Showing posts with label traders. Show all posts
Showing posts with label traders. Show all posts

Forex Myths: Seems that everyone is trading, today.

I'm sure everyone searches the web for the info related to trading. We started like this as beginners, in need of a strategy or system. We do it as advanced traders, searching for news, analysis, rapports, etc.

While we are surfing the web, we see a very aggressive advertising campaign, usually promoting services related to trading. We can say this is ok. This is how they look for their clients. Now, since social networking has exploded, we find many people promoting trading.

Some of them claiming they are "traders for living". This can make us believe that everyone is trading today. So who is behind this advertising around the web?  Usually these guys have the "I'm a rich person, I do this just for fun!" attitude, when they promote the "services" (claiming they are real traders).

Another problem starts when this kind of “trader" starts to combine these "services" presented down below and offer you a complete "portfolio" of services, from opening an account to managing it. You will never be a successful trader "working" with these guys. You will just fill the "more than 95% losers" in this field. 

You can spot many of them on Facebook, usually having a "sexy girl" as their profile photo (not more than 3 photos). Just try to read the comments on their photos: "wow, so hot!", "what a beautiful IB/MM, I have!", "thanks for being my friend...you are so sexy!”

First time you notice that, you will make a huge LOL, but if you will try to think more about it...you will start to cry. This is how many poor people are tricked and usually they lose all their money. Me, personally, I would never ever pay for something (service/product), just because a "sexy girl" presents me that offer, but I guess there are lots of poor men out there...

In my country there is a saying: "Is not a fool the one that ask...but the one that pay the ...****! I guess in this case these "traders", that need to sell services to “make a living” from trading, are right, but is this ethical? Is there anyone going to do something about it?

I'd like to believe that there are still fair people out there that promote these services, in an honorable manner. This should be the smart people’s business, not a scammer’s world.


Introducing Brokers
Introducing Brokers are usually promoting their referral links. If you click on these links and register to that broker, they will receive a commission (place your mouse on that link and you will see some strange digits and characters on your Add-on bar, bottom-left on your screen - if you have it activated on your browser) 

This commission can be paid one time only, either when you register as a client or a monthly % from spreads. Until now, it looks good. We can consider IBs as a sales mobile department of a broker, but what if this IB is spamming the web? (E-mail, facebook groups walls, "smart comments" on forums, etc).

Why should I choose this annoying person from all the others thousands of IBs, promoting the same broker? Is he/she going to present me the broker services in a fair way? Does he receive a proper training on how to present the broker services?
The answer is no! If you don't believe me, try to contact a broker that offers IB programs.

No market experience needed (if you mention you have it, is more than enough). No anti-spam policy explained (only mentioned in the contract, but nobody consider it if you report it for any IB), not to mention, no proper training for giving to their clients, proper consultancy.

You should consider it twice, if your brokers offer/allow this kind of promoting. For me, even if they will change their "policy" in the future, I won’t even consider talking with these brokers. (I receive phone calls, e-mails with "business" proposals, every week). There are a few of them that already "look big" on the web, because of this aggressive advertising from IBs.  Unfortunately, as brokers, they offer lousy services!!!


Signals Providers

These services, in my opinion, are the beginner trader’s worst nightmare. Being their clients, you will never learn how to trade. Being successful in this field means you will learn from your mistakes.

How can you learn if you don’t even know the reasons for placing that order on the market?
You will get feed on SMS, e-mail, social networks, with some "signal": buy here...exit there.  If they are right...you don't understand how. If they are wrong, you lose more than money: You will lose more than that. You will lose the opportunity to learn from that bad trade, not to mention, you will never "learn how to catch your own fishes". You will always depend on that "service" for as long as you will live...

Now, this "gang" is gathered on big websites that promote "performance links". This is another "trend" in this field. This is also a great IB business for the websites owners. To keep their "performances links" in place for more than a month, they have to open their real account on that website (referral link), yet, this is something that everyone forgets about:

"Past Results Do Not Guarantee Future Profits!"


And the worst part...I notice everyday, "known" traders around the world starting their own "signals services" business, instead of funding a company with shareholders, to invest on the market.
I find that so LAME...


Forums Traders


The beginning was great. I still remember those days, when there were few fair forums on the web. A nice place where you could talk, share your results, learn from advanced traders, and learn from their mistakes...

Those days are gone...and will never be the same again. Now forums have advertising contract and write articles for paid advertising, become IBs (sharing referral links) or started "performance links" business...

The forum traders now, are mostly beginners. They read a few things and tested it on demo and...Done. They are now "gurus" and teach trading! Every forum you might join, have thousands of threads opened...with different strategies and systems that had thousands of followers posting every day...charts, results...until eventually they stopped doing that and the thread was closed...Why ? Doesn't it work anymore?

Then the old followers become "gurus" and take the idea and start a new thread posting old links: "this is the original idea...and we are just improved it and end up with this...” And this...usually stop earlier than the original idea, because they don't have enough followers and expected results...

Then there is the "forum trader", thinking of starting his own "business"...by making his own forum. This is how all the forums around the web now have the same ideas (sometimes just copy+paste) from the FF Forum...the first great place...  This is how, learning from the web, today (for free), in 80% of cases is just a lost time...Sometimes money, too, if you open a real account without months of demo testing, before. And by testing all ideas shared on the web today...could really take you years...
So they thought: It is either you have time to get proper training in this field...or money to lose to buying other’s "experience". Sometimes it is both. I'm sure many of you, have a "deja vu" by reading this.

Advanced traders are no longer on the web, sharing for free, their experiences. They are "hidden", now, due to this "big noise" about the trading, everywhere.
Years ago, an advanced trader didn't have to "show" his statements. It was enough for us that he could answer all our questions, with lots of most logical details, for free. Also, when having lots of money in your account, you will start to think of personal security...so no real names, no other details.

Hey, have any of you seen the Warren Buffet "performance link”? How about his investor password? How about George Soros? Any other big trader's statements? :) I can assure you...you won’t see it! If a fair big trader what to share his results will build a company with shareholders, to invest on the market. (Like Warren Buffet did with Berkshire Hathaway Inc.)

Back then, when beginners were happy about results, they wanted to "show off" a bit and they were publishing their results (less than $ 50k). Now all beginners with few hundreds in their account "show off" with their statements to earn clients. Why? Their system is not working that good to "trade for living”?

This category represents that 80% noise...that will stop soon and they will vanish (when their "system" will stop working like on FF Forum, years ago). But new ones are coming...so watch out of these "show off" guys! They are not yet traders. They are just...beginners with some results. They are "forum traders"...


Strategies Sellers

If you can trade profitable, you can make millions, by starting with few thousands. Why should this trader allow this "stress" of having clients, for few thousands/month, only?
They are "forum traders" that had some results...but not enough. Why do I think this way?

It is simple: How much money can you make, by starting with $1 and having 100% profit (ROI), in 30 days?
Do the math for yourself. You don’t have to make 100% and you shouldn’t count days. Months or years will do, to have millions. Not to mention you don't have to start with $1...

So every time you meet a trader selling a strategy ask yourself this:

If it is that profitable, why does he/she sell it?
And why is it so cheap?

Would you sell a strategy that can get you millions?
How much money would you ask for it?


The web is full with these "successful strategies" with only $ 99.9! And when it comes to results...the monthly profit is between 99.9%-999999999% :)

So they built "good looking" websites and sell you the success in "just one click". Also, they have great reviews (fake ones) as comments (or now the upgraded versions of advertising it: many small websites around the big one, with fake communities, reviews, etc)

"What are you waiting for? Get it now with $99!!!"

I'm sure that many of you have a "deja vu", again... :)


EAs/Indicators Sellers

Ohh...what sweet memories. These products started few years ago, when if you were visiting a forum and you dare to talk about your strategy, the first comment would have been "Sounds great man! Can you share with us the EA? Please, please, please...” If you didn’t have one...you should have felt ashamed of yourself as a trader and run away crying to look for a programmer to build it fast :)
Today, we must agree automated trading is the best, but since you dont have a bank/hedging company EA to buy...why bother? All the other products on the market are just...
Why? Remember this?

