MACD

The MACD is an oscillator. Many people use it for a variety of tasks. I used it to
show me divergence, nothing else.
What is divergence?
A divergence occurs when the MACD indicates a move in one direction while price
is moving in the other; when price for example makes higher highs yet the
oscillator makes lower lows.
Let me give you a real life example of what divergence is. Let’s take for an example
the real estate market. Let’s suppose that prices have been dropping for about 2
years. At some point prices will still go down yet the number of potential buyers
will begin to rise.
This is a divergence; prices go down in the first place because of lack of buyers. If
you see that at some point there are more interested buyers in the market than
this might serve you as an early warning of a change of trend.
Obviously there are many more factors to the above example, but I just wanted
you to get the point.
Back to MACD. I found this indicator to give excellent divergence signals. In fact, I
believe that a divergence has to happen when looked at on the ‘correct’ time
frame.
I will not go into how exactly the MACD works; briefly, it plots the difference the
between two different Exponential Moving Averages.

As you can see, while on the price chart the A high is lower than the C high, on the
MACD the C point is lower than the A point.
Here is the weekly time frame with another divergence. In fact, there are at least
3, can you spot them?

Williams Percent Range - lesson 2

Here is an example of a very recent finished trend on the ‘correct’ time frame, the
AUD USD on the H8. We clearly see that we would of known way in advance that
this time frame is almost certain to give us the signal that this trend is over. In fact
we can see that each vertical line is a signal/confirmation that the last trend is
over.

So, this specific use of the W%R takes care of the major dilemma of selecting the
most effective time frame to observe. Did you know that speculate means observe
in Latin?
So, once again, how do we do it?
We focus on the first wave of the trend as it is reflected on the W%R. We want to
see the first wave as a swift move from one extreme to the other (just like it is on
the above screenshot). When we locate the time frame that displays that (in real
time), than we can confidently assume that this time frame is likely to show us the
end of the current move. As time progresses and as more information becomes
available to us, we might change our choice of the ‘correct’ time frame.

Williams Percent Range

Williams % R a magical indicator
There is really nothing magical about W%R; however, used effectively it can do
miracles to your trading account. The W%R is a basic indicator that compares the
current price with the last X number of days and displays the current price’s
position in percentage, I use the 20 setting (X=20).
Objectives of using the W%R:
Effective use of W%R helps me resolve the following most critical issue:
Determining which time frame/s will serve me best in viewing the market most
effectively. I specifically want to know which time frame will give me a definite
and dependable signal for the end of the current move (also the beginning of the
possible new trend).
The nature of the W%R
Because of its simple formula, the W%R just about always makes a very sharp
move on the first wave. It is logical because a first wave is (just about always) a
trend (fast price movement). Wave one (the first wave in a series of waves that
make up a trend) always follows a correction (slow price movement).
As far as the W%R is sketched, the first wave usually dictates the rhythm. What I
mean is that during the first wave, when price moves fast and makes new highs (or
lows), the W%R reflects that.
Because the first wave comes after a correction where price had moved relatively
slowly, the W%R has to move sharply from one extreme to the other; in fact it
must eventually (but rather quickly) reach the new extreme. As the trend
continues, the W%R usually stays around the upper extreme (above -40) during an
uptrend and around the lower extreme (below -60) during a downtrend. Price
remains in that zone until the trend is over; then it will once again move swiftly in
the opposite direction, to the opposite extreme.
In simple words, the W%R creates a unique pattern (when observed on the
‘correct’ time frame) for as long as the trend is in motion.
Here is an example of the current AUD JPY trend (July 4th, 2011). This is the H5
time frame which I selected as the ‘correct’ higher time frame. (When I will get a
signal from the W%R on this time frame, I will get out of my open long trades

The real value of this approach is that I get to know well in advance which time
frame will be of value to my trading efforts. At the moment, I know for a fact that
either the H5 or H6 will show me the end of the current wave/trend. A mere
correction is not likely to get the W%R under the -60.

See the second lesson

Square of 9 (SQ9)

