Trading Focal Points -- "A Leap Of Faith"...

If you are a one-tool guy and don't like tool boxes, then stop here and return to the Forums overview (https://www.forexfactory.com/forums) -- this thread is not for you and you will not only be wasting your time, but mine as well. On the other hand, if you like learning something new and not afraid to learn something that is not only new but rather "alien" compared to the way you've currently been trading, then read on. And to be clear, I'm not pushing Focal Points as the next Holy Grail. It is another style of trading you may find fun and intriguing that breaks-up the boredom of endless screen-staring.

I recently learned about Focal Points from @parisboy in the PlanetX thread (https://www.forexfactory.com/thread/...tx-oscillators). @parisboy is a brilliant man with a great sense of humor and an expert on envelopes, waves and cycles (https://www.forexfactory.com/thread/...s-waves-cycles?). I've known him a few years and read his posts from time-to-time, though they generally fly over my head. My brain marches to an empirical beat, whereas @parisboy's is more theoretical. However, during our recent engagement on the PlanetX thread a few things began to click. I asked a few questions, received nice responses, and then more began to click. And then, at one point, a light bulb went on. Focal Points are super, super easy to trade, plus they are colorful and visually pleasing to the eye. However they aren't used the way you think they might be used -- and that is the catch. If you read the first few posts here and think you understand then, for sure, you don't. You'll need to re-read until that light bulb goes on.

I've developed a new Focal Point indicator that I will share and explain its use in a post below.

I should also emphasize early on that trading Focal Points is highly discretionary -- you will need to use your brain's pattern-recognition capabilities. The Focal Point strategy does not lend itself to automation -- so, don't expect a future EA.

Full disclosure: Focal Points are new to me and as of this writing I have not yet traded them -- I'm an algorithmic trader. However, I plan to incorporate Focal Points into my discretionary trading.






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Update: 2022-03-23 (Taken from post #88)

This post includes an updated version of the R4M-FocalPoints-OnCharts indicator. Using the default settings it does a good job of detecting Focal Points -- though I won't claim it is perfect. As I've touched on above, not all Focal Points are created equal -- at least not visually. The SMA intersections rarely occur at exactly one point -- there is always a bit of a horizontal or vertical offset. Your brain can easily spot the colorful pattern and ignore its imperfections, but that's not so easily done in code without very specific, predefined rules -- that currently don't exist. So, I came up with my own and it seems to work. I am happy to continue refining the detection algorithm. However, if you come across a discrepancy where the detection is wrong or misses an obvious FP then it's okay to complain -- as long as you include a chart that points to the discrepancy and provides enough information that would allow me to reproduce it. If I can't reproduce a problem then I can't fix. Also, I'm not a mind-reader.

Let me explain a few of the indicator's features. In the image below the bullish and bearish FPs that the indicator detected are marked by blue and purple circles, respectively. I think of Focal Points in terms of pairs (i.e. couples) of a bullish one coupled with a bearish one. I'll call these FP1 and FP2. In between FP1 and FP2 there will be either a High or a Low. When FP1 is bullish and FP2 is bearish there will be a High, and when FP1 is bearish and FP2 is bullish then there will be a low. Once FP2 is formed the indi has enough information to compute the TargetPrice (yellow line). If current price has not yet reached the guesstimate TargetPrice then the yellow line is solid and may still be valid. However, once the current price has exceeded the guesstimate TargetPrice then it should no longer be considered and it is drawn as a dashed line.



The updated version of the indicator includes two settings: 'Crossing Type' and 'Tolerance'. These come about because, as mentioned above, not all Focal Points are created equal and are described below:

Crossing Type: There are 11 crossing types -- 16x32, 16x64, 16x128, 16x32x64, 16x32x128, 16x64x128, 16x32x64x128, 32x64, 32x128, 32x64x128, 64x128. The default is 64x128, since I think that works best. But feel free to experiment with the others.

Tolerance: This is the "breathing room" required by the detection algorithm. Intersecting SMAs occur in close proximity to one another, but not at an exact point. This setting is the number of bars that intersecting SMAs are considered to belong to the same FP. The smaller the number the more strict. In the case of 64x128 the Tolerance can be set to '1' since there is only one crossing. In the case of 16x32x64x128 if you use a setting of '1' then you will probably not see any FPs.



Below is an example of a bearish FP where the guesstimated Target Price may still be trade-able because it hasn't yet been exceeded by the current price.


And some tips:

1. Pay attention to the Fractal Channels you see in the background.
2. Pay attention to SMA(128).
3. Trade in the direction of SMA(128).
4. Perhaps it's best to attach the indi twice to a chart -- one using 64x128 and the other 16x128, each using a 'Tolerance' of 1.

Don't force it -- if a candidate setup isn't obvious and you feel like you have to ask @parisboy whether or not to enter a trade, then that is your clue not to trade it. When you get your head around this algorithm you won't need to ask questions. If you feel a need to ask questions then that probably means you don't yet have your head around it. I would consider this a highly discretionary strategy. The indicator I've provided is just a tool -- it can not guide your hand to the BUY / SELL button. A tool is only as good as the craftsman who holds it.




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Update: 2022-03-24 (Taken from post #136)

Here is a new indicator -- R4M-GuppyPoints-OnChart. It is a new concoction that combines the idea behind Focal Points with Daryl Guppy's GMMA (Guppy Multiple Moving Average). The results are similar to FocalPoints and though it may ruffle some feathers, I actually think they are better. I'll explain why below...



