Plan the Trade

Todays 123 shenanigans on the UsdCad;

Quick 123 on the UsdCad again a moment ago;



Grabbed a handful, spot the pattern!

Someone posted on a forum once, stating that they had noticed that, sometimes an ending diagonal would see a major reversal breakout, whereas others resulted in a very minimal pullback before prior trend resumed.

The answer lies in EW.

An ending diagonal in a cycle is a 5w abcde sequence (comprising overlap between waves 'b'&'d') and occur in either 5th waves or in C waves. Here's the thing - if you happen to see one which is the 5th (subwave) of the 3rd wave, it only leads to the 4th wave (corrective) and these are more commonly shallow (compared to the 2nd wave which is more commonly deep).

This is common sense because the 1st wave shows a lot of indecision and thus usual weakness until the trend becomes well established (wave 3), wave 4 is now the reverse, where the indecision comes because people do not know if it is really time to sell or not, some are selling into the strength and/or buying pressure is starting to wain...

Thus an ending diagonal for the 5th of the 3rd will usually not see much of a pullback once it ends (breaks out), whereas an ending diagonal for the overall 5th leads to the full ABC correction to follow.

It's common to see one set follow another as the 5th of the 3rd and then the overall 5th, separated by a shallow 4th wave, something like this;



Extended 5th waves will also usually correct violently.

With that said, have a look at the Dax chart for this afternoon;



It looks to me as though we had an ending diagonal (v'th) of 3rd, then 4th (pullback), followed by, in this instance, a standard 5 wave impulse 5th.

If that was the case above, maybe we will get a little bit more of a pullback, or possibly back to uptrend, (if this move short was ABC corrective). Unfortunately, PA is a bit too vague for me to stick my neck out with that call, but HH/HL's is all we need!

Update to above, we have our first (minor) HH;



Nice alternation between subwaves 'ii'&'iv'

Couple of things to look out for ref 123's;



Of course, it looks too clinical on paper, but i will try to give some examples through the week in real time for reference.
In an ideal form the PA between point 1&2 (start to high point) should be i a visible 5w and stay within a channel...

I've shown a deep pullback for the 'Handle'. In this instance i would trade a smaller 123 to get back into trend if it presented itself...

I mentioned likelihood on Thursday afternoon of ' a little bit more of a pullback, or possibly back to uptrend, (if this move short was ABC corrective)' ref the Dax, obviously that was going to apply to the Dow too.

Here we have the Dow action today;



This goes some way to explaining my ideal situation of the PA remaining within a set of channel lines for each cycle. The problem is, that right now, it is simply too difficult to determine whether this pullback from the low is ABC corrective to the main trend being short, or indeed that the move short last week was merely corrective to the larger uptrend. I have theories, both for long and short and they both cancel each other out, so until we get either a HH or a LL, it won't become clear. Having no position is a position in itself.

Hello Cableguy:

Your "plan" will yield different results based on time frame analyzed. Which is your preferred time frame?

Hi TooSlow,

Well, i mostly watch fast tick charts as they produce a more realistic chart. I'm not sure i agree entirely with you, unless of course, you mean in relevance to sheer number of set-ups incurred? This is entirely scaleable, although granted, patterns are easier to determine, the larger the timescale you view.

There is the same risk every trade, thus i trade small timescales to find between 5 - 10 trades a day. If i traded the daily charts for example, i may only find three or four a month.

Ok, further to Dow chart above, we now have some fibs lining up for a possible irregular corrective wave. Probably the most difficult to prove, but lets see if we start heading downwards from here. The relevance of an irregular B wave (making a fresh low), is that it shows underlying weakness and thus we should expect an extended wave next. Bit late in the day here, but lets look out for 123's short - a fresh high negates the above analysis;

The point of my using EW is generally only to try to predict when a trend is likely. These will generally be 3rd waves. The pullbacks will only be minor and thus we can make the most of the trend, trading whatever we can to get back into trend after each pullback.

You might argue that if i could predict a 3rd wave coming then why not simply enter a trade and hold it? Well, occasionally i do, but i have proved to myself many times that you need many things to line up firstly and also, it is unlikely that you will ever know just how long the 3rd wave may become, (they are the most likely wave to extend).

So the EW work is to be taken lightly as all i am really looking for is HH's/HL's (or vica versa LL's/LH's), then the pullbacks and 123's

There is only so much EW can do in any case. Imo, it is best used on longer timescales (1hr and upwards), as it tends to filter out a lot of 'noise' and then wave structure is often easier to identify.

