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.]



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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

New idea + old faithfuls

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.

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.

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