The Square Root Theory
According to the theory the prices of financial instruments move over the long and
short term in a square root relationship. As an example, on the October 26th, 2000
(marked by the purple square) the EUR USD reached an all time low of 0.82250.
On Jan 5th, 2001 it reached a major swing high of 0.95990. This is within a few
percentage points of the square of the sum of the square root of the low price + 2.
On Dec 30th, 2004 it reached a major high of 1.36680. This is within a few
percentage points of the square of the sum of the square root of the low price + 8 .
On July 13th, 2008 it reached a record high of 1.60380. This is within a few
percentage points of the square of the sum of the square root of the low price +
11.
All of the horizontal lines that were drawn on the chart are different degrees of
the square root of the price from Oct 26th, 2000. Look at how price respected
those levels again and again.
The magic of the Square of 9 (SQ9) does not end there…Do you see the vertical lines?
They are equally spread out 29 weeks apart (28.6792 rounded).
If you observe very closely, you will see that the major red trend line (the only one
that’s fat) begins at the 0.82250 price and goes through the point where it is one
unit of price increase and one unit of time (29 weeks).
The rest of the red trend lines are parallels.
Isn’t it amazing?
Do you see the green trend line?
It begins at the 0.82250 price and goes through the point where it is one unit of
price increase and one unit of time based on 29 days instead of 29 weeks.
In the words of W.D Gann: “When price and time square change is inevitable”.
Gann was a mathematician, a man of science. ‘Inevitable’ is a really obligating
word for such a person.

Fibonacci time retracement:

- The majority of A-B-C corrections are complete in the 61.8% to 100.0% time
retracement zone.
- It is not unusual for a complex correction to reach a 161.8% time retracement.
Fibonacci time expansion:
- Works in the same way that price expansion work.
- The 61.8%, 100.0% and 161.8% ratios are used.
Fibonacci fan:
A great tool that is somewhat underused yet works really well in the Forex market
is the Fibonacci fan.
- The ratios used are the 61.8%, 78.6% and 88.5%

Fibonacci external retracements:

Fibonacci external retracements:
- The ratios that are typically used for external retracements are 127%, 162%, and
262%
- External retracements are helpful in recognizing the end section of a trend or
countertrend.
- External retracements are not used on their own for price targets, but only to
confirm a price expansion and/or an internal retracement.

End of wave C price target projections (in order of importance):
- Fibonacci retracements of preceding trend: 38.2%, 50.0%, 61.8% and 78.6%;
most likely zone is between 50.0% and 78.6%;
- Price expansion of Wave-A: 61.8%, 100% and 162%;
- External Retracements of wave B: 127%, 162% and 262%
** The odds of a wave C target projection increase if a cluster of projections is
formed. The odds increase even further if the cluster includes one projection from
each of the above sets.
End

End of wave 5 price target projections (in order of importance):
- 38.2%, 61.8% price expansions of waves 1 to 3 from the end of Wave 4.
- 100% price expansion of wave 1 from the end of wave 4.
- 127%, 162% external retracement of wave 4.
** Naturally the odds of the projection increase if we get one projection from each
of above 3 sets.

Price & Time Projections

Fibonacci internal retracement:
- The ratios used for internal retracements are 38.2%, 50.0%, 61.8%, and 78.6%.
- Most common retracements end at or around the 61.8% and 78.6%
retracements.
- The 38.2% retracement usually acts a temporary support or resistance instead of
ending the correction.

Fibonacci price expansions:
- The price expansions that are normally used for corrective sections are: 61.8%,
100%, and 161.8%.
- The price expansions that are normally used for Trend sections are: 38.2%,
61.8%, and 100%
- By far, the 100% price expansion is the most commonly found price expansion in
a corrective structure. When a correction reaches a zone that includes one of the
key internal retracements and the 100% price expansion pay close attention.
- Corrective sections hardly ever go beyond the 161.8% price expansion.

- In regards to a trend, the 38.2% and 61.8% price expansions are mostly used to
calculate approximately the end of wave 5 based on waves 1 and 3, from the wave
4 high or low.

Elliott Wave - the Basic Pattern - lesson 3

Combination - A combination correction is made of any two of the prior waves
connected by an X wave. Rather difficult pattern to recognize in real time.
I try to avoid this pattern. It is usually quite difficult to recognize in real time.
Elliott wave theory rules:
1. Wave 2 cannot exceed the beginning of wave 1.
2. Wave 3 can never be the shortest out of waves 1, 3, and 5 and is usually the
longest.
3. Wave 4 cannot overlap the range of Wave-1. Although this is an Elliott wave
rule, I found several instances where wave 4 penetrates the range of wave 1 by a
little bit especially in intraday charts. Use your judgment if you see a slight
violation of this rule.
For our purposes, waves 5 and C are the most important waves to recognize. The
reason for this is that usually these waves signal the end of the current trend.
Remember that after every trend comes a correction and after every correction
comes a trend. By recognizing wave 5 and wave C and by being able to project
their end, the trader can successfully project high probability turns in the market.
Remember - a major part of our analysis is based on Elliott Wave theory but our
entry method is mechanical and objective.
Examples of Elliott Wave pattern on different time frames:
The following charts are real charts of the Dow Jones Industrial Average. Please
notice that each chart represents a different ‘time frame’, cycle.
Chart number 1 is a cycle that lasted for about 3 minutes; chart number 2 lasted
for about 10 days; chart number 3 lasted for about 24 days; chart number 4 lasted
for about 9 months; chart number 5 lasted for about 10 years; chart number 6
lasted for about 70 years.
Our basic pattern can be seen on all of them.