If i show a quick chart of the UsdCad from earlier today, we can also see how EW can interfere with our thoughts;



A natural way to view this chart would be that trend is down and what we may be seeing is a slightly larger pullback within the current downtrend, thus i have labeled it ABC corrective. Even if this is the case, how do we know when 'C' will end. Wave structure on this timescale is far too vague and fibs of wave 'A', not worth trying to use.

Now if we view it from our pullback flag/C&H set-up system, we can view it somewhat differently.
Look at the very RHS of the chart. Firstly the spike higher, has taken out what appears to me to be the prior last LH on the left handside of the chart. (This would be before the last 5w decline to the low). That's a head's up as to a large shallow bowl in itself. Now the pullback immediately after the spike (RHS) looks like a 3w move currently, (abc minor). Roll the chart on a fraction and we get this;



So, i have added a few labels. My EW work is lightly involved in the sense that i think we had an abcde ending diagonal to the low. Once we break this point, we have a HH. At this stage, we do not know for sure, but it is possible we have a trend emerging to the long side.
I mentioned the pullback to the RHS looking like abc minor, thus i've labeled it so you can see what i mean. This then gets broken with a slightly HH to create a small C&H, by virtue of a 123, so....... we now have a feasible set-up. We do not know for sure if it will work, but the ingredients are all there, thus the trade should be taken.

The result;

I talked briefly about timescales yesterday. I do not generally stick to one single scale, i will vary it to suit current PA on whatever instrument i am watching.
My argument was that i am looking to maximise gains by finding more set-ups during a trading session, over and above using longer timeframes.

This chart below might help me explain it further;



The original point of the chart was to explain how using EW you can predict the end of a pullback and thus when to expect a 123 back into (in this case) the uptrend. The pullbacks shown are both abc with the c waves as ending diagonals (abcde).

Now here's the thing, you could view the complete move to the LHS (between indicated HH/HL as a 123 in it's own right. However, your risk would be much larger pointswise. Thus, if your determined risk was always say 3% of your pot, your gain might in this instance be less than what you risked. Not a good formula.

By coming down the timescale we can see that over the entire PA shown, we had two great 123 set-ups both giving minimum return of 1:1, but holding until divergence forms, could be closer to 3 times your risk. Max risk at anyone time - 3%, reward here - potentally 9%. Ok so that might be hindsight talking with the benefit of the chart before us, but this is exactly how this system works. The harder part is determining your exit. A relaxed approach is key. I like the new aid of bollingers and i do not have an exact exit criteria. It depends on PA during each trade.

In the chart the first set-up requires that you move your stop up to below each minor retrace until divergence forms, whereas the 2nd set-up shows real strength, so bollingers (not shown in this chart) or the 20sma would keep you in the trade for longer... If we believe our 123 was waves 1&2 of a 5wave sequence, we should be prepared to sit through at least one pullback.

Anyway, hopefully that explains timescales. The minimum required which will give enough points to make it worthwhile above and beyond the cost of the spread and the +1 stop/entry... to maximise potential set-ups during a session.

Last nights Dow;



and current;

I wrote a piece elsewhere about my observations on the Dow at the weekend.

It was about how i felt the last HH during the week was in a 3w move, not a 5w move. This can only mean one thing if correct. It was a 'B' wave of a corrective move. We can not have an impulse long cycle finish on 3 waves unless it is wave 'E' of an ending diagonal.

Of course, there is always the slim chance that the market had printed something really obtuse, but zooming in on the 3min chart it certainly looked (to me) that the move was in 3 waves. What do you think?!



How can you make 5 waves out of that?! C was 123.6% of A and made a set of channel lines. This was a clue to what would come next.



Yesterdays fall was wave C of a deep abc pullback (probably wave 2 of the next cycle);

The current chart;

I'm corresponding via PM with a handful of traders presently, some topics of conversation can be replicated so i will make a post as a generalisation.

For a long time in the early years, i traded without stops. Anyone can do this. Keep positions sizes small, let it run until it returns a profit.
The most likely thing to happen under these circumstances is that you let one or two bad positions run against you and eventually they have to be closed (recognised).

They usually wipe out the previous 2/3 months gains, or more. But you keep going, telling yourself that you are learning all of the while.
Nothing changes. You manage to learn enough to go on a decent winning streak, confidence builds and position sizes get bigger...