If it is that profitable, why does he/she sell it?
And why is it so cheap?

Would you sell a EA that can get you millions?
How much money would you ask for it?

This product is also sold by beginners or unprofitable yet traders. Most of them are not only claiming they are traders. They say they have 10y market experience. This is how they got the strategy and worked really hard to build the EA. If you ask them how old they are...25 seems their lucky number :)
(So they started trading at 15y)


Book Writers

There are good books in this field. But also some that will make you to waste your time...and money.

By searching the eBay for some good new books, I wanted to know more about the writer of that "good book" I was watching, for sale $20 or something. I’ve checked the reviews...lots of positive ones. The good part came when I clicked on the writer ID to see other books he writes about. He turned out to writes good books also, about: cooking, gardening, paintings, sculpting, travel, etc....and trading.... :)

Also, if you will check some "great writers" books at the bibliography of book you will find out their "source" was many other good books. So nothing new...copy+paste like on forums (ofcourse edited with his own words - copyrights laws).

Therefore to find a good and helping book about trading, today, is really a challenge. Me personally, I've read thousands...and I must say less than 20% were good. The rest  were such a waste of good night's sleep...

That's why I can call trading "books selling" just the upgraded version of the "forum trader", when some beginners think they can "make some money fast", while advanced traders, use the marketing tricks to "write a new book", that doesn't necessary share something new or unwritten until now. So, most of them just "sell" their personal brand, not the books value...And I am really disappointed about my old "idols"...new books.


Trainers

You know how they say: "If you can't trade...teach!"

So, why should you pay for a trainer ...in trading? For his spent time with you?
Shouldn't he consider this as something to "give back to this field”?

And if his lessons are free around the web...and he can't trade successfully...what am I actually paying? Probably they think they teach you "how to do it". Yet, they fail to do it...for themself...if they charge you for this.

Some say that they like ...to travel. So this is the best way to travel for free...When I hear this "starting joke" at some courses...meetings, I leave immediately. To think of it, to say it in front of other people, when you pretend you are a trader...This is so LAME, again...

Yet, there are lots of "gurus" around the web. Usually they claim they are successful traders...And have some brilliant description "Best trainer in the..." or "The most beloved trainer in the ..."
Who gave him this ...title? Himself!

But I have to agree, there are some great courses out there. But how many of you payed some courses...that didnt helped you at all, as trader? "Deja vu", again? :)

I've attended many courses in my life. Few related to trading. And I must admit, most of them didn't offer me new knowledge. Mostly, these courses can be helpful for your...moral. But for this you shouldn't pay hundreds or thousands of dollars...

Finding a good course can be again, a challenge. All websites have payed "advertising": articles, forum comments, social networks, etc. So, finding decent reviews is hard. I started to think that friend’s reviews are the most trusted opinion. But this also turned out to become a "referral" business, (like in MLM "businesses" that made friends avoid contact with other friends that already "joined the system", because they can't stop "recommending it"...for a commission...).


Money Managers

By the book, a MM is a person that manages their client’s accounts. And yes, these MM should be traders. The problem is that every one is claiming around the web that he/she is a Money Manager.

I'm sure that my follows already know the TV Show (best documentary) "Million Dollars Traders!" produced by BBC. The purpose of the documentary was to find out if some persons with no previous knowledge about the market can become traders. Why? Because the Fund Manager, used to hire people with "experience" and not all of them...were profitable. They admitted that finding good traders is hard, because good ones trade for themself. And those that are willing to join don't come for a monthly salary, but for a big commission...which is not that good for their business. So they tried over the years to train traders. Again, after teaching them to trade profitable, they were leaving for building their own business...or carrier. :)

So if a big trader, does he chose to not become employee but decided to work for himself, as trader (or for his own company), why does he need clients?

Today, people are mistaken a MM with a "signal provider" that share his trades with a "trade copier" software.

In my opinion the definition by the book for MM, should be for institutional traders, only.

And a Private MM, should be able to teach you a strategy/a system (without being a strategy seller), then to be able to guide you (without charging for teaching) and then to become your mentor when you start to enter on the market (not to "share" his own trades using a "trade copier" or to sell you signals). And yes for this he might charge a monthly commission, when you have profits.

Why?  Well, he tells you how to do it...shows you how to it...and you are doing it, eventually, with his help. Working like this with a good MM, can help you become a trader yourself, eventually, in 1-2 years, but after that, you can trade for yourself, without paying thousands of dollars for books, courses, etc.  So this can save you money and ...time.

But finding again a good MM, is really a challenge. Especially now with these "performance links" websites, that claim they show you MMs. Yet, they are nothing but, signal providers.  They won’t teach you how; they will just "share" their trades with you...as long as you will pay for it. And even if you find a good one, if he will stop, someday, you must search all over again. Because you wont be able to trade for yourself. Not to mention not using their money, doesn’t represent a guarantee. They can fund their account with $100 and they can have $1 mil from their clients. If he loses that $100, he will just make a new account :)

That's why, I also agree with good traders, as MM, that builds their own company using shareholders as long as they can fund 51% from the trading budget. People that can't trade, they can be partners on a trading company that uses their money for trading on the markets- like a Hedging Company. If the MM is not good enough he will lose his money too (as an extra guarantee).


Conclusion:


As you can see, there are many sellers in this field, on the web. Not all are traders. I think there are more sellers than traders. Is hard to make this statistic, because I don't think all of them will admit it.

I let you to be the judge of that. Just watch the posts on trading groups on Facebook, forums, etc. And tell me who is really sharing something for free. How many of these free services do you consider useful and how many can be consider "marketing tools" for these services. Not to mention that I know good free sources on the web that aren't free...anymore.


Best Regards,
^^_Lord_Ice_^^

What type of trader should I be ?

There are many types of traders and because of confusions I see everyday on the web, I've decided to write an article about it. Also, I will try to explain in details, the differences between them.

Because I've been involved in management and this has become "my second nature", I can't help myself not to show you the SWOT Analysis for all the types of traders. Hopping with this, you will think twice, when you will chose your path in this field.


Trader - is a person that buy and sell financial instruments, expecting for profits.


Day Trader ( Intraday Trader ) - is a person that trade intraday. That means he will open and close positions in the same day. Because there are many TFs in the intraday ( from M1 to H1 charts ), traders in this category can be scalpers or higher TFs traders ( M30, H1 ).


Day traders can be retail traders ( work for himself ) or institutional traders ( work for an institution ).

Because of this, we can consider intraday trading, the biggest "battlefield" on the financial markets.
That's why I've always said, that trading intraday, specially on lower TFs, is not for the beginners. Yet, many people start trading like this ( first on demo, then on real money accounts ), because they don't have patience. They think they don't have time to "wait" a position to be in profit on higher TFs, so they start intraday trading.

Trade fast = lose money fast, if you don't know what you're doing. Or if you don't have time...you should have money...to lose, in order to learn ( by practicing ).

This wrong idea of starting your trading carrier is influenced also, by many sellers in the field ( from brokers/ IB to strategy sellers and EA sellers ). They can't wait for you to "test" the markets for months. They need to "sell trading to live", even if some of them claim they are "traders for living". And they want their commission "yesterday" if possible...And because of this, probably the most common sentence you've heard was: "You saw the profits with these few trades....Let's start to make some money...!!!" And we wonder why 95% lose money in this market ?


Swing Trader - is a person that keep opened positions longer than a day, but less than a Position Trader. On Forex keeping a position opened longer than 2 weeks, might not be profitable, because of the swap points ( except long positions ).



