Trading W and M patterns on RSI

Stop loss placement - a specific solution.

2009-11-21T17:15:00.010Z

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.

2009-11-21T15:54:00.008Z

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.......

2009-10-31T08:50:00.006Z

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

2009-09-13T22:54:00.002+01:00

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

Should have done better and some [EWT thoughts].

2009-08-13T15:38:00.008+01:00

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.

2009-08-10T12:15:00.023+01:00

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

New idea + old faithfuls

2009-08-01T12:39:00.020+01:00

OK let's start with a standard trade.
If you need the practice go through the checklist:
RSI shape,
RSI level,
Price/Bollinger,
Possible initial reward:risk assessment.

Apologies for the next bit two bits being rather "wordy" but I can't think of a way to avoid it.

I then have added a new idea. It's a standard support level as shown on the diagram as the green line BUT it's validated by the trade following from the W delivering the 0.5% return or better. This validated level is then the basis later on for a bounce OR crash through trade. I have been focussing on the unexpected crash scenario (more fun) and kept missing out on the expected bounce.

It was the market behaviour at 4500 which made me realise I was missing out. The top of that 1Hr M held out many times, OK I got the crash through spot on but opportunities were missed.

On the next diagram the support level appears as double thick green dashed line, the double bit will become obvious when you look at what happened.

The black lines are downstream channels based on previous Highs. The lower ones are the standard parallel click and drag through previous Lows.

Apologies for the red lines they are part of something I am trying out.

So I was ready for either the bounce or crash scenario. Once it was a confirmed move below the support line AND break through the trendline, I would go Short going with the double whammy. If, however it bounced and went back inside the channel then I'd go Long. The support was confirmed so the line was made double thick.

The thin green line on the next chart shows the PDH used during trading the following morning. During the night the index moved way above where I was expecting it to be - nice surprise. Once it came below that level I put covering trades on and so was neutral. There was no specific evidence to close the trade but I was looking at a healthy profit. The light blue trendlines showed the possibility of more to come BUT the early moves to close gaps and high volatility make this my least favourite time to be running a trade. The purples ones were added later.

So what made me remove the cover? Well it was the weak signal from the W in the next image. No way is this a system ENTRY but it was good enough to warrant letting the trade CONTINUE. If need be, go back and re-read the section on trend reversal shapes and trend continuation ones.

Trigger on the UKX board and of "moo river" fame, would be proud of what's in the next image. The upstream crossing of a downstream river and a breakout.

Finally just a few simple trendlines, a continuation W where the RSI signal that confirmed it had formed, was as high as any we have had. It delivered 20+ on Price, with the RSI hitting a maximum afterwards of nearly 80.

Key point here is that for continuation WMs it's the shape and NOT the level that matters, plus the Price/Bollinger is totally ignored - unless of course you include the Price moving along the SD=2 band!

cheers theory

Third trial Cable trade.

2009-07-15T05:35:00.010+01:00

The W has 7 points, as referred to in the first post in this blog i.e. Stage 1.

My software identifies the Pt 1, 2 and 3 - as used in the pdf on 1-2-3 trading. Point 0 is the one before Point 1 and Point 4 is the trigger one on RSI.
The least number of dots is therfore 5, Points 0,1,2,3 &4.

This shape has Points 0,1,2,2a,2b,3 & 4 i.e. 7 in total. What are 2a and 2b? They fill in the gaps between Points 2 & 3.

I prefer my WM shapes on RSI to have as few points as possible and 7 is my maximum.

A quick run through the checklist should confirm the trade meets all the rules.

The following images show how I use trendlines. I prefer to think right to left, so my trendlines are based on the latest information. In the case of an uptrend like this, the latest two Lows form their basis.

The single black line was all I used to start with. The initial two Lows define its slope, the third touch confirms it, the breach calls for a re-think.

The horizontal lines in red are my S/Ls, my style is to split trades. The upper dotted line is the "snuggle up" position and the solid line the "time to close down" level. I want to allow the trade as much freedom as possible but without throwing profit away, on allowing too big a retracement before closing it down. They are positioned below both a previous Low AND the trendline.

The latest Low is then used to construct the next channel. This time the upper trendline, formed by click and parallel drag on the chart, fits data that is already there, so it now goes in double thickness and I chose red to show up well in the posts.

After that I added the next trendline, using different colour and design of line. The problem becomes having too much info but this is a trial trade, so what the heck.

I have included RSI14 in the image below, using the standard line setting. This shows a W on RSI, of the continuation type, forming when the Price bounces off the already established red trendline again - context,context, context!

The split trades finlly finished when 16300 was hit and then finally 16275.

cheers theory

Cable trades - widening the net.