Then along comes an extended 3rd wave, completely at odds with your thoughts. So strong are your thoughts that you are determined to hold through the markets little 'games'. You keep adding to that position as it continues to run against you. Eventually you have had enough, desperate for a pullback simply to enable getting out of the most recent trades at less of a loss.

This is about the time the 3rd wave picks it up a notch. You can no longer function in a rational manner. You can not leave the screen, you can not believe what you are witnessing. It's all rigged, manipulated, the market makers are all crooks etc etc...

If you are lucky, you do not have all of your pot in one account and as a sudden spike wipes out the account, you can take comfort that you have some more money elsewhere to start again. You just wiped out an account, but at least you can sleep again. You read forums and take comfort that many many others like you suffered the same fate.

Hmmmmm

Well, i speak from experience. I shorted oil at $100 years ago on it's way to $147 a barrel and wiped out an account. I was doing well for a while, bagging several hundred $'s a day sometimes, until i could no longer keep up and my underwater positions took me out.

I did the same again going long starting at $60 during the short cycle of 2008, same result another account blown. I then shorted the markets as they climbed in early 2009, convinced they had lower to go. I closed out a painful loss and switched long into a little known flash crash later in the year.

I will never forget the lines on my chart all had to bunch up to fit all of the data in. Before i knew it, the positions ran out of margin and were closed. By the next day, the price had recovered, but it was too late, the money was gone...

Rinse repeat. Did i know what i was doing? I thought so (obviously).

For a long time i have battled coming to terms with trading with tight stops. There are actually many ways to make money from the markets, but in my (humble) opinion, nothing is more obvious and more simple than trading with the current trend.

The system described here is the best way to do just that. Minimal risk, but risk just the same. It takes time to adjust to viewing a chart in a certain way.
EW has taught me to view pullbacks as abc's. In a 3rd wave they are usually simple (as opposed to complex).

By the time we have discovered a strong trend, the natural thought is that it has passed you by. You missed the boat. But that is the beauty of this system.
All you are doing is trading probabilities.

Take a look at todays action on the Dax;



We wait for a pullback and adjust down to smaller timescales if necessary to find a recognisable one. We see an abc retrace followed by a 123. Take the trade. It either works or it doesn't. You control the risk, not the market. In all probability, it should continue up.

There is another argument on another thread about running a position for the big gain vs the little by little approach.

IMO there is no right or wrong answer there. Everyone must find what works for themselves and how they feel comfortable trading. It takes a certain resolution to hold out for the biggie. It is quite likely that you will do so and see 3/4 trades stop out for +1 when (many) more points were available. The first time you decide after this to bank them when they are on offer, is the one time that the position does run!

You're damned if you do, you're damned if you don't!

Personally i like to get the points bagged using the methods i described yesterday, (bollingers or divergence).

Again, i read elsewhere, others shorting this market into last night close and the reason? The same everytime - because it's gone up lots! FFS!

Those same shorts fuel the market higher when they get closed out later (for a loss!)

Sure it will come down sometime, but when? at what point? Why worry about it, go with the trend instead! When the trend changes, it will start making LL/LH's
The art here is to match the timescale with the size of your position. A bit bigger pullback could easily be construed as trend change, but that doesn't mean that there wont be a few winning short set-ups in the making.

As i said in the last post, it's whether you want to hold out for the biggie or take what's available relevant to the timescale that you are trading...

A dripping tap fills a bucket.

Arrrrgh, i hate it when this happens!

Set-up looking nice, ticket open ready to execute and the trigger candle (circled) jumped 12 pips instantly... no inbetween. I would imagine a limit order would also gap, despite IG being generally excellent in execution.



You can see how edgy the PA is with the candle getting all excited just before the trigger point as god knows how many algo's were triggered at the same point!

I figured i would wait for a retest of flagline for a second chance, but no such luck

Just took a loser, which i was confident would be a winner,

UsdJpy;



Update;



Comes under my riskier deeper pullback 123's...

UsdCad winner however;



Something i haven't covered here in my thread is the double bite trade.

My colleague, Harold, (Divergence) likes to trade this idea - where you take a first set of pips eg 15 and then wait for a retest of the 123 entrance point (point 2) and then hold for 30 pips, with your second trade virtually 'free'.

My problem is that i use several different timescales and thus pip targets vary wildly. It becomes difficult to gauge where to attempt this and how many points to aim for etc.

When you see this trade, you are usually seeing a diagonal;

For those who want a more sedentary lifestyle, this is a scaleable model, as explained before.

Here is the hourly Dow chart, with usual 123 making shallow flagline;