I'm a swing trader ( and a bit trend follower trader ) for few years now and even if I've started like many others on intraday, I must say nothing compares with trading H4, Daily and Weekly charts. Setting up my charts, dont take me more than 1h/few days. And even if I'm watching my positions daily ( mostly for managing the opened positions and that's possible because I'm full-time trader, now ), that is not even necessary every day. So for this type of trading , max 1h/day is enough for taking care of your business. So, you can be part-time trader, as well. That's why I don't understand why people that have a day job, try to trade intraday, in their free time, always complaining they lost good trades because of their job and lose money because they can't trade in the "right" session.

Also, higher TFs are not that much influenced by daily news release ( need several days of bad news for a pair to chance the direction ).


Position Trader - is a person that keep his opened position longer time: from months to years ("buy and hold" - for Forex ). This term has been introduce first time for the traders that trade Future Contracts, because they are taking a "position" ( buy or sell ) for a financial instrument and keep it for months ( usually 3, 6, 12 months - for future contracts ).


In this category there are hedgers and speculators. But for me this is the definition for a person, that try to keep his savings, while making some profits, on the spot or the future market, as well.

For example, lets say you want to keep your money in the bank. Lets say you have 100,000 euro. First of all, keeping money in a bank deposit/account, even if will give you an interest, that doesn't mean you've made profits ( usually interest < inflation ). Ofcourse you should keep it, in a bank, in case you'll need it fast ( liquidity ). But what if you know you wont need it for 1 year or 2 years? ( savings/loans ). In which currency will you keep your money in the bank ? How do you know which currency will give you a higher interest ?


For a person with no financial education is hard to understand the process and most of them are just guessing ( gambling with their savings/loans and always hopping they'll be ok ). They are Position Traders, without even knowing it.

A position trader, unlike the other types of traders, can hedge his contracts ( or his savings/loans ). Let's say you have those 100,000 euro in your bank account ( or a loan ). That will be your "spot" position. In that moment you could "protect" your currency "position", by using margins and taking the opposite position with Future Contracts. And that is possible, using a margin of only 1% to 5% from your deposited/borrowed money ( only 1,000-5,000 euro ). Doing this even if lets say the value of your 100,000 euro is decreasing by inflation, the "loss" is compensated by the profits from the Future Contracts ( in this situation your bank deposit interest is sure profit ). And ofcourse if your bank account will increase the value of your money, this will be lowered by your loss from the Future Contracts ( but this second situation is rare ). So, hedging your position = "keeping" the value of your money.

A speculator can do that for profits, by using hedging and market arbitrage, for spot and/or future market.

In both sub-categories, a Position Trading, means: profits and protecting profits, on a longer period of time ( If the hedging necessity is for a period shorter than 1 month, Forex market might be a solution, as well, specially for long positions, when receiving swap points - since Future Contracts starts from 3 months period and you must pay a commission/contract ).

Conclusions:

While Position Trading can be considered investment with "sure" profits ( 80% of traders in profit ) and Intraday Trading is very risky ( less than 5% of traders in profit ), Swing Trading might be the best solution for you, after learning the basics of trading ( 15%-20% of traders in profit ).

This is how we end up to trading, right ? We wanted to make money, then we tried to keep it, while making more. And then we found out there are ways to put the money to "work for us" ( not us, working for money ).

So beginners, should start with Position Trading ( Weekly charts ) and after learning basics, they can successfully start Swing Trading ( Daily, H4 ). Intraday Trading is the "final level" in case we want to consider our trading activity, as a job. But I prefer to consider trading a profession, a business. And I want to invest less time with maximum results. That's why Swing Trading for me, is a way of living from trading !



Best Regards,
^^_Lord_Ice_^^

Personal Life Money Management as trader ( or the real "Holy Grail" in trading )

Being a trader ( full-time), you need to know that without a good Personal Life Money Management System, you can't trade profitable on a long run. Not even if you have a good strategy, a good MM Rules or even if you have a good Open Positions Management.

Let's start with the beginning. Why do you want to be a trader ?

Im sure many of us, started trading to get rich faster, more than "keeping" our economies. Being a trader, we thought we will have faster ( few years ), lots of money to buy houses, cars, expensive holidays, etc.

So the temptation was big. Still is. Think of this: you started to trade profitable, you quit your job ( or other income sources ) and reached $ 100,000 in the last 5 hard years.
How's your life improved with this money ? Would your life, still be the same with this big trading account ?

If you withdraw money from your account could be better. But if you do that ( or started to do that earlier, month by month ) you don't have the same big account for your main income source. And even if you still continue to earn money from trading, by withdrawing it each time for improving your life, you will never be a rich person...Not to mention that someday or from time to time, your trading is not working like it did before...and you "must" withdraw part of it, because you already saw something to buy...a new car...a new house or to pay an expensive holiday you always dream of.

We all know that having "goals" while trading will add negative emotions and will make us to take bad decisions while trading ( "today I have to make $ 1,000" or " by the end of the month I have to pay...$ 3,000 bills" or " by the end of the year I want to buy a new house " ). So we still do it. Is in our human nature to wish more or to dream of. And by doing this we forget the initial purpose of becoming traders: a beautiful and comfortable profession, working from home or in holidays using a laptop, never have employes or clients and earn more money that a regular job or profession. And in the end...becoming rich...and have a totally independent life.

So we must have a balance, an equilibrium. And this is so hard to get. And that's why this lack of patience of becoming a wealthy person while "living your life" and spoiling yourself with what you think you need, make most of the new traders to blow their accounts away. ( " If you buy things you don't need, soon you will sell things you need!" - Warren Buffett ).

The first "battle" is not won, when you started to become profitable, but when you trade and no matter if you earn money, or not,  you still keep your lifestyle! And that's the most important thing you should understand, when you want to become a trader and intend to remain "on the market"
( "Being a wealthy person equal the period of time of keeping the same lifestyle, without earning more money - R.T Kiyosaki )

Therefore, there are some good Personal Life MM Rules:

1). Don't start trading, with borrowed money. ( Use economies + investments income from your economies, only )
2). Don't start trading using money, you can't afford to lose.
3). Don't start trading if your life or your family life, depends on the profits unearned, yet. ( monthly goal )
4). Don't start trading with a $ goal in your head, like a "new car" ( "Trade what you see, only" )
5). Withdraw profits initially, only to deposit it in a bank. ( increase "backup money" ). You can keep it into your trading account, if is not tempting you to increase no of lots, without MM Rules.

Also, you must understand that in this profession, you either have initial money to start trading big ( when you are prepared ) or you have time to start it with a small amount and have patience ( years ) to end up "trading for living". If you start with less than $ 1,000, you need years to become full time trader. ( or you can live a cheap life until then - like being student and living with your parents ).

Just to have it in mind: a healthy profit / month = 10-15%. You can make more...or less. But don't expect 100% / month. If you like gambling ( or need it to become rich faster ), better go to a casino and use all your money on a single roulette number. You have more chances, mathematically, to win, than trading  Forex with a bad MM. You can have "luck" to trade profitably like this, few months, but you can't have luck each month...to make $ 100,000 faster.

So how can you start trading ?

I can show you how I did it, after many loses that almost made me quit trading in my beginning years:

1). Build a strategy for trading. ( specific signals/confirmation for entry + exit rules )
2). Build the MM Rules according your strategy statistic ( SL, TP, lots, account's exposure %, account's % loss for stop trading )
3). Trade it on DEMO few months ( at least 3, ideal 6 months or better 1 year )
4). Remember profits on demo does not guarantee profits on a real account. ( different emotions )
5). Establish the amount of money you can afford to lose. ( economies )
6). Deposit 50% to bank ( backup money ) and 50% to a Forex account.
7). If you lose the established % from account balance, stop trading, go demo and don't come back to real trading until you found out, what went wrong ! Refill the account using the backup money and start over.
8). If you are profitable, don't double the no of lots until the account balance is doubled, as well ( or withdraw profits and deposit to bank account to increase backup money ).
9). If still in profit after 1 year, you can add 50% from backup money to you trading account to double or triple no of lots, using the same MM Rules and keep withdraw profits to bank deposit for building backup.
10). If still in profit after 2 years, you can fill your account with all backup money and you can upgrade your MM to the next level ( from 1% to 2% risk/trade and exposure from 15% to 30% ). Start again to build your backup money deposit, using monthly profits.

