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Trading Edge 139 If you have tried using chart patterns in the past, you may have had hit or miss luck with them. That’s mainly the reason why anyone discards anything.Itdoesn’twork.Theremainderofthereasonliesinabasichuman trait: the search for something better. This unknown may exist on some levels of living, but not in trading. What’s best for you may not be best for me. “Best” is relative. Remember a couple basic ideas of price: 1. News and fundamentals are built into price action. 2. Price action reflects the psychology (think: fear and greed) of the market. I am not a technician (technicians rely more on indicators, which are always lagging), but rather I am a chartist who focuses on price. Nothing leads price. Some tools like pivot points and Fibonacci levels may forecast, but this is not predicting. The other aspect of price that no one seems to tell anyone—so I’m going totell you now—is that price can only be interpreted effectively if the underlying market direction is identified. It was reading article after article written by Charles Dow that crystallized this for me. The market currently is in one of four market cycles: accumulation, mark up, distribution, mark down. A market, you have learned, can only travel up, down, or sideways. Thisisnotenough,though.Wemustknowhowtoidentifythecurrentcycle in real time. Now take this concept back to what may have been a hit or miss re-lationship with chart pattern–based entries. Occasionally, I can imagine, they worked, and occasionally they did not. In all likelihood you were by chance pairing trending patterns with a trending market and sideways pat-terns with sideways markets. Eventually the frustration of this haphazard winning and losing made you drop chart patterns and move on. They’re for newbies after all, you may have huffed as you went to Google to search out your next trading strategy. So what do we know now? Chart patterns must be paired with the correct market cycle. Here’s how you can use a simple trio of three Fibonacci–based moving averages to accomplish this. I call it the “Wave,” as you now know. The Wave, to recap, is three 34-period exponential mov-ing averages, one set on the high, one set on the close, and one set on the low. These lines will travel up, down, and sideways across your charts. When they are used in the proper reference, you will have what I call a clock angle. For example, if you are trading off a daily chart (also known as an “end of day” chart), ideally you should be looking at a year’s worth of data. This amount of data does a few things for you. First, it will put 140 FOREX ON FIVE HOURS A WEEK all relevant price action front and center: recent trends, 52-week highs and lows, and reversals. Second, it will allow you to take a proper clock angle reading, which means that theyear’s worthof datacompresses priceaction into the right scale so that when you look at the angle of the three lines, it’s an accurate reading of the cycle the market is currently in. Let me mention right now that while I will be using chart patterns, there is not a trader alive who couldn’t benefit from an accurate and real-time reading of the current cycle of the market. It’s not limited to any style of trading. In fact, it’s the very reason you should be utilizing one type of entry over another. All entry styles currently are designed for trending, re-versal, breakout/breakdown, or range-bound cycles—whether you know it or not! So the first thing you must determine about your current stable of entry strategies is what cycle was it meant to capitalize on. No single entry strategy can capitalize on every cycle. That’s a fact. When it comes to trending versus nontrending patterns, it’s fairly easy to determine this with the chart pattern name. Falling wedges and down channels are, as their name implies, downtrending patterns. Rising wedges and up channels are uptrending patterns. I mention this because many times traders find the lines and levels that form a pattern and then go straighttoenteringatradebased upon those boundaries. The problem with that is the missing step. In order to use a trending chart pattern set-up cor-rectly, the underlying market must be in a trend. Except for the Wave, I know of no other way to do this in real time. As shown in Figure 11.1, the 15-minute USD/CAD is heading down at what I would call a four to six o’clock angle. This is also a mark down