be considered as the quantitative trading strategy. This helps us to trade with less emotion. In addition, the price pattern can be combined with the pairs trading strategy to improve their performance. In that case, the margin of safety in the pairs trading could be applied to confirm the direction of the price pattern. However, there are some disadvantages for the pairs trading too. For example, this technique might be more complicated than other trading strategy. Firstly, they could be more complicated because the technique involves dealing with two assets at the same time. Secondly, they could be more complicated because the technique requires some knowledge of statistics and statistical trading.

About this Article

This article is the part taken from the draft version of the Book: Science Of Support, Resistance, Fibonacci Analysis, Harmonic Pattern, Elliott Wave and X3 Chart Pattern.

https://algotrading-investment.com/portfolio-item/science-of-support-resistance-fibonacci-analysis-harmonic-pattern/

You can also use Pairs Trading or Spread Analysis in MetaTrader to accomplish your technical analysis. Here is the landing page for Pairs Trading Station in MetaTrader 4 and MetaTrader5.

https://algotrading-investment.com/portfolio-item/pair-trading-station/

https://www.mql5.com/en/market/product/3303

https://www.mql5.com/en/market/product/3304

Below is the landing page for Optimum Chart, which is the standalone tool to scan the trading opportunities for all symbols and all timeframe in one button click.

https://algotrading-investment.com/2019/07/23/optimum-chart/