You think this is "too much" ? Yet, you go ( or went ) to school more than a decade plus 4-5 years in a college, to start a "normal" profession, followed by 2-4 years of practice ( doctors, engineers, IT programmers, architects, teachers, etc ). Why did you thought that becoming a trader is easy ? If this would be easy...then we'll all be rich and happy. Right ? :)

Still think you can start a trading account with less than $1,000 and in less than 1 year become full time trader ( "trading for living" )?

Good luck, then ! And send me an e-mail in 1 year, to tell me how you did it. Or better, build a website and let us all know about it ! Maybe there are few that done this, with less than $ 1,000 in less than 1 year...But what if you will be on the other 99% that risked all to achieve this in less than 1 year...


Best Regards,
^^_Lord_Ice_^^

Open Positions Management ( or cut the losses and let your profits run )

Besides Money Management, the Open Positions Management is another way of making any strategy, a profitable one ( or more profitable ).

You can use PA's highs and lows or other tools, like Fibonacci Levels ( or Fibonacci Confluence Areas ) and move the initial SL, while PA is moving in the direction of your forecast, using the next formulas:

Initial SL = Previous High/Low ( Fibonacci Confluence areas )

New SL = Entry ± Spread ± few pips

*
Next SL = High/Low ( or Fibonacci Levels ) ± Spread
± few pips*

*few pips = 5p for 4H chart, for example.

And so on, until PA will form a bigger pullback and hit the SL ( in profit ). This technique is also known as Break Even ( BE ).


This strategy will increase most of your profits/trades, in no of pips, but sometimes will change the statistic for the whole strategy. Why ? Well, let's say your strategy have a statistic of 7/10 trades in profit. Using this way of changing the initial SL, might cause it to be hit near entry, most of the times, with few pips in profit ( or the next swing with a small amount of profit ), before continuing the initial direction forecast by you.

So, your initial strategy, could have 5/10 trades in profits, only. But, if you consider that those 5 trades in profit, might have more than 3 x SL as R:R Ratio, you might like it. ( Imagine you can catch the whole trend or 80% of it / trade ).

This way of managing the open positions, might help you to add new trades / same trend, since all open trades are running in profit ( ONLY if your MM Rules allow you to open more positions ).

For example, I use initial confirmation of the new trend, by entering with 1 lot ( for "testing the waters" ) and when this is in profit and I receive the second confirmation, I add 5 more lots. On the next high/low confirmation ( or Fibonacci Confluence Areas ) I add a new trade of 5 lots and so on until I'll find a "possible wave 5" ( Elliot Wave ) or an important Fibonacci Confluence Area on higher TF. In that moment I look for exit for all positions ( or move the SL, closer to the PA and let this last SL to be hit, eventually ).

Now, let's do the math:

- initial entry lot = for example, 80% from the whole new trend
- next entry lots = for example, 50% from the whole new trend
- next entry lots = for example, 30% from the whole new trend


And since I trade on higher TFs ( H4, D charts ) and trends could have from hundreds to thousands of pips...hope you understand, now, why I like to name this: " milking the pips" ( or "cut the losses and let your profits run" )


Best Regards,
^^_Lord_Ice_^^

Money Management ( or how to make money using any strategy )

Money Management ( MM ) is one of the most important thing you should know about trading, yet is not always on the front page of the courses, books, etc.

There are lots of ways of using MM in your favor. The problem for many traders, beginners or not, is how to stick to it.

Everyone knows the basics, yet, not everyone understand it: "Never risk more than 2% from your account (SL), never invest more than 30% from your account (opened positions)". For beginners, I would recommend risk = 1% / trade and max investment/trades = 10-15%. This will not make you rich fast, but will give you the change to grow constantly. ( MM for real accounts trading is completely different from MM for the contests accounts, where you must use a much higher exposure and a much higher risk to be in the top 10 traders - but still, you must stick to it, from the beginning to the end of the contest ). To find some MM examples, check Lesson #8 from my Free Course.

Trading is about chances. By opening any position, buy or sell, on any financial instrument, you have 50% to be right ( price can go up or down/swings, even if the swings might have same highs and same lows - range market ). Because of this, you need a strategy, that will increase your chances to be right. Here is the catch: many people think of it and search for the "holly grail" of trading. The problem is they never quit searching...and they become "testers" of all the possible strategies around the web, for this. ( sometimes their lack of patience for testing it on demo, makes them testing it on real account, when their initial strategy failed them ).

Finding a good strategy might take you time, but it's either you have time ( for testing on demo ), either you have money to lose, to find it, this way. Sometimes, you don't have time for testing and you don't have money...to lose either.
And after first loses, you start to "search" a new strategy that might make you rich. That's one of the most common mistakes, that will make you blow, one account after another...

After my first 2-3 years, while searching and testing all possible strategies, around the web, I found out that is useless to search for a "better strategy" ( any mistake you will mention it to me, remember, "I've been there and I've done that!" - that's why taking bad choices = experience for me, now ). The secret is related to the MM and R:R Ratio ( TP = 3x SL, for example ), besides Opened Positions Management and Personal Life MM. ( articles to come ).

Let's have an example of good MM and a very bad strategy with only 3/10 trades in profit ( yes, a very very bad strategy ), using a TP = 3 x SL :

- 7 negative trades ( 7 SLs hit)
- 3 profitable trades ( 3 TPs hit )

Lets say your MM Rules allow you a SL = 30p, that means your TP must be at least 3 x SL = 90p.

- 7 negative trades ( 7 SLs hit ) = 7 trades x 30p loss = 210p loss.
- 3 profitable trades ( 3 TPs hit ) = 3 trades x 90p profit = 270p profit.
____________________________________________________
TOTAL: 10 trades ( 3 positive and 7 negative ones ) = 270p - 210p = + 60p in profit.

Can you imagine now a medium strategy with at least 7/10 in profit ? Can you imagine what means using it with strict MM Rules and a R:R 1/5 or 1/8 ( using harmonics and Positions MM, your TP could reach up to 20 x SL my moving your initial SL and your initial TP ).

Lets see the math behind using the same MM Rules example  with SL = 30p and TP = 3 x SL = 90p:

- 3 negative trades ( 3 SLs hit ) = 3 trades x 30p loss = 90p loss.
- 7 profitable trades ( 7 TPs hit ) = 7 trades x 90p profit = 630p profit.
____________________________________________________
TOTAL: 10 trades ( 7 positive and 3 negative ones ) = 630p - 90p =  + 540 in profit.

Hope now is clear for everyone, that your MM Rules must be nailed on your wall, on your monitor and what's most important, in your head. And if you trust your strategy and keep the same data for your MM, while trading it, you should be in profit.

But, do you trust your strategy ? Did you made the statistic yourself ? Or you just use this strategy because someone claim is 7/10 profitable ?

Considering other people statistic is not enough. I also like to use 100 trades not just 10. So my statistic, could be: 80/100 trades in profit, for example. Why ? Because I need to see it on a long run and because math behind must show me if the "chances" are proven facts. ( do the math: how many consecutive loses can be possible , until 1 trade will make the profits )

We all know, trading is about emotions. To control emotions, we need rules. And we must stick to it, no matter what. That's why a 7/10 strategy, that will give you 5 consecutive loses, make you stop trading it and start to use another one. But what if the math was right, and you will see it as 70/100 trades ? That means you must be there for 30 loses...why to stop using it after just...5 negative results, consecutive or not ?