2009-07-10T22:36:00.008+01:00

The first M, in red, was a valid trade. It was possible to get to B/E and wait for it to deliver. IMO it didn't deliver enough to warrant being rated as a potential "failed M etc...." trade. On the FTSE I use 0.5%, which on Cable equates to around 80pts. Trading the breakout through its top would have been over aggressive IMO based on FTSE findings.

The second M is a cracker. I've included the S/L, entry and initial target on Price. The reward:risk ratio is clearly OK. Make sure you go through the checklist for all the other rules.

When there was a chance of the W forming I moved into defensive mode and locked in profit. My exit would have been on the W forming on Price AND moving within the SD=1 Band.

Ws that form on the SAME time setting as the original M are rated as big dangers. I forget the rules for entering a trade, if they form on Price, I get out whatever their quality.

IMO there is a big difference between putting money from the bank into a trade compared to being too casual about conserving profit from a runner.

The trade survived but later another W started to form on 25 min., and I took the view that the market was having another go at reversing. I waited for it to form on RSI and go back above the SD=1 band, got stopped out. IF I had sat back and waited for it to form on Price, like I did with the first one, then I would have survived.

Now for the second trade, in which I did not cover myself with glory.

Inverted H&S, only the black W is traded, no anticipation!

Entry 16190, S/L 16150,initial target 16250. Reward:risk ~ 60:40, OK.

Quickly go through the other rules, no problems.

I just didn't like the way it panned out. Seemed to keep hitting its head on around 16210 and it broke down through a wedge I had drawn on the 5 min chart. So I closed it for a loss of 13 pts. As soon as I did that it started to go back up again, got to B/E and into profit......

I am still very much a novice at trading the Cable since this was my first one! It is a long time since I got caught out like that on the FTSE. I might have closed down half on the FTSE but not all of it, the base of the W never came under threat.

On reflection it was very poor technique, I got drawn into action by the 5 min Price action and forgot about the biggger picture i.e. the 45 min one.

cheers theory

Why isn't this a tradeable W?

2009-07-09T20:01:00.005+01:00

Run through the checklist:

RSI Shape is sharp and tight, good internal gaps.
RSI min. is only ~40
Price/Bollinger is great, a double down and up again
Entry is at RSI around 47 or 48 giving a Price of 4164 to 4166.
The initial reward to the middle Bollinger is less than 10.
The known risk to just below the base is more than 15.
The reward:risk ratio is less than 1.0, never mind 1.5!

The bodies of the candles are chunky and alternately coloured. However, the volatility within each candle, means the tail on the one that matters, in deciding the S/L, makes the risk too high to warrant a trade in this case.

IF the middle Bollinger line had been say 25 away, then go for it.

cheers theory

A lot of effort .......

2009-07-09T15:20:00.007+01:00

Last night the readings of RSI were below 30 on many timeframes after that fall. I was scanning the standard settings 15min, 30 min, then I tried 31 min, just to have a look.

Notice the internal candles are Red Red Green Green. Nothing wrong with that pattern at all BUT I do like it tighter IF possible.

Now if you double the time setting then either the first two pair up and then second two pair up and give really big internal Red Green candles combination or the inner two do and cancel each other out - doji formation time.

Quick look at 62 min. and it's obvious what has happened this time. Beautiful chunky equal sized alternate coloured candles, no wonder the RSI W is so well defined.

Straight forward trade, check the filters for yourself, it should be coming automatic by now!

Sharp tight shape?
RSI level?
Price/Bollinger?
Entry RSI will be? Leading to price entry @ ?
Reward:Risk?

So today it was fixed in my mind that the signal was on ~ 60 min, so when the M came on the 14 min, it was just "noise" and I defended against it without problems. When the W on 14 min arrived I was in trend continuation mode.

The W on 18 min reinforced the trend continuation in my mind, the later M was a good quality one and just in case I shifted the S/L on my running trades to where it would form on Price. It did and with a vengeance.

Why the title? Well it was all building up towards a taking out of 4200, which was just above the top of the M on 14 min that delivered big time yesterday. That would have been a previous strong M, that really delivered but then failed, time to launch some Longs from the profit of the ones already running.

An awful lot of planning and thinking out possible alternatives went into the day's trading. Just seemed at the time like one very big let down, by tonight I'll be thinking of the profit banked!

cheers theory

This one didn't get away!

2009-07-08T19:55:00.003+01:00

The first W from last night met all the criteria except one, the reward:risk was too low, tempting but dangerous.

The next one was a horrible shape internally - no shifting of time setting seemed to give a sharp W on RSI.

