Stop loss placement - a specific solution.

One of the biggest problems facing a trader is what to do if a trade goes wrong.

Do you trust your original judgement and hope it turns?

Does your fear of being wrong cause you to close it too soon before it does significant damage?

With WMs, last December 2008 on the DOW, was a nightmare. They kept forming on RSI, then Price, then retracing and taking out the base and then reversing again, lovely trade IF ONLY I'd had stayed in a bit longer.

Problem is, how much longer is "reasonable"?

This idea is based upon a specific situation in EWT as posted by SED on the iii UKX board - this is my interpretation & I have added in the WM idea.

Wait for a clear wave1 with 5 wave substructure.

Wait for the wave2, with a clear 3 wave substructure,to retrace at least 38% of the wave1.

Wait for the WM to form on RSI and establish the base level on Price.

Split the trade into chunks so that the S/Ls take into account the base level on Price and at least two of the Fib levels below that for a W.



I realise that the 80% is not a true Fib level but it is the figure use in a lot of EWT research as signifying a boundary between expected and unexpected. As usual the conditions under which the data was collected is very important, as is an understanding of what the researcher means by "unexpected".

With this example I'd split into three chunks and use below the base, below 62% and below 80%.

It increases the cost compared to just using below the base BUT it adds a reasonable amount of extra space. [IMO, never commit more than 2.5% of your bank to any one trade.]

cheers theory

WMs on RSI in context of EWT waves.

I think of three types of WM "failures", where probably only one of them is really a failure, one is disappointing and one can prove very useful.

The real failure is where it forms on RSI, maybe even Price and then collapses. The only defence being phase out and exit.

The next one does form on RSI, Price and even moves far enough to set up a small loser, break even or maybe small profit before it reverses.

The final category forms on RSI, Price and delivers a good return before retracing and taking out the original shape on Price.

I now feel I can go some way to placing them relative to EWT waves. I am not saying that all EWT waves end on a WM, just that some do.

The purple waves with the ? after them are the unknown next phase.



The failures are more likely to be in the following positions:

at the end of the 1st wave, if the 2nd turns out to be mild;
at the end of the 3rd wave, the 4ths are usually mild;
at the end of the 4th wave, if the 5th truncates.

The disappointing ones probably are:

at the end of the 1st wave, if the 2nd turns out to be neither mild nor sharp;
at the end of the 3rd, if the 4th puts up a bit of a fight but then gives up.

The last category seems to me to be best located:

at the end of the 1st, the 2nd is a high % retrace and then wave 3 kicks in.
at the end of the 3rd, the 4th is a high % retrace and then an extended 5th occurs.

It is possible to get a good return from trading a smallish % retrace of a very big wave OR a big % retrace of a smaller one. However hitting a big % retrace of a big wave is a much easier way of making money.

I hope this helps you with "shot selection". Previous posts have looked at the context of WMs in terms of RSI level, Bollinger, Trendlines, R/S levels and now I am adding EWT waves.

cheers theory

Work In Progress - ongoing development.......

Rather than replicate everything in two places, I have included a link below to a newly formed discussion site I have joined.

The III UKX site was no longer providing what I needed - end of story!

Aplogies but cannot get the link inserter to work, so copy and paste is the only way around it.

http://ftfexcel.invisionzone.com

The work is in the FTSE folder under the name of "theoryman". Guests have the full access to images.

cheers theory

Linking ideas together - WMs, EWT & Channels

Just to let you all know the direction I am moving in.

I'll be trying to use EWT from a short time frame basis, checking possible patterns & then putting them together to make vaild possible counts on th longer timeframes.

I'll be using two ZigZag indicators, one set on High & the other on Low to mathematically identify the key Highs & Lows needed to decide if it's moving in 3s or 5s etc.....

I don't think I will bother to fully automate the process but I'll be using some code to try and remove the "seeing what you want to see" problem with any pattern spotting.

cheers theory

More questions than answers [EWT again!]

As I posted on the iii UKX board, I took yesterday off, so this is a reflective/hindsight view. It has however helped me with my attempts to link WMs on RSI to EWT on Price. [Anything to do with EWT thoughts as opposed to the system is in square brackets.]

