Support, Resistance & Chart patterns

[slipshod]

Seeing we covered it last week, it doesn't hurt to take another look at GBPAUD:-

ga-h4-20130306a.gif

One question that's been asked a few times in this thread is "where & when do I enter?" ... which is something I've been struggling with as each reversal seems to have its own quirks and peculiarities.

Lately I've been experimenting with a much simpler method on the H4 chart, a band of High/Low 64 period EMAs. The following chart explains how I'm starting to use them to both enter trades and trail stoplosses.

ga-h4-20130306b.gif

Its not foolproof, but nothing is What it does though is set a test for the market - there's no entry until the price demonstrates its willingness to reverse by punching through the band. Unless that happens I'm on the sidelines. Its contrary to Sam Seiden's principles of picking a supply or demand zone and entering against the market's direction hoping the zone holds, and it won't get you the greatest entry price or the tightest stop. What it should do though is ensure that a higher proportion of entries hit their profit targets rather than busting their stops.

[WideEyed]

Your use of EMAs is interesting and worth testing. I'll do that in due course. Do let me know what you discover.

In the meanwhile, I attach an analysis of EURJPY H4. Wolfe advised drawing lines through the points 1 and 3 that are parallel to the 2-4 slope. These are the red dotted lines in my image. With respect entry points, the zone between the two red dotted lines seems to be a good entry point - or "sweet spot" - on the 40 odd examples I examined.

However, Wolfe also advised that when a counter wave develops it's time to get out of the trade. In this case a counter wave developed as represented by the blue dotted lines and the price could drop all the way down to the lower red dotted line (which corresponds with the 1-4 slope not shown here). The brave would hold on for it to hit the lower red dotted line before rising to my red rectangle.

Based on the theory, price should hit the lower red dotted line by early next week and take a couple of weeks to climb all the way to the red box.

[WideEyed]

The parallel lines for the GBPAUD leave a very big "sweet zone"

[slipshod]

Honestly, I wouldn't trade either of the waves on EURJPY, and the chart below explains my reasoning. Its early in the morning here & I haven't properly woken up yet - if there's anything unclear about what I'm saying pls don't hesitate to ask.

Btw its odd, on my chart the price has moved back inside the earlier wedge, in yours it hasn't?

[AnotherBrian]

Here's my take on price action. I notice the blue areas of demand are not respected, blown right through. The top yellow area was respected. Price is approaching am area where price fell fast after a small tight rectangle base. The blue flag sort of looks like a pull back type of correction, I don't trade flags though. I'm considering entering a short either at the top down sloping orange line or inside the bottom yellow box. Another thing I look for on pull backs from strong moves like this is lining up that orange trendline with a pull back 78% of the way back. Eye balling that looks like 78% is close to where price will hit the orange line. The problem with this method is where do I place my stop? Probably above the orange line where entry takes place.

So I think wedges and trendlines and fibs can be used with S/D.

ej-h4-20130307.png

[WideEyed]

AnotherBrian, absolutely, I think there's a good place for Fibs and S/D especially in relation to SL and TP levels.

slipshod, in answer to your question, yes, my price has moved back into the wedge.

Wolfe advocates that the best waves are the ones that form just after a trend breakout. That does not seem to be your experience? Also, do you find a particular TF best suited to this method? I've been using H4 and D1 but was wondering about playing around with M15.

One more question if you don't mind. Have you got anything on Rashke waves you can share? I've found a lot of material written by her but so far nothing on the waves you were talking about.

[slipshod]

AnotherBrian, absolutely, I think there's a good place for Fibs and S/D especially in relation to SL and TP levels.

So do I! Your analyses are great Brian, please keep 'em coming

Wolfe advocates that the best waves are the ones that form just after a trend breakout. That does not seem to be your experience?

I think the markets Wolfe traded tended not to trend, preferring to revert to the mean instead. Hence any movement away from a sideways chop that had a WW formed would be almost guaranteed to reverse. I think that's why he allowed waves with a point 1 hanging halfway along the preceding rise or fall rather than on a swing high or low, as he's trying to catch as many mean reversion moves as possible.

Forex can be like that, but when it switches to trend mode it'll sometimes create a wedge and then explode out of it for a meteoric move (instead of reversing & negating the trend). Here's a couple of examples:-

ga-20130308.gif

ej-20130308.gif

Therefore I prefer to see a WW form after the trend's run a bit (more chance of the traders entering it starting to exhaust) and the price is approaching a supply/demand zone (more chance of traders opposing the move). Some examples:-

au-20130308.gif

ac-20130308.gif

Also, do you find a particular TF best suited to this method? I've been using H4 and D1 but was wondering about playing around with M15.

I've morphed into a mostly H4 trader, simply because I'm too busy to watch the market (and I've found that I really don't need to). Harald, a good friend of mine, trades these patterns on M5 & M1 charts, so they're certainly valid on the lower TFs.

One more question if you don't mind. Have you got anything on Rashke waves you can share? I've found a lot of material written by her but so far nothing on the waves you were talking about.

In her writings she called them Wolfe Waves - Raschke wave is my term. In Bill Wolfe's definition, "Trend line of 1 to 3 and trend line of 2 to 4 must converge" (page 6 of his book), in other words the wedge formed by points 1 to 4 must be a converging one, not a price channel or an expanding formation. Linda Raschke, however, ignored this and posted examples of expanding formations in her book, calling them Wolfe Waves. Here's an example from her pdf...

Loose Linda.png

My aforementioned friend Harald and I noted this some time ago when I saw him trading them. I asked "shouldn't that be a converging wedge?" and he said if its good enough for Linda its good enough for me. As its a different formation, we decided to give it a different name (originally we suggested the "Loose Linda") as the rules of trading it are not the same as a WW. I'll add more analysis of Raschke Waves in a later post.

[slipshod]

Just noted this on GU and thought it worth posting here...

[slipshod]

Bless you Yen for being so weak, and carrying all the **JPY pairs with you Hope everyone's had a successful week.

Btw, as I've mentioned in a PM to WideEyed, I'm working on a more general-purpose and complete trading system that incorporates chart patterns & support/resistance, but by no means relies on them. It incorporates both Momentum and Mean Reversion concepts, and aims to reliably capture impulse moves on a H4 chart with minimal time analysing and watching the market.

I've manually backtested it extensively & it all seems good, but there's more backtesting I want to perform along with trading it in demo for a couple of months, just to be sure I'm not pulling the wool over my own eyes. If it bears up I'll be sharing it here in a new thread - just thought y'all should know, for what its worth.

[WideEyed]

In your AUDUSD chart - the one with a wave at the end of a long bull run - I don't see a wave. The price hits the 2-4 line twice between 1 and 3 and then hits the 1-3-5 line shortly after 3 and before getting to 4. I'm curious as to your reasoning for calling it a WW. Is there something I'm missing. The 2nd wave in that image looks perfect though.

And you seem to be spot on with cable.

In her writings she called them Wolfe Waves - Raschke wave is my term.

Now that makes sense! I look forward to your further Rashke analysis (and the new thread).