Ofcourse you should use MM Rules and:


n1. You must know, your SL and TP.
2. If your account reach -30% from initial balance, you should stop trading and go demo again!
3. Don't come back to real, until you'll find out, what went wrong !
4. Refill your account ( you need back up money always - Personal Life MM )
5. Keep the same rules and increase your trading lots ONLY if your account is double !

n
So, if your limit of loses is 30%, that must be the bottom line. You just need a system that allow you as many possible consecutive loses. If your MM Rules allow you ONLY 10 possible loses until this limit, not even the best strategy in the world, can't offer you profits !!! ( or if you have profits 1 month, means you are just... lucky )


Best Regards,
^^_Lord_Ice_^^


 



"ABCD" - Continuation Pattern ( Price Action Trading )

"ABCD" is not a continuation pattern ( our D entry could be or not, in the direction of the trend ). But if we see it like this ( or trade it like this ) we'll spot it earlier and we won't make confusion between this and 1-2-3-4 reversal pattern.

So on the counter trend ABCD pattern, we will have AB = CD and we buy/sell D ( trend direction ).

Ideal ABCD is like this:





Special case 1:

When AB and CD is in the direction of the trend ( and also a powerful trend's impulse ), we might find that AB CD.

So on the trend direction ABCD pattern, we can find that CD = 127.4% from AB ( so not equal in pips ) and we buy/sell D ( as a counter trend direction ).




Practicing this patterns trading while combined with 1-2-3-4 reversal pattern, you will see that these 2 strategies combined with fibs is all that you need most of the time.

* Special case 2: We will study this in "Advanced Strategies".

ABCD Trading Strategy.


Lets say we had the new trend confirmation ( using 1-2-3-4 pattern ) and get the profit between the 2-4 distance. Now we can look after ABCD ( in the direction of the trend/counter trend ).




1. Bought on BO of 2 ( using 1-2-3-4 )
2. TP @ 4 ( using 1-2-3-4 )
3. Use 3 as A, 4 as B
4. C= 61.8% from AB ( we could buy here using PO for fibonacci strategy No 2 )
5. As we going long, we found out that AB=CD (and TP for our buy limit =161.8 % from BC = D)
6. Sell D
7. TP for ABCD = 61.8% from CD.

In this chart we see that we won 2 profits from trading 1-2-3-4 and ABCD. Now we can search for another entries ( in the direction of the trend or counter trend ).
Not longer than 1 swing further we spot something that got our attention again: a powerful retracement that could form AB ( in the direction of the trend ):




* We also could of sold our B as a 50% retracement from previous traded swing ( as ABCD ), but that would have been a counter trend position and we will speak about it on our "Advanced Strategies".
** Also: C is failing to BO lower than 78.6% (yellow fibonacci, candle close above - in case we trade manually). But we would've bought with PO the 61.8%, with SL = previous LL (A).

Now, we have ABC formed:

1. We find that D = 127.4% from BC ( special case ) - we can use a TL and trade it as BO of TL
2. Sell D
3. TP = 61.8% from CD. (olive fibonacci)

Practicing this you will find out that B is sometimes only 50% from AB, or TP is only 50% from CD.
Never the less this pattern, like I said before, is one of the most powerful tool along the 1-2-3-4 pattern and of course Fibonacci retracement tool.


Best regards,
^^_Lord_Ice_^^


Fibonacci Tools & Strategies.

Fibonacci is one of the most powerful tool for trading. There are many fibonacci tools in trading platforms: Retracement, Expansion, Fibonacci Fan, Fibonacci Arcs and Fibonacci Times Zone.

The beauty of this toll is that work in every markets conditions and on every TF. Ofcourse like all trading strategies, works better on higher TF.

Before I'll start to tell you about strategies using these tools, I want to make sure you will use correctly Fibonacci Retracement:

1. Always draw this tool in the direction of the trend ( we want to see how much the PA will retrace, before continue the main trend - we want to know the possible end of the counter trend ).
2. If trend is short, click top, drag while keep pressing click, until bottom and release click.
3. If trend is long, click bottom , drag while keep pressing click, until top and release click.

Now the chart should look like this:



The HH level used for drawing is not actually HH, but it's a previous High ( LH ). You can use only the previous swing's High for measurements. 

For the importance of Fibonacci you might wanna look this article too: Fibonacci Retracement.

1. Fibonacci Retracement + TL BO.

This is one of the most used strategy using fibonacci retracement. But before we continue, you must look at TL BO Strategies.



Drawing a TL ( on counter trend ) offer us a great entry possibility to enter the market when:

1. PA failed to BO the 61.8% fibonacci retracement level ( golden ration ).
2. BO of the TL
3. Tight SL, previous High, before BO occur ( or 61.8% fib level + spread + 5 pips ).
4. TP is 0.0% fibonacci retracement level ( the start of the counter trend - here PA is possible to fail to break further )

2. Pending Orders on Fibonacci Retracement Levels.

 This is one of the most profitable fibonacci strategy because you always trade with this in the direction of the trend only. ( "the trend is your friend " ).
For this, we will use same example as the previous strategy chart. This strategy works better from H1 to Weekly chart.


1. Draw the fibonacci retracement from top to bottom ( since our chart has main trend short ).
2. Put pending Sell Limit Orders on 32.8%, 50% and 61.8% ( we expect PA will return to short trend at one of those levels ).
3. As SL use 61.8% or 78.6% level ( if PA BO the 61.8% from the big main swing, we might have a change of the trend, from short, to long, in our example ).
4. For our first TP, we will have 0.0% level ( or the LL - we expect this to be BO or rejection from it, when PA will fall down )
5. For the next 2 levels of TP, we can use Fibonacci Expansion. 100% and 161.8% ( drawn same as retracement tool - click top, drag bottom, then click and adjust the retracement line to the correction end - near 50% retracement level, in our example - the red dotted line ).


At this strategy you might wanna consider this:
a) If only 1 pending order hit ( first 32.8% ) and PA follow the main trend down, delete the other 2 pending orders. As TP use TP 3. ( 161.8% - expansion tool red ). If counter trend was so weak to touch only this level, that means stronger main trend down coming ).
b) If 2 pending orders were hit ( 32.8% and 50% ) delete the 61.8% pending and as TP you can use TP 1 for 50 %, TP 2 for 32.8%.
c) If all 3 pending orders were hit, you can use TP 1 for 61.8%, TP 2 for 50% and TP 3 for 32.8%.
d. Also you can use Trailing Stop or move SL manually after each BO, to the previous HL until BE.

3. Fibonacci Retracement on multi Time Frames.

Another profitable way of trading fibonacci is to draw it on a higher time frame and look for entry on lower TF. For example draw fibonacci on Daily chart and look for entries on H1.
For this you need all fibonacci levels for retracement added in the "Properties". To go there, use this way. Here you should have all those levels: 23.6%, 38.2%, 50%, 61.8%, 70.7%, 78.6%.

1. Draw Fibonacci Retracement on Daily chart ( same as previous example ).
2. Lower the TF to H1 and look trades on every level ( buy counter trend or sell correction over ) like Trend Lines Strategies or Support/Resistance Lines Strategies. Careful attention on 32.8%, 50% and 61.8%. In those area correction should end. In case correction is only 32.8% a fast down trend usually occur.
3. TP = next level / opposite TL BO / Trailing Stop.
4. SL = next level / opposite TL BO / Move SL manually on previous HH/LL.




Best Regards,
^^_Lord_Ice_^^

How to setup your Fibonacci Retracement to show price on each level on MetaTrader 4 ?

Here is a simple trick that will show price near every level from your Fibonacci Retracement tool:

1. Draw your fib to the chart ( for example from the top to the bottom )
2. Double click on the "Common Line" ( connect levels from top to bottom, for example )
3. Right click on the selected Fibonacci Retracement + Properties.
4. Select "Fibo levels" from menu.
5. At "Description" add near the levels "= %$" (you can put 2 x space before that = to see it more clear)



Now your drawn Fibonacci Retracement tool will show the price on each level like this:



Now you don't have to check the price everytime, using your "Crosshair" tool, cause price apear next to the fibs levels.