The H&S on 14 min RSI was an absolute gift, only the black M is used but the symmetry of the overall shape is beautiful! There was also an M on 16 min if you prefer to stick to 15 min or above. Remember most of the system is rules, this part is a guideline.

Max. RSI is above 65.
Single move of the Price above and back below Bollinger Band.
The entry on price was so close to the top of the M, the reward:risk was fine.

For those who follow the iii board, I was already Long from 4162 (non-system trade). I used the shape to close the running trade for just less than 30. I then traded the M from afresh - there was no way I was going to get caught out two days running!

cheers theory

Was this a missed trade?

2009-07-07T16:53:00.005+01:00

The Price/Bollinger is a double break through and back under.
The RSI shape is tight and sharp.

The max RSI is only above 60 rather than 65 or 70, so it's only in Group C but they can and do work.
It is a faller on RSI but only from 63.2 to 62.9, still counts as a faller though.

The distance from the entry level on Price to the top of the M is greater than the distance to the middle Bollinger line - this is what stopped me. The initial potential reward:known risk ratio was below 1.

How do I rationalise missing out on a trade like that? It's simple, it didn't meet one of the criteria, end of story!

cheers theory

Inverted H&S on RSI

2009-07-07T12:28:00.008+01:00

Since I NEVER trade falling Ws on RSI, it's the one in black that is used to trigger the trade.

The lines of best fit in red, on RSI,show the trends before the W that help to make up the inverted H&S.

The W passes all the filters:
tight sharp shape with good gaps between the internal RSI points,
low level of minimum RSI at less than 30,
double move below the Lower Bollinger on Price,
potential reward:known risk ratio exceeds the minimum required.

The horizontal line in red on Price was where I placed my S/L on the running part after the previous move up.

The lower window shows the drop in Price required to produce an RSI of 50, during the active candle, just something I wanted to keep an eye on.

cheers theory

A tale of 4 Ws

2009-07-06T19:26:00.007+01:00

The attack on the long running lower channel on the FTSE, using the April lows, was a sign to either trade its cataclysmic collapse or use it as support and look for Ws as the trend reversed.

The first W formed on RSI as shown by the segment but eventually failed as the base on Price didn't hold - can't win them all. A nice high prob. low risk trade BUT it was not to be.

The next one did deliver - standard trade for followers of the system.

Now for the interesting bit!

The continuation W in black. Note the rules for continuation Ws are totally different to those used to find trend reversal ones. Basically forget the RSI level,check the the RSI shape is tight and sharp with good internal gaps and hopefully find a bounce off the MIDDLE Bollinger line. These points have been covered in a previous post.

Since the bounce off the middle line is a key requirement, it acts as the get out level if things do not go to plan. A low prob. low risk trade hoping something unusual happens.

Then something happened that I cannot remember happening before, the continuation W got an extra bit added on its end, shown in red. What I refer to as a Ww shape to reflect the relative sizes but really they are conjoined Ws sharing a common section.

The extra trendline on the Price window was put in to help me locate an alternative closing level should I decide to not use the middle Bollinger line - basically running along the same line anyway.

So now it's just a matter of waiting to see where it goes.

cheers theory

Time for a break

2009-06-12T09:17:00.002+01:00

Hopefully most, if not every, possible point has been covered in:

Stages 1 to 6 posted in May,
Worked examples,
Comments.

I'm taking a break from trading, need to recharge the old batteries, hope to start the blog again in early July.

cheers theory

Mm on 14 min - reward:risk was 1.5:1

2009-06-11T18:10:00.005+01:00

The shape was there on the 17 min. but not as good in terms of internal gaps on RSI, so I used the 14 min. one. The windows have been adjusted to the same size for ease of use on this blog.

The long left leg of the M is purely there to define the context I am seeing it in i.e. the possible end of a long running uptrend - it does not affect the Pt1, 2 etc...

Entry was at 58.9 on RSI, Price equiv 4471/0.

The middle Bollinger line was close BUT the risk, to the top of the shape, was very small. Reward:ratio was just above the modified value of 1.5:1.

No problems with the rest of the filters, go for it.

The predicted problem occured, it got through the middle Bollinger and then came back before I could take 20 with half, so I was forced to take 15.

The rest was run from 10 above B/E, which was the top of the shape.

I now had a situation where I was "being paid to trade", the worst outcome was 0.5(15-10) for a 2.5 profit.

The extra little m (last bit of the original blck one + the extra bit in red ) appeared, usually a bearish sign, very encouraging BUT it didn't turn out that way. The trade was still running though when I shut down the platform.

cheers theory

Patience rewarded - M on the 23 min.