Firstly I'll compare and contrast the two Ms in terms of the system. One is above RSI 70 and is formed when the Bollinger bands are wide apart. The other is just above 60 and is formed when the Bollinger bands are close together. They are both "fallers" - the first one only just.They both are OK in terms of Price action /Bollinger. The first is tradeable, the second is NOT!!! Why not? Answer comes later on.





[I feel that both clearly come at the ends of EWT waves. The first one at the end of a trender, the second at the end of a corrective. I already "feel" that correctives can be gentle or sharp, this was a gentle one. The Bollinger bands signal what has gone on before, the Ms the end of waves.]

[Now some real problems for my system!]

Because the corrective went above the B/E for the first M, I'd have been stopped out on my backstop. The only way I could have survived is to keep some back at the original S/L.

[My best WMs, in terms of meeting the rules, come at the end of trends, so am I just trading the correctives? IF it's a sharp one then bingo but if it's a gentle one I only get my "0.5(20+0)" sort of return.Should that concern me, still making money?]

[Some of my best WMs in terms of return have been the taking out of a previously verified R/S level, the infamous "failed WMs etc....". So that's a real bonus, the system indentifies a corrective, which then fails, so it leads to a motive.....]


[The second M was not a system trade, fails the Price/Bollinger reward:risk check. If it's a gentle corrective then the Bollinger bands must be narrow but that doesn't mean the next motive won't be a real trender.]

So in a nutshell, the reward:risk rule is working both for and against me. It filters out those WMs generated by market noise BUT it also keeps me out of those at the end of gentle correctives which MIGHT lead to a really big move.

I need time to think + would welcome any thoughts from practised EWTers.

The next image shows a wW which is uncommon.

[Signalled the end of the powerful wave 3? The subsequent move back up to the region of a standard Fib level(not on image) seems to confirm that.]



---------------------------------------------------------------------------------
Finally, for those who like 1-2-3 trades on Price, this was the set up that coincided with my 60 min M that was NOT a system trade - maybe that is something that needs looking at?



cheers theory

Should have done better and some [EWT thoughts].

The first image shows a sequence of events on the 14 min. timeframe.

The first one is a straightforward trade. The W then kept appearing on longer and longer timeframes, which I usually find is bullish - OK it was a slow burner but it finally delivered.



Here is what the 40 min looked like when it formed.



Now back to the 14 min., same chart as the top one, just placed here for ease of access.



It delivered more than it looks like it did because the post 16:30 candles were reduced by around 8pts on the IG cash chart, to allow for the dividend correction.

So its base is a verified support level. When it failed next day, I went Short, expecting a new EWT wave down. [ The W IMO signified the boundary between two waves, the lack of oomph after it formed led me to believe it was a corrective, so we should get a nice motive down to follow.]

What I didn't take seriously, I just wasn't in tune with the market that morning, was the second W which formed on the chart. [Now seems obvious that the wave down to the first W was a 3, followed by a corrective 4 and then a weak 5, the end of which was signified by the second W.]

The internal structure of the second W is better than the first on RSI. Just check how chunky the bodies of the candles were on Price in the second compared to the first one.

[Note to self, wave 3s can never be the shortest in an impulse wave but wave 5s can be!]

RSJ on the iii site called it perfectly. I only joined in later on the breakout OCO after the continuation W had formed.

That trade delivered the famous 0.5(20+0) and then I got a trend continuation that behaved itself perfectly.

It led to a possible EWT count that really fascinated me. The possibility became more and more probable and it was a very enjoyable experience. Again, thanks to RSJ for confirming that my count was a possibility and not some rubbish from an EWT novice.

I am convinced that the next big step forward with this system will be melding it with EWT.

cheers theory

Start here! - Links to initial postings.

Suddenly thought that this would make it easier for anyone wishing to access the earlier stuff. Nothing new if you have been here before, just links collected together in one place.

What do WMs on RSI look like? How do they differ from 1-2-3 shapes on Price?

What levels of RSI am I looking for?

How are Bollinger Bands used?

Putting it all together or "Context,context,context...."

What are "Wws", "MMs" and how are Head & Shoulders on RSI traded?

What if a WM forms on RSI, then Price, then delivers BUT then reverses?

cheers theory