Best Regards,
^^_Lord_Ice_^^

"1-2-3-4" - Reversal Pattern ( Price Action Trading )

This reversal pattern can be found at the end of the trend if:

1. TL is broken.
2. PA failed to make HH ( for Sell ) or LL ( for Buy ).
3. BO of 2 ( confirmation that the trend is changed ).





This is a Price Action Strategy and for better understanding this you should check this strategy, too: Swings Trading ( Price Action Trading )


Lets see an example on the chart:



In our example, we have a retest of the BO of 2 level, but it doesn't happend all the time. That's why for proper trading this strategy, you can use only 1 pending order, Buy Stop/Sell Stop at the Break Out of 2.

SL can be @ 3, but also you can use a more relaxed SL, below 1 level.
For TP we project the same distance in pips, as between 1 and 2 level.


Best Regards,
^^_Lord_Ice_^^


Swings Trading ( Price Action Trading )



Swings ( waves ) are PA formations, described as an impulse, followed by a correction, during trends and counter trends. Every trend have ups and downs (swings ).

Best way to see the swings, is to draw them manually, connecting with lines the Higher Highs and the Lower Lows.



Now all we have to do is to mark the swings:

HH = Higher High
LL = Lower Low
LH = Lower High
HL = Higher Low



So for an UP Trend ( bullish ) we will have swings:

LL-HH-HL-HH-HL...

And for a DOWN Trend ( bearish ) we will have swings:

HH-LL-LH-LL-LH...

So based on the swings and PA, we might use the next strategies:

1. Trend Lines BO 

2. Support & Resistance Lines ( S/R Lines )
3. Channels

For trading the swings, SL should always be a large one ( previous HH or LL ).


Best Regards,
^^_Lord_Ice_^^





Moving Averages ( MA, SMA, EMA )


A Simple Moving Average is the average of a series of prices, over a period of time which is constantly updated by dropping the oldest value and then adding the newest value and recalculating the average.

For Exponential Moving Average, the formula is changed and the last prices count more than the oldest ones.

MA is used for trading, as a "mobile" Trend Line or S/R Line ( range market ), because every time a new candle is closed the "line" is drawing that change in PA.

Also, MAs, even if there aren't used as crossing strategy, can be used as trend indicator ( like a TL, adjusted every time a new candle is formed ).

There are many ways we can use it as trading strategies, too.

1. One Moving Average BO

For example we can use 50 SMA, like this.



1. Always use the direction of the MA to establish trend for swing
2. When 50 SMA point UP, look to BUY only, when 50 SMA point DOWN look to SELL only.
3. After trend is confirmed ( SMA pointing UP or DOWN ), you can open a buy ( in our example ), after PA closed above 50 SMA. SL would be the LL of the candle that made the BO or the previous LH ( we are in a uptrend now ).
4. After that, you can add more positions ( BUY ) on every retest that failed to break below 50 SMA or other crossing ( from below-above ) between PA and 50 SMA. SL would be previous LH or the LL of the candle that made the BO (crossed the 50 SMA ).

2. Two or more Moving Averages Crossing

This is the common use of MAs for trading. For example we can use 20 SMA, 100 SMA, like this.



1. Previous down trend is over, 20 SMA crossed above 100 SMA, we look to BUY opportunity.
2. PA retested the SMA 100 = BUY, SL would be @ previous LL.
3. Candle closed above 20 SMA, you can also BUY , the next candle opening. SL would be @ previous LL.
4. After the BO of the new formed HH, move the SL to next HL ( our entry ) until BE, or use trailing stop.
5. You can also add more BUY positions on every crossing UP ( 20SMA over 100 SMA ), or new closed candle above 20 SMA ( when changing directions again from pointing DOWN to pointing UP - rejection from 100 SMA)

In this way you can also add the 3rd SMA and add positions to the crossing of first 2 ( 20 and 50 ) and use SMA 100 for trend direction confirmation.



If in this example, 20 and 50 SMA, cross below 100 SMA, the long trend is over and we look for sell opportunities only.

3. Moving Averages and TL or S/R Lines

As I said, MAs are also good for indicating ( pointing ) the main trend.



But another way you can use 50 SMA is to confirm BO. One of the best ways to do it is to trade TL's BO on the main swing trend like this.



To read more how to setup the trades using TL's BO systems, SL and TP, go here.


4. 200 EMA using multi TF


This is one of the best trading strategies. Very simple and yet so effective ( you will never be against the trend ).



1. Daily chart, PA is below 200 EMA
2. H4 chart, PA is below EMA
3. M15 chart "bucking" the trend and must also go below 200 EMA.
4. For filtering the entry, on M15, you can use Stochastic oscillator crossing from top to bottom ( crossing 80% - oversold level )
5. SL would be previous @ LH ( down trend ).


Best Regards,
^^_Lord_Ice_^^


Channels



Channels are basically 2 parallel TL drawn on the chart, that contain LL and HH of PA's last swings. There are many ways to trade channels.

1. The common use of channels is to trade it as Trend Lines BO or Pullback ( rejection ).


2. Also, when the formed channel is horizontal we can trade it as S/R Lines BO or Pullback ( Rejections ).



3. BO Boxes Channel Trading Strategy

After we found a channel on higher TF we can lower the TF to M30 to find our first BOX. Then we can use it to keep add positions or to move SL until BE.



Also using same technique with boxes, you could of predict the drawn channel forming since beginning. All you have to do is to find first pullback and make a box of it.



Sl would be opposite BOX direction. You can add positions, move SL ( BE ) when it's BO of the BOX, or use Trailing Stop = BOX pips. ( HH-LL ).

From my experience this work better on London's opening and no important news in that day for the pair you trade.



Best Regards,
^^_Lord_Ice_^^

Support & Resistance Lines ( S/R Lines )

Support & Resistance Lines ( S/R Lines ) are horizontal lines connecting at least 2 previous HH or LL of PA on the chart.



To draw S/R Lines we can use HH/LL or close price, as our R Line from the chart above.

The common mistake of trading these S/R Lines, is to consider them ...lines. S/R Lines are actually Zones.

Normally second R Line is a LH on the chart ( is a resistance when we connect at least 2 previous HH/LL ).




In this example using zones, we could connect our second R Line with previous LL/HH. ( since there are sometimes 10p-20p difference, between those levels ). Using only a line we can't connect them properly.
 
Every broken Support, becomes Resistance and every Resistance broken, becomes Support.

There are many ways to trade S/R Lines.

1. S/R Lines BO Strategy.

After a candle broke a S/R Line and close below you can entry on the next candle opening, with a SL above the candle's high ( our example is a short one ).



For TP you may use Trailing Stop, BE ( moving SL after each further BO ) or find the next Support Zone pullback. ( rejection ).

2. S/R Lines Pullback Strategy ( rejections )

If you look carefully at our previous chart, you will see that was a false BO of the S Line on the bottom of the chart. If we would of drawn a Line, we might of trade it as a BO of S Line.

But since we've considered a S Zone ( connecting the last previous low and the last one ), we look for a candle to close above to entry. ( rejection )



3. S/R + TL BO Strategy


An interesting idea of trading S/R Lines is to combine it with TL.





For trading it like this all we have to do is to lower the TF ( we used H4 and now we entry on H1 - for proper entry and a tight SL ).


4. Pending Order @ Retest previous BO of S/R Strategy

This is one of the best and yet simpliest trading strategy I've ever found.




Ypu can use pending order for this ( after previous BO ), or use rejection from R Zone.
Your SL would be @ new formed HL. For TP you can use previous LL, BE or Trailing Stop.


Best Regards,
^^_Lord_Ice_^^

Trend Lines I ( TL )

A Trend Line is formed by a diagonal line, connecting at least 2 pivot points ( HH or LL ).