2009-06-10T17:05:00.007+01:00

Apologies for the different fonts, had to add a bit to the original, via Paint, when pacman raised a question via the iii UKX board.

The candles in the M do look much chunkier on Price when viewed on full screen - go and have a look if you don't believe me!

The difference between Pt2 and Pt3 was just over 1, so it just passed the internal check. With all the other WMs so far, this has not been an issue.

Nice high max RSI but only a touch on the Upper Bollinger by Price.
Entry was from RSI hitting 71.1 i.e. 1 below Pt2 which was @ 72.1.
Price equivalent just below 4500.
Risk very small - look where the top of the M is on price.
Reward potential very good - look where the middle Bollinger line is.

The rest is history, IMO a very simple trade to run whatever your personal style.

How about loading up the 23 min chart, it should still be there today and tomorrow.
What happened when it first hit the middle Bolliger line?
What happened when it hit the Lower Bollinger Band? And after that.....?
Put some Fib levels on using the maximum drop from the top and see how they could have been used to run the last bit of the trade.....

With the benefit of hindsight, we can all maximise the return from a trade. In reality it's about getting the balance right between protecting profit and giving it room to breathe. I like to split my trades and give myself the chance to do both.

cheers theory

Anatomy of a losing trade on 16 min

2009-06-10T10:23:00.004+01:00

Looked superb, RSI level, Price/Bollinger,low risk, high potential reward.
Entry was at 72.2 i.e. 1 below the level of Pt2, this gave a Price equivalent B/E of around 4474/3.

After it failed in two attempts to get beyond 10 pts, I grabbed 5 with half and left to rest to survive or die, it died.

The double doji in the candles after the one that triggers the trade is not good news at all - this is supposed to be a momentum trade. If in doubt, grab profit with some and keep the potential loss as small as possible, is my personal style.

Total return 0.5*(5-12)= -3.5 pts, I can live with that as a failure!

cheers theory

Trading on less than 15 min - two examples 14 min.

2009-06-09T17:26:00.005+01:00

Trading on 15 min or more is a guideline and not a rule. If the circumstances warrant it then I go for it. Shortening the time setting does leaves me open to market noise triggering a trade. However, if the RSI and Price/Bollinger criteria are met and the reward:risk ratio looks good, then so be it.

I'll happily shift to 14min, maybe 13 min if there is a potential shape showing on slightly longer timeframes but personally I will not go in on 12 min., other users go as low as 10 min, maybe even lower!

This example shows the use of a 14 min. one with supporting evidence.

Tight sharp M, good high RSI and excellent Price action/Bollinger.
Pt 2 was 62.4, so entry was at 61.4 or Price equiv around 4439.
The top of the M was 4449, just 10 above the entry!
The middle Bollinger line was well away compared to that, so reward:risk is fine.

I used the 14 min W to phase out the Shorts I had running - my dream of support levels collapsing did not materialise.

This time the entry is from 1 above the Pt2 on RSI, Price equiv was around 4403, with 4406 confirming the formation of the shape on Price.

I wouldn't have used it to enter a trade because the risk was much bigger than in the original and the Bollinger middle was closer - reward:risk didn't measure up.

There is a world of difference IMO, between using info to close a winning trade and protect hard earned profit; as opposed to entering the market and putting some of my bank at risk.

"nearlythere", I've put those RSI levels in for you and shown a WM with more than the minimum number of points.

cheers theory

Risk, reward and possible trading strategies.

2009-06-07T17:47:00.005+01:00

Firstly I'm thinking of changing the rule about the initial potential reward to risk being at least 2:1. I feel that at least 1.5:1 will allow enough freedom to trade without allowing too much rubbish through the filter, if the reward is below 20pts then the nearer it is to 20 the better

Most people who follow my posts on the iii UKX board know that I like to split my trades. When I got to the stage where I could afford to enter with double the minimum stake allowed, I could not believe the extra freedom it gave me.

All my initial S/L goes at a point decided by the shape on Price.

If the trade immediately reverses then I'll phase out half at the first possible S/L above the original and leave the rest to survive or die.

If the trade moves my way, I'll shift up half to that same S/L, leaving the rest behind.

Next shift will be the moved one, shifted up again to B/E.

After that there are just too many possibilities to go through in detail.

If I have an effective free trade, running half from -x with x locked in then I'm happy.

If I can get where I'm being "paid to trade", then so much the better i.e. half at B/E and half with some locked in.

The other lines on the image are there to act as mental triggers.

If a bounce off the middle Bollinger line is expected and it does so, then why get caught out, maybe grab some with half?