or downtrend. The downtrend would be a perfect pairing for a downtrend chart pattern like a falling wedge or down channel: not however for a tri-angle, rectangle, double or triple top or bottom, as these are examples of sideways or range-bound patterns better suited to an accumulation or dis-tribution cycle. See Figure 11.2. This is not limited to short-term intraday chart analysis. How about a longer-term, end-of-day chart of the EUR/USD? See Figure 11.3. As shown in Figure 11.4, this is a down channel and must be traded in a downtrending market. So finding the pattern is step one. Confirm-ing that this pattern is occurring in the correct market cycle is step two. Now realize that chart patterns are simply the combination of downtrend lines, uptrend lines, horizontal support, and resistance. This channel is two downtrend lines. Has it formed in a mark down cycle? Use the clock angle of the Wave to determine. This market cycle filter or confirmation step can be applied to any type of trading as long as you know which market cycle your strategy was de-signed for. This is something that most traders don’t consider, mainly be-cause they are seldom told to. Traders usually define themselves by their Trading Edge 141 (CAD A0-FX - CANADIAN DOLLAR,15) Dynamic,0:00-0:00 1.1600 1.1550 1.1500 1.1450 1.1400 1.1350 1.1300 1.1250 1.1223 1.1188 04:00 09:00 14:00 19:00 00:00 05:00 10:00 15:00 20:00 01:00 06:00 11:00 16:00 05/20/09 05/21/09 05/22/09 FIGURE 11.1 Confirmed Downtrend with the Four to Six O’clock Wave Angle © eSignal, 2009. (CAD A0-FX - CANADIAN DOLLAR,15) Dynamic,0:00-0:00 1.1600 1.1550 1.1500 1.1450 1.1400 1.1350 1.1300 1.1250 1.1223 1.1188 04:00 09:00 14:00 19:00 00:00 05:00 10:00 15:00 20:00 01:00 06:00 11:00 16:00 05/20/09 05/21/09 05/22/09 FIGURE 11.2 The Falling Wedge Pattern Should Only Be Traded in a Downtrend © eSignal, 2009. 142 (EUR A0-FX - EURO,D) Dynamic,0:00-24:00 MA(34,H)e MA(34,C)e MA(34,L)e FOREX ON FIVE HOURS A WEEK 1.6000 1.5500 1.5000 1.4509 1.4364 1.4000 1.3632 1.3500 11 18 25 03 10 17 24 31 07 14 21 28 05 12 19 26 02 09 16 23 30 07 14 21 28 04 11 18 25 01 08 15 22 29 06 Mar Apr May Jun Jul Aug Sep Oct FIGURE 11.3 Two Parallel Downtrend Lines Form a Down Channel © eSignal, 2009. (EUR A0-FX - EURO,D) Dynamic,0:00-24:00 MA(34,H)e MA(34,C)e MA(34,L)e 1.6000 1.5500 1.5000 1.4509 1.4364 1.4000 1.3632 1.3500 11 18 25 03 10 17 24 31 07 14 21 28 05 12 19 26 02 09 16 23 30 07 14 21 28 04 11 18 25 01 08 15 22 29 06 Mar Apr May Jun Jul Aug Sep Oct FIGURE 11.4 The Down Channel Is Only Valid in a Downtrend © eSignal, 2009. Trading Edge 143 (EUR/AUD A0-FX - EURO/AUSTRALIA DOLLAR COMPOSITE,D) Dynamic,0:00-24:00 MA(34,H)e MA(34,C)e MA(34,L)e 2.0500 2.0000 1.9892 1.9711 1.9571 1.9319 1.9000 15 22 29 05 12 19 26 02 09 16 23 02 09 16 2 1.8500 2009 Feb Mar FIGURE 11.5 Rectangles Are Consolidation Patterns © eSignal, 2009. trading entry style: “I’m a swing trader” or “I’m a momentum trader.” This is only half true. When the market cycle is sideways, only then should you be a momentum trader. When the market is trending, you should look for swing entries and trending patterns. Let the cycle dictate your entry! Let’s look at a sideways pattern. This one is an interesting look at what could be one of two choices. A few things to take note of: Do you see the width of the pattern? The range from the horizontal resistance to the horizontal support is wide enough to merit trading within the range. See Figure 11.5. Inside the range trading is a strategy that takes advantage of wide side-ways patterns like this, with static (horizontal) levels that can be shorted at the ceiling and bought at the floor. Alternatively, a breakout/breakdown play can be set-up that would entail waiting for price breaking up through the ceiling or down through the floor. Of course, this pattern must be con-firmed by a sideways market cycle. See Figure 11.6. In each of these examples, the chart pattern was only considered a potential entry after the market cycle confirmed that the pattern was oc-curring in the appropriate cycle. Without this confirmation, the lines and levels of the pattern could potentially be acted upon incorrectly. No mat-ter what your trading style, understanding which cycle your strategies are most likely to succeed in will increase the chances that you’ll be on the right side of price action. See Figures 11.7 and 11.8. ... - tailieumienphi.vn
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