I know there are many traders that draw these TL between closing/opening price, but I prefer to draw them by connecting HH/LL. ( with some exceptions when starting with 2 HH/LL and the next taps are fake BO's of the TL ).

So there are many ways of considering an entry using TL.
1. TL's 3rd tap strategy 

Considering an entry by waiting another touch of this TL ( also known as "3rd tap").

If the candle touched the TL and didn't closed below, in our example ( fail to break ), we can open a long position on the next candle open area. SL would be @ previous HL and TP @ previous HH, or Trailing Stop.





For exit you may also use opposite TL broken like in the next example.

2. TL's BO Strategy.

Another common use of trading the TL is to trade the BO.





As you can see in our example, we have 3 opportunities to enter the trade:

Entry 1 - @ retest ( pullback ) of the broken TL.
Entry 2 - @ new formed "HL" of the PA.
Entry 3 - @ the real "HL" of the PA ( since the PA failed to break the HH and formed a LH in top of the chart )

For exit the trade we may consider Trailing Stop or the opposite TL BO.




PA also failed to BO the LL of the chart ( forming a double bottom ) that offer a great exit opportunity. But normally we can use the BO of bearish TL.

3. TL's BO Strategy, following the main trend

Drawing a TL on a higher TF like H1, then lowering the TF to M30, offer us many entry opportunities in the same direction of the main trend.




SL for all those entries might be the BO candle lowest or the last swing HL ( since we have a bullish trend in our example ).


Best Regards,
^^_Lord_Ice_^^

Elliot Wave Principle

The Elliott Wave Principle is a form of technical analysis that some traders use to analyze financial market cycles and forecast market trends by identifying extremes in investor psychology, highs and lows in prices, and other collective factors. Ralph Nelson Elliott (1871–1948), a professional accountant, discovered the underlying social principles and developed the analytical tools in the 1930s. He proposed that market prices unfold in specific patterns, which practitioners today call Elliott waves, or simply waves. Elliott published his theory of market behavior in the book The Wave Principle in 1938, summarized it in a series of articles in Financial World magazine in 1939, and covered it most comprehensively in his final major work, Nature’s Laws: The Secret of the Universe in 1946. Elliott stated that "because man is subject to rhythmical procedure, calculations having to do with his activities can be projected far into the future with a justification and certainty heretofore unattainable." The empirical validity of the Elliott Wave Principle remains the subject of debate.



Overall design

From R.N. Elliott's essay, "The Basis of the Wave Principle," October 1940.


The Elliott Wave Principle posits that collective investor psychology, or crowd psychology, moves between optimism and pessimism in natural sequences. These mood swings create patterns evidenced in the price movements of markets at every degree of trend or time scale.

In Elliott's model, market prices alternate between an impulsive, or motive phase, and a corrective phase on all time scales of trend, as the illustration shows. Impulses are always subdivided into a set of 5 lower-degree waves, alternating again between motive and corrective character, so that waves 1, 3, and 5 are impulses, and waves 2 and 4 are smaller retraces of waves 1 and 3. Corrective waves subdivide into 3 smaller-degree waves starting with a five-wave counter-trend impulse, a retrace, and another impulse. In a bear market the dominant trend is downward, so the pattern is reversed—five waves down and three up. Motive waves always move with the trend, while corrective waves move against it.

Degree

The patterns link to form five and three-wave structures which themselves underlie self-similar wave structures of increasing size or higher degree. Note the lower most of the three idealized cycles. In the first small five-wave sequence, waves 1, 3 and 5 are motive, while waves 2 and 4 are corrective. This signals that the movement of the wave one degree higher is upward. It also signals the start of the first small three-wave corrective sequence. After the initial five waves up and three waves down, the sequence begins again and the self-similar fractal geometry begins to unfold according to the five and three-wave structure which it underlies one degree higher. The completed motive pattern includes 89 waves, followed by a completed corrective pattern of 55 waves.

Each degree of a pattern in a financial market has a name. Practitioners use symbols for each wave to indicate both function and degree—numbers for motive waves, letters for corrective waves (shown in the highest of the three idealized series of wave structures or degrees). Degrees are relative; they are defined by form, not by absolute size or duration. Waves of the same degree may be of very different size and/or duration.

The classification of a wave at any particular degree can vary, though practitioners generally agree on the standard order of degrees (approximate durations given):

    Grand supercycle: multi-century
    Supercycle: multi-decade (about 40-70 years)
    Cycle: one year to several years (or even several decades under an Elliott Extension)
    Primary: a few months to a couple of years
    Intermediate: weeks to months
    Minor: weeks
    Minute: days
    Minuette: hours
    Subminuette: minutes

Elliott Wave personality and characteristics

Elliott wave analysts (or Elliotticians) hold that each individual wave has its own signature or characteristic, which typically reflects the psychology of the moment. Understanding those personalities is key to the application of the Wave Principle; they are defined below. (Definitions assume a bull market in equities; the characteristics apply in reverse in bear markets.)

Five wave pattern (dominant trend)

Wave 1: Wave one is rarely obvious at its inception. When the first wave of a new bull market begins, the fundamental news is almost universally negative. The previous trend is considered still strongly in force. Fundamental analysts continue to revise their earnings estimates lower; the economy probably does not look strong. Sentiment surveys are decidedly bearish, put options are in vogue, and implied volatility in the options market is high. Volume might increase a bit as prices rise, but not by enough to alert many technical analysts.

Wave 2: Wave two corrects wave one, but can never extend beyond the starting point of wave one. Typically, the news is still bad. As prices retest the prior low, bearish sentiment quickly builds, and "the crowd" haughtily reminds all that the bear market is still deeply ensconced. Still, some positive signs appear for those who are looking: volume should be lower during wave two than during wave one, prices usually do not retrace more than 61.8% (see Fibonacci section below) of the wave one gains, and prices should fall in a three wave pattern.

Wave 3: Wave three is usually the largest and most powerful wave in a trend (although some research suggests that in commodity markets, wave five is the largest). The news is now positive and fundamental analysts start to raise earnings estimates. Prices rise quickly, corrections are short-lived and shallow. Anyone looking to "get in on a pullback" will likely miss the boat. As wave three starts, the news is probably still bearish, and most market players remain negative; but by wave three's midpoint, "the crowd" will often join the new bullish trend. Wave three often extends wave one by a ratio of 1.618:1.

Wave 4: Wave four is typically clearly corrective. Prices may meander sideways for an extended period, and wave four typically retraces less than 38.2% of wave three (see Fibonacci relationships below). Volume is well below than that of wave three. This is a good place to buy a pull back if you understand the potential ahead for wave 5. Still, fourth waves are often frustrating because of their lack of progress in the larger trend.

Wave 5: Wave five is the final leg in the direction of the dominant trend. The news is almost universally positive and everyone is bullish. Unfortunately, this is when many average investors finally buy in, right before the top. Volume is often lower in wave five than in wave three, and many momentum indicators start to show divergences (prices reach a new high but the indicators do not reach a new peak). At the end of a major bull market, bears may very well be ridiculed (recall how forecasts for a top in the stock market during 2000 were received).

Three wave pattern (corrective trend)

Wave A:
Corrections are typically harder to identify than impulse moves. In wave A of a bear market, the fundamental news is usually still positive. Most analysts see the drop as a correction in a still-active bull market. Some technical indicators that accompany wave A include increased volume, rising implied volatility in the options markets and possibly a turn higher in open interest in related futures markets.

  
Wave B: Prices reverse higher, which many see as a resumption of the now long-gone bull market. Those familiar with classical technical analysis may see the peak as the right shoulder of a head and shoulders reversal pattern. The volume during wave B should be lower than in wave A. By this point, fundamentals are probably no longer improving, but they most likely have not yet turned negative.

Wave C: Prices move impulsively lower in five waves. Volume picks up, and by the third leg of wave C, almost everyone realizes that a bear market is firmly entrenched. Wave C is typically at least as large as wave A and often extends to 1.618 times wave A or beyond.