If the opposite Bollinger Band is where some resistance ought to be expected, then why get caught out when it does, maybe grab some with half of what's left?

The last sentence implies I now use more than double the minimum, which is correct.

cheers theory

A tale of two Ms - Friday 5th June

2009-06-05T20:11:00.011+01:00

The first one appeared this morning on the 18 min chart.

Max. RSI is nice and high, good sharp shape.
Price action/Bollinger Band is a double move up and back down.
Risk was small compared to distance to middle Bollinger line.
Full trade.

Bounce off a near approach to the middle line - ready for that, took profit with half and shifted rest to B/E.

Didn't qualify as a "failed M etc.." because it did not deliver the 20+ minimum needed. If you risked the profit and had a punt at half stake then you would have got away with it.

The second one was on almost the same time setting but not quite, being on 17 min.

Max. RSI is nice and high again, good sharp shape.
Price action / Bollinger Band is a double one again, including a very close / touch on the SD=4 Band - fairly rare event that.
This time though the risk is bigger and the Bollinger middle line closer.

It's at least a half trade but not,IMO, a full one - in that case I settle for a 75% trade.

Took profit with 25% and let the other two 25%s run as split trades. Will leave them, hopefully over the weekend but with guaranteed S/Ls if that happens.

cheers theory

Today's Post - there isn't one!

2009-06-04T21:43:00.002+01:00

There is no post today - which of course is a contradiction in terms because I have just posted this.

cheers theory

Non-system M on 34 min & the "failed Ws" trade.

2009-06-03T17:41:00.005+01:00

I've swapped the window sizes around because it's the Price action that needs to be looked at for both trades.

If you look on the readily available data there was a long drawn out M on the 15 min but the 30 min was useless - consecutive red/green equally chunky candles got joined to form an almost doji. It was just a matter of finding the time setting needed - happened to be 34 min, which just happens to be a Fib. number......

Max RSI is above 65 and it's a faller. The Price action is fantastic, a double break up and back down again through the Upper Bollinger band.

So why is it a non-system trade? Because the risk was around 15 and so was the initial potential reward marked by the middle Bollinger line.

It's a much better than 50% prob. in terms of two of the criteria but even money on the other. If the market moves my way on opening then the Bollinger Bands will widen......, I risked a half trade.

I've also drawn on the bases of the four Ws mentioned in yesterday's post in red, they were on different time settings to this chart but that doesn't matter.Yesterday I traded the failure of the first chunk of three and lost a small amount.

My rationale for repeating the trade is along the following lines. There is such a collection of support levels clustered together that IF they get hit at speed, then there could well be a whole load of S/Ls being triggered, which feeds the fall....

Failed yesterday for a small loss, worked today for a big win, part of which is still running.

cheers theory

Dojis on Price as shape destroyers on RSI

2009-06-02T17:53:00.005+01:00

This post is to show why I search the time settings to get the best shapes on RSI.

I like them as tight and sharp as possible. This corresponds to a dream scenario of a set of equally chunky alternate coloured candles on Price but that isn't always possible.

Sometimes they aren't equally chunky and other times they don't alternate in colour but they are more than acceptable replacements for the ideal.

The first image certainly isn't that!

The next one shows the same data but bundled in to 14 min. chunks rather than 19 min. ones and I am much closer to my dream. Now it is possible to put in the Ws on RSI, check out the candles that go with them, not perfect but so much better than on 19 min..

WwW on FTSE 14 min Tuesday 02/06/09

2009-06-02T16:59:00.012+01:00

I've put two images in this post covering the same time but on one the Price will be the bigger and the RSI on the other - just to make it easier to see what was happening.

It's a rare event the WwW on RSI. First the one in black, which met all the criteria. It made a move up then stalled and came back again but not low enough to close the trade. Then the extra boost from the bit in red, again it didn't get going. Finally the tagged on green part kicked off and initial trade turned out well. There was no way IMO that the extra red and green ones were reasons to add to the trade, they just re-confirmed that the RSI was trying to move upwards.

The initial RSI W in black and associated Price/Bollinger data met all the criteria to trade - RSI level, risk and initial potential reward. I made it RSI ~ 32 for a Price equivalent of 4457.

The final outcome was a trade that went all the way up to the Upper Bollinger which at the time was around 4488 if my memory serves me correctly.

The problem for me was that I was already Short from the previous night! Instead of moving my S/L down towards the W as it formed on Price, my usual defence, I hung back, deliberately putting profit at risk, and got stopped out at 4470 for a reduced profit of 40.

The market then fell from this high and I traded the failure of a W. Which one? The highest base level, which I used to go Short at 4447. Looked promising, then the market turned, so I grabbed 10 with half and moved the rest to -15 which was linked to a Fib level of the drop. It died after putting up a bit of a fight, losing 2.5 pts overall.