Elliott Wave - the Basic Pattern - lesson 2

It is important to remember that Elliott Wave is not a method but more a theory
and a great way to analyze the market.
- The most common type of correction is a 3 wave correction.
- According to Elliott wave theory a 3 wave correction could be either a Zig-Zag or
a flat correction; for simplicity I will refer to all 3 wave correction as an A-B-C
correction.
- All other types of corrections will be referred to as complex corrections.

Zig Zag - made of 3 waves; A - B - C.
Wave A divides into 5 sub waves, wave B divides into 3 sub waves and wave C
divides into 5 sub waves.
- Wave B is usually 38.2% or 50% of wave A.
- Wave C is usually 100% or 161.8% of wave A.
A-B-C Guidelines:
1. Wave C should go beyond the extreme of wave A.
2. We begin to assume that wave C is over, once price turns and goes back into the
range of wave A; at that point the bare minimum conditions for a correction are
complete.
3. Once price surpasses the extreme of wave B, we assume that the correction is
over.

Flat - made of 3 waves; A - B - C.
Wave A divides into 3 sub waves, wave B divides into 3 sub waves and wave C
divides into 5 sub waves.
There are 2 kinds of Flat corrections, Normal and Expanded (like in the photo) flat.
In the expanded flat, wave B exceeds the beginning of wave A and wave C goes
beyond the end of A. In a normal flat, wave B does not exceed the origin of wave
A.
Triangle

Triangle is made of 5 waves; A-B-C-D-E.
Each wave divides into 3 sub waves.
A triangle usually occurs in wave 4.
At the end of wave E, price will shoot up (or down) in a thrust.

See Lesson 3

Elliott Wave - the Basic Pattern

Elliott’s pattern consists of “impulsive waves” and “corrective waves.” An
impulsive wave is composed of five subwaves. It moves in the same direction as
the trend of the next larger size; a corrective wave is divided into three subwaves.
It moves against the trend of the next larger size.

Each wave is further divided into that very same pattern, like so:

In the above illustration, waves 1, 2, 3, 4 and 5 together complete a larger

impulsive sequence, labeled wave (1). The impulsive structure of wave (1) tells us
that the movement at the next larger degree of trend is also upward. It also warns
us to expect a three-wave correction — in this case, a downtrend.
That correction, wave (2), is followed by waves (3), (4) and (5) to complete an
impulsive sequence of the next larger degree, labeled as wave 1. At that point,
again, a three-wave correction of the same degree occurs, labeled as wave 2.
Note that regardless of the size of the wave, each wave one peak leads to the
same result a wave two correction.
Within a corrective wave, subwaves A and C are usually smaller-degree impulsive
waves. This means they too move in the same direction as the next larger trend.
(In Figure 2 below, waves A and C are in the same direction as the larger wave (2).)
Note that because they are impulsive, they themselves are made up of five
subwaves. Waves labeled with a B, however, are corrective waves; they move in
opposition to the trend of the next larger degree (in this case, they move upward
against the downtrend). These corrective waves are themselves made up of three
subwaves.

See the second lesson

Forex Strategy - Elliott Wave theory

What is a trend?
- A trend usually unfolds in a 5 non-overlapping wave pattern.
- A trend usually goes in the same direction of the higher degree trend.

What is a correction?
- A correction usually unfolds in an overlapping pattern and goes in the opposite
direction of the higher degree trend.

When the market overlaps it is usually a clear signal that a correction is taking
place. An overlap is when price makes a low or a high, and then reverses and
penetrates that price range of the last wave. When the market overlaps, more
often than not it is making a correction.

Forex Strategy - Basic strategy

We search for a correction that is about to end. It makes sense because if we see a
trend on a specific time frame than we are likely to be already too late to make an
entry. Our objective is to enter the market at the end of a correction. Our prime
target is the end of waves 2 or B.
We determine the most likely price zones for the end of the correction using our
Square of 9, pattern, divergence & Elliott Wave analysis as well as price and time
projection.
When price reaches those projected zones, we go to shorter time frames. We look
to see if the pattern appears complete. We once again use the same projection
techniques that we previously used. We base our analysis on all of our available
tools. After we see that the pattern on the short time frame appears to be
complete then we look at our oscillators for an entry.
1) We look at the W%R and establish what time frames will signal our entry. We
patiently wait for both signals.
2) We enter using the two halves technique meaning that the first half will be
exited when we gain as many pips as we risked (usually). At the time of our first
half’s exit we might move the stop loss of the second half. We will exit the second
half based on the higher time frame’s W%R.