Pattern recognition and fractals

Elliott's market model relies heavily on looking at price charts. Practitioners study developing trends to distinguish the waves and wave structures, and discern what prices may do next; thus the application of the wave principle is a form of pattern recognition.

The structures Elliott described also meet the common definition of a fractal (self-similar patterns appearing at every degree of trend). Elliott wave practitioners say that just as naturally-occurring fractals often expand and grow more complex over time, the model shows that collective human psychology develops in natural patterns, via buying and selling decisions reflected in market prices: "It's as though we are somehow programmed by mathematics. Seashell, galaxy, snowflake or human: we're all bound by the same order."



Elliott wave rules and guidelines

A correct Elliott wave "count" must observe three rules:

    Wave 2 always retraces less than 100% of wave 1.
    Wave 3 cannot be the shortest of the three impulse waves, namely waves 1, 3 and 5.
    Wave 4 does not overlap with the price territory of wave 1, except in the rare case of a diagonal triangle.

A common guideline observes that in a five-wave pattern, waves 2 and 4 will often take alternate forms; a sharp move in wave 2, for example, will suggest a mild move in wave 4. Corrective wave patterns unfold in forms known as zigzags, flats, or triangles. In turn these corrective patterns can come together to form more complex corrections.

Fibonacci relationships

R. N. Elliott's analysis of the mathematical properties of waves and patterns eventually led him to conclude that "The Fibonacci Summation Series is the basis of The Wave Principle". Numbers from the Fibonacci sequence surface repeatedly in Elliott wave structures, including motive waves (1, 3, 5), a single full cycle (8 waves), and the completed motive (89 waves) and corrective (55 waves) patterns. Elliott developed his market model before he realized that it reflects the Fibonacci sequence. "When I discovered The Wave Principle action of market trends, I had never heard of either the Fibonacci Series or the Pythagorean Diagram".

The Fibonacci sequence is also closely connected to the Golden ratio (1.618). Practitioners commonly use this ratio and related ratios to establish support and resistance levels for market waves, namely the price points which help define the parameters of a trend.  See Fibonacci retracement.

Finance professor Roy Batchelor and researcher Richard Ramyar, a former Director of the United Kingdom Society of Technical Analysts and Head of UK Asset Management Research at Reuters Lipper, studied whether Fibonacci ratios appear non-randomly in the stock market, as Elliott's model predicts. The researchers said the "idea that prices retrace to a Fibonacci ratio or round fraction of the previous trend clearly lacks any scientific rationale". They also said "there is no significant difference between the frequencies with which price and time ratios occur in cycles in the Dow Jones Industrial Average, and frequencies which we would expect to occur at random in such a time series".

Robert Prechter replied to the Batchelor–Ramyar study, saying that it "does not challenge the validity of any aspect of the Wave Principle...it supports wave theorists' observations," and that because the authors had examined ratios between prices achieved in filtered trends rather than Elliott waves, "their method does not address actual claims by wave theorists". The Socionomics Institute also reviewed data in the Batchelor–Ramyar study, and said these data show "Fibonacci ratios do occur more often in the stock market than would be expected in a random environment".

It has been suggested that Fibonacci relationships are not the only irrational number based relationships evident in waves.

After Elliott

Following Elliott's death in 1948, other market technicians and financial professionals continued to use the wave principle and provide forecasts to investors. Charles Collins, who had published Elliott's "Wave Principle" and helped introduce Elliott's theory to Wall Street, ranked Elliott's contributions to technical analysis on a level with Charles Dow. Hamilton Bolton, founder of The Bank Credit Analyst, provided wave analysis to a wide readership in the 1950s and 1960s. Bolton introduced Elliott's wave principle to A.J. Frost, who provided weekly financial commentary on the Financial News Network in the 1980s. Frost co-authored Elliott Wave Principle with Robert Prechter in 1978.

Rediscovery and current use

Robert Prechter came across Elliott's works while working as a market technician at Merrill Lynch. His prominence as a forecaster during the bull market of the 1980s brought the greatest exposure to date to Elliott's work, and today Prechter remains the most widely known Elliott analyst.

Among market technicians, wave analysis is widely accepted as a component of their trade. Elliott's Wave principle is among the methods included on the exam that analysts must pass to earn the Chartered Market Technician (CMT) designation, the professional accreditation developed by the Market Technicians Association (MTA).

Robin Wilkin, Ex-Global Head of FX and Commodity Technical Strategy at JPMorgan Chase, says "the Elliott Wave principle ... provides a probability framework as to when to enter a particular market and where to get out, whether for a profit or a loss."

Jordan Kotick, Global Head of Technical Strategy at Barclays Capital and past President of the Market Technicians Association, has said that R. N. Elliott's "discovery was well ahead of its time. In fact, over the last decade or two, many prominent academics have embraced Elliott’s idea and have been aggressively advocating the existence of financial market fractals."

One such academic is the physicist Didier Sornette, visiting professor at the Department of Earth and Space Science and the Institute of Geophysics and Planetary Physics at UCLA. In a paper he co-authored in 1996 ("Stock Market Crashes, Precursors and Replicas") Sornette said,

    It is intriguing that the log-periodic structures documented here bear some similarity with the "Elliott waves" of technical analysis ... A lot of effort has been developed in finance both by academic and trading institutions and more recently by physicists (using some of their statistical tools developed to deal with complex times series) to analyze past data to get information on the future. The 'Elliott wave' technique is probably the most famous in this field. We speculate that the "Elliott waves", so strongly rooted in the financial analysts’ folklore, could be a signature of an underlying critical structure of the stock market.

Paul Tudor Jones, the billionaire commodity trader, calls Prechter and Frost's standard text on Elliott "a classic," and one of "the four Bibles of the business":

    [Magee and Edwards'] Technical Analysis of Stock Trends and The Elliott Wave Theorist both give very specific and systematic ways to approach developing great reward/risk ratios for entering into a business contract with the marketplace, which is what every trade should be if properly and thoughtfully executed.

Criticism

The premise that markets unfold in recognizable patterns contradicts the efficient market hypothesis, which states that prices cannot be predicted from market data such as moving averages and volume. By this reasoning, if successful market forecasts were possible, investors would buy (or sell) when the method predicted a price increase (or decrease), to the point that prices would rise (or fall) immediately, thus destroying the profitability and predictive power of the method. In efficient markets, knowledge of the Elliott Wave Principle among traders would lead to the disappearance of the very patterns they tried to anticipate, rendering the method, and all forms of technical analysis, useless.

Benoit Mandelbrot has questioned whether Elliott waves can predict financial markets:

    But Wave prediction is a very uncertain business. It is an art to which the subjective judgement of the chartists matters more than the objective, replicable verdict of the numbers. The record of this, as of most technical analysis, is at best mixed.

Robert Prechter had previously stated that ideas in an article by Mandelbrot[16] "originated with Ralph Nelson Elliott, who put them forth more comprehensively and more accurately with respect to real-world markets in his 1938 book The Wave Principle."

Critics also warn the wave principle is too vague to be useful, since it cannot consistently identify when a wave begins or ends, and that Elliott wave forecasts are prone to subjective revision. Some who advocate technical analysis of markets have questioned the value of Elliott wave analysis. Technical analyst David Aronson wrote:

    The Elliott Wave Principle, as popularly practiced, is not a legitimate theory, but a story, and a compelling one that is eloquently told by Robert Prechter. The account is especially persuasive because EWP has the seemingly remarkable ability to fit any segment of market history down to its most minute fluctuations. I contend this is made possible by the method's loosely defined rules and the ability to postulate a large number of nested waves of varying magnitude. This gives the Elliott analyst the same freedom and flexibility that allowed pre-Copernican astronomers to explain all observed planet movements even though their underlying theory of an Earth-centered universe was wrong.

source: www.wikipedia.org


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