Just for a laugh, it was ended by a W on the 16 min! The tail on the green candle between 1:00 and 2:00 triggered the "failed 14 min W" trade but provided Pt1 for the 16 min one!! To make matters worse, the 16 min one wasn't tradeable because the Bollinger Bands were too close together!!! Deduction, we were probably range trading.

cheers theory

The Ms on FTSE RSI Monday afternoon (01/06/2009)

2009-06-01T19:31:00.000+01:00

It was just a matter of waiting until the initial reward (as defined by the Bollinger Bands) was worth the risk, given the high level of probability of success.

The first tradeable M appeared on the 10 min IMO, but this is below my 15 min guideline. I have swapped the size of the Price & RSI windows to show what I mean by "chunky" candles on Price - alternating colours, lovely.....

The next one appeared on the 14 min, after the 10 min one was put under pressure but survived.

I traded the survival of the 10 min one and anticipated the formation of the 14 min one by going in at B/E 4510.

At this level the risk was small and the middle Bollinger Band was about twice the distance away (guideline is twice and this crept in).

What I really liked was the double break up and back down through the Upper Bollinger Band - the extra one is not needed for membership of Group A but is a real bonus.

I am going to re-think my groupings, maybe RSI above 75 or less than 25 should be A*, likewise the double moves on Price/Bollinger should also be A*!

If you were prepared to wait longer then the following ones on 22 min and 28 min had their good points.

The 22 min one was a faller on RSI, slightly so BUT it past the filter.

The 28 min one was also a borderline pass on one of the filters. Pt3 on RSI was only just 1 above the Pt2 BUT it past the filter - a measure of internal strength of the shape.

From then on it's personal choice as to how to trade it. I split the trade into halves, took 20 with half and moved the S/L on the other to B/E. The latter one JUST survived the first Stop hunting retracement - we always forget the ones that do!

cheers theory

Thoughts about the previous post - 3 examples.

2009-06-01T06:59:00.000+01:00

The early morning W is typical of the problems faced at this time of day. The big limitation is the narrowness between the Bollinger Bands compared to the risk - IMO no trade.

The other problem it highlights, is backtesting systems using RSI. Only the final value for the candle based on the Close is available. The same candle on Price could have been formed in many ways.

Was it an Open, then down, then up and then move to the Close? Or was it an Open, then up, then down and then move to the Close? If you had decided to trade it, think of the two different outcomes and what they would do to your trade.

The first M looks great - HPLRHR. How you trade it is down to personal style. I use split trades and I would have ended up with running two of them. The minimum result would have been break even overall.

The next question is, "Does this count as a failed M etc....?". The answer depends on your definition of a "good profit". So go Long or stay out as it fails depending on your viewpoint.

The second M looks great as well - another HPLRHR. Again it fails to deliver big time! The comments about this one are the same as the last.

Just because you get a series of high probability trades, it does not mean one of them will work before you get destroyed! IMO, it is vital to survive in order to thrive at a later time.

What if I had decided to trade the initial W and it hadn't got stopped out? The Ms take on a whole new perspective, they are my enemies! Now I have to decide just how close I would move up the S/Ls on the runners when they form. If I survive I am going to add when they fail....

Context, context, context.

cheers theory

Time to try out your understanding of the system?

2009-05-31T08:27:00.000+01:00

Here are three examples on the same day, on the same time setting of 16 minutes.

It is good practice IMO to try and work out what the Price would have been when the RSI target was hit.

Have a look at each one and then decide if you would have traded it or not.

If you had done, then how would you have handled the subsequent action?

If you hadn't done, could you have used it later to instigate another trade?

I'll give my thoughts in the next post tomorrow.

cheers theory

Example of a Mm on RSI

2009-05-30T10:04:00.001+01:00

Fairly straightforward, the extra bit in red followed on from the original in black.

The entry is via the black M at 56.7 i.e. 1 below the Pt2 at 57.7, the red bits played no part in the trade other than give a boost to morale!

cheers theory

Example of a "failed W etc....."

2009-05-30T09:06:00.000+01:00

The original W on RSI was on a timescale that is no longer available in the stored data but the 15 min chart on Price does show the basic ideas.

The S/L was below the W at 4440, with a B/E of around 4456.

The W formed on RSI, Price and delivered a good profit. Then it reversed with three possible outcomes:

My split trades were both stopped out in profit.
An alternative was leaving one at B/E but that would have been hit.
The more aggressive alternative was to leave one at the original S/L - hoping it's something to do with EWT waves are there is no overlap.....

Any surviving trade then went on to deliver a further oportunity to take the money.

Then we get confirmation of the support level but the next move up it not as big as before. Followers of the 1-2-3 system will recognise this as a wide, big M over many candles.

The combination of the formation of their 1-2-3 M on Price and the failure of my original W on RSI was just too good to miss.

If it gives, ride the wave....., if it doesn't, then get out for as little as possible and wait for the next one. I believe that you can't thrive unless you survive!

cheers theory

Stage 6 - Failed WMs etc.......

2009-05-30T07:58:00.000+01:00

How can I possibly benefit from the failure of the system?

Well suppose the initial trade was a high prob, low risk, high potential reward one and it goes through the following stages.

It forms on RSI (at which point we enter), then it forms on Price (using RSI usually gets you in that bit earlier), the mob join in and off it goes into profit. Defining "into profit" is difficult, at the moment 20 pts or ~ 0.5% seems about right.

All is looking rosy and then it turns!

I used signals from the market to enter the trade and it was a potential cracker, looked very promising and now the market has changed its mind. I have very little attachment to my trades if they don't deliver, they are momentum trades and I prefer the momentum to be in my direction.

So I'll take profit with half and shift the S/L on the other to B/E (just in case the Market changes its mind again).

What I'll also do is set up an order to trade the breakout through the original S/L position (see diagram). I'll only use the profit from the initial trade, so the whole process is self funding.

My rationale is that something has spooked the herd, the effect of the herd hitting a previous resistance/support level can be pretty spectacular. Then again that isn't always true, so I'm not afraid to close the trade down if it gets triggered but the follow through just doesn't happen.

Maybe it's something to do with EWT i.e. impulsive wave ends, I trade the corrective, then another impulsive comes along. Why stand in its way?

cheers theory

Stage 5 - Wws and H&S on RSI

2009-05-30T07:22:00.000+01:00

Much easier to describe what a WW is or an Mm is, when you can actually show people!

When it comes to trading them, it all depends........

The RSI patterns only show the closing position, so a lot could have happened on Price during the candles - this is why backtesting anything based on RSI is fraught with problems.

If the original trade has survived, then maybe it's an opportunity to add another partial or even whole one, or maybe just enjoy the stress free ride.

If the original trade got stopped out, then the next one should stand on its own merits IMO - but most humans will be swayed to go with a borderline one.

Now for the Head & Shoulders (H&S) on RSI. This is not an MM because the initial M would be a rising one i.e. Pt3 above Pt1 and that is not allowed under any circumstances. All we do is trade the second part i.e. the basic M shown.

The Price action that matches the RSI pattern could be a H&S on Price or even a set of rising tops. This does not matter, I am trading on RSI patterns.

cheers theory

Real life example - FTSE 20 min 12/05/09

2009-05-29T11:34:00.001+01:00

Notice the RSI window is far bigger than the Price one. The RSI is set on Double thickness Points. The lines of best fit are put in manually with the segment drawer.

This trade shows just the RSI levels and Price movement relative to the Bollinger Band.

The RSI of Pt1 was greater than 70 - Group A.
There was a move above then back under the Upper Bollinger - Group A. The double move is a bonus and not necessary for membership of Group A.

The S/L placement was just above the highest point within the M on Price.
The entry was governed by the RSI hitting 63.5
The risk is the difference between the two values, it was fine!

The initial target was the middle Bollinger line, with a further one of the Lower one. Compared to the risk, even the initial looked very good indeed.

So it was a high probability, low risk, potential high reward trade.

cheers theory

Stage 4 - Context,context,context.

2009-05-29T09:13:00.000+01:00

Assuming that you now know you should be looking for tight sharp WMs on RSI - you will be rejecting those which have internal dojis or near dojis on Price. You will soon gain the expertise to find the timeframe on which the dojis disappear and the required shape appears. If there is no timeframe to do this, there is no trade!

Probability of success

Check the RSI level - which group will the shape be in?
Check the Price action compared to the Bollinger Bands and middle line. Which group is it in?
Is there a nearby Resistance/Support level that could well act in your favour? (See the grey and blue coloured lines on the diagram.)
Likewise, is there a trendline of Fib level?
If you use EWT do you think you are looking for an end of Wave 5 or a C?
Use all of these to assess the probabilty of its success.

Assess the risk to your capital

How far is it from the B/E entry on Price to the place where you are going to position your S/L?Anything up to 20, I use whole trades. Once it gets above this I scale it down, so 40 needed will only be a half trade. This limits the max risk to 40*0.5=20.
You have now assessed your risk.

Assess the extent of your initial reward

This means taking into account the nearness or otherwise of a Price level which will get in the way. Typically these will be a previous strong resistance/support level or the middle Bollinger line (which is why I like widely spaced Bollinger Bands).
Is there "room to trade"?
Can you get the trade to B/E and still be a reasonable distance off the Price action?
Is the the distance to the problem area at least twice the initial risk required?
You have now assessed your initial target reward.

The ideal trade?

Timeframe >= 15 mins (guideline)
High probabilty of success.
Low risk to capital.
High initial target reward before you get to a problem area.

What Trigger & I call a HPLRHR trade.

cheers theory

Stage 3 - Use of Bollinger Bands on Price

2009-05-29T09:10:00.000+01:00

Bollinger Bands are a well known measure of "unusualness". They are based around the calculation of a standard deviation (SD) from the Price data. The more multiples of the SD the Price moves away from the mean, the more unusual it is.

The problem is of course two fold. Should one even attempt to calculate an SD from the data input and do the conditions remain valid for it to be used with any sort of meaning, given that it had any in the first place!?

Fakeouts are the death knoll of any system based on going Short on an initial move above the Upper Band. Likewise going Long on an initial move through the Lower Band. When the market starts to trend, the Bollinger Bands widen and it's not unknown for the Price to move along the Band in question.

Trades can be split into groups based on the Price & Bollinger Band action. Just like with the RSI levels, Group a has the highest probability of success, B less so………

Group A, the Price moves outside the relevant Band and then returns, if it does so again that is just a bonus.
Group B, the Price touches the relevant Band.
Group C, any other, BUT in particular when the Price bounces off the middle 20ma line.

The wider the distance between the Bands the better it is in terms of potential reward - the middle line and the opposite Band are further away.

Expect the trade to stall at around those levels, if not even reverse.

cheers theory

Stage 2 - RSI levels for trend reversal or continuation.

2009-05-29T08:46:00.000+01:00

Trend reversal RSI patterns fit into 4 distinct groups. It is the level of Pt1, and Pt1 alone, which decides the category they are put into.

For a trend reversal W, basically it's the lower the better in terms of deciding the probability of delivering a B/E trade.

Group A, highest % chance Pt1 has RSI less than 30.
Group B, next highest % chance Pt1 has RSI greater than 30 but less than 35.
Group C, even less % chance Pt1 has RSI greater than 35 but less than 40.
Group D, least % chance Pt1 has RSI greater than 40 but less than anything you want.

For a trend reversal M, basically it's the higher the better in terms of deciding the probability of delivering a B/E trade.

Group A, highest % chance Pt1 has RSI greater than 70.
Group B, next highest % chance Pt1 has RSI greater than 65 but less than 70.
Group C, even less % chance Pt1 has RSI greater than 60 but less than 65.
Group D, least % chance Pt1 has RSI greater than whatever you want but less than 60.

Trend continuation WMs are totally different.

At NO stage were they ever the opposite shape and then they changed back within the triggering candle.

In terms of Price action, they are non-threatening retracements within the original trend.

cheers theory

Stage 1 - What are WMs on RSI?

2009-05-29T07:31:00.001+01:00

May as well start off with the most basic of the underlying ideas. A W on RSI is a potential buy signal and an M on RSI is a potential sell signal. There are a lot of filters they need to pass through first, before they become confirmed signals to trade.

At this stage I am only going to show W formations. I used to refer to rising Ws, but now I don't bother. The pt 3 MUST be higher than pt 1, if it's level or lower then it's no trade!

Throughout my work, the emphasis is on RSI points and levels - I have the RSI window on Double thickness Points, any line is added by using the segment drawer or ZigZag set on Point=1.

With minimal practice you will soon be able to spot Ms, where of course pt 3 must be lower than pt 1.

The 5, 6, 7... pt shapes are those I use in my WM finder software package - hence I've kept the naming. RSI is ALWAYS 14, so that will not be mentioned again.

The pt 1,2 & 3 labels are those used in the 1-2-3 system on Price, so I have kept them even though I work on RSI.

For an excellent view of 1-2-3 trading, I suggest you read:

Mark Crisp's 1-2-3 trading.

[Some systems will prevent you getting there directly BUT just click on the link you come to, it works.]

The matter of when a W forms is personal - reversal within the same candle is a nightmare!

I allow a 1 pt leeway before entering - see diagram above.

I also like at least 1 pt difference on RSI between, pt 1 & 2, and 2 & 3 - otherwise I am leaving myself open to attack from "market noise". The candles on Price should have "chunky" bodies, so dojis and "almost dojis" also get rejected by using this criteria.

cheers theory