GuppyPoints lacks the rich history and theory of FocalPoints, though it does share some similarities. Whereas FocalPoints relies on multiple SMA lines that differ by powers-of-two, GuppyPoints relies on multiple EMA lines who's periods don't follow any particular pattern, as far as I can tell. I suspect they were chosen by empirical observation -- i.e. trial and error. GuppyPoints uses two groups of EMA lines -- long and short. The periods of the long group are 30, 35, 40, 45, 50, 60, and the periods of the short group are 3, 7, 10, 12, 15. In addition, there is no backshift -- which is a YUUUUGE benefit. Hence, there is no extrapolation or extension since the lines reflect the real-time data all the way to the current bar (Bar[0]). In addition, from a programmatic point of view, the rule for detecting crossings is much simpler and does not require a 'Tolerance' or 'Crossing Type' setting. All intersections are created equal.

I am NOT advocating the use of GuppyPoints over FocalPoints. I am simply sharing an observation -- make of it as you will.

The theory behind Focal Points was developed over 60 years ago by engineers working at the Jet Propulsion Laboratory in California. The JPL is owned by NASA and managed by the California Institute of Technology -- roughly the equivalent of MIT on the West Coast (USA). The engineers were working on missile guidance systems. Certain portions of their algorithms were later found to be applicable to financial trading -- this is where Focal Points enter the scene. Though not widely used (as far as I can tell), they have been adapted and used for decades in trading financial instruments. There are folks here at FF who also use them -- hopefully they will jump in and share some charts, insights and help answer questions as they arise.

The Focal Points algorithm requires something that you've probably never applied to trading -- a concept that I'll refer to as a "Leap of Faith". The reason I call it that is because you do not Enter / Exit trades based on BUY / SELL signals that occur on the most recent bars. If you're shaking your head because you don't understand then read that sentence again. The indicator employs 5 back-shifted SMA lines. As a result of the back-shifting the indicator's data ends about 32 bars ago -- though it is extrapolated / extended to the current bar for visual and discretionary purposes. So, once the indicator's data ends and you enter the extended portion you are effectively walking a tight-rope 100 feet off the ground with no net beneath you. This is where "Leap of Faith" comes in.

Using historical Focal Points, the algorithm computes a guesstimated TargetPrice. If the TargetPrice looks appealing and suits whatever additional criteria you wish to apply (e.g. R:R, or whatever) then you enter a BUY / SELL trade regardless of what the most recent bars are doing. That's right, you read that sentence correctly. Once a guesstimated TargetPrice has been computed you enter a trade with the TargetPrice as your TakeProfit -- ignoring the most recent price bars -- and then walk away. There is a very high probability the TargetPrice will be reached.

For those who have been around for awhile and are familiar with @George's thread where he exhorted "TARGETS, TARGETS, TARGETS", please don't be offended if I draw a comparison to the Focal Points strategy. That battle is over. "TARGETS, TARGETS, TARGETS" referred to historical prices that are likely to be revisited sometime in the future -- but you don't know when. They are future target prices.

Focal Points has a similar element -- but differs in a couple of ways:

1. It computes a guesstimated target price. The guesstimated target price is not a historical high / low. It is derived at using a simple calculation. If you can subtract two numbers then you can do it in your head.

2. The guesstimated target price can be used NOW. You don't need to wait for price exhaustion or price exceeding TMA lines. That target price is a destination price that will be arrived at shortly.

So, my variation of @George's mantra is "GUESSTIMATED TARGET PRICE, GUESSTIMATED TARGET PRICE, GUESSTIMATED TARGET PRICE". It's a mouth full but, hopefully, you get the gist...

Okay -- I'm ready to begin digging into some details...

The chart below shows two Focal Points -- circled in yellow. These occur when back-shifted SMA lines intersect. For purposes here, I will focus on SMA(16), SMA(32), SMA(64) and SMA(128) for now.


I've also labeled the portion of SMA(128)'s "extension". The SMA lines are back-shifted 1/2 their period. This means that SMA(128) is back-shifted 64 bars. And that means the SMA(128) line actually ended 64 bars ago. For visual and discretionary purposes the indicator extends the SMA(128) to Bar[0] -- but that is not based on recent price data. The indicator simply extrapolates the line based on the slope 64 bars ago. This is important to grasp. If the light bulb isn't beginning to flicker then read that again.


And the chart below shows the Focal Points algorithm in all its glory. This is an example of a Bearish Focal Point. Focal Point #1 (FP1) occurs in a bullish trend and Focal Point #2 (FP2) occurs in a bearish trend. In between FP1 and FP2 is a High. Now, comes the advanced math, so put on your thinking caps:

Target Price = FP2 - (High - FP2)

The yellow line is the Target Price. If you study the chart for a moment you'll notice that FP2 falls equidistant between the High and the Target Price. In other words, the distance between High and FP2 is the same as the distance between FP2 and Target Price. So, dusting off what you learned in 1st Grade math you can probably guesstimate the Target Price without the use of my "magic mush" indicator (thanks to @moodybot for that one)...

Feel free to experiment and play with the indi to get a feel for it. And it goes without saying that should be done on a Demo account. Though the indicator displays markings those are NOT, and I repeat NOT, trading signals. This is a discretionary trading strategy -- it is your brain that decides when to press the BUY / SELL button.

A couple of tips:

(1) SMA(128) -- this SMA line is "da man". The SMA(128)'s brownish line passes through most all the valid Focal Points. That is probably the first thing I notice. If the SMA(128) line intersects with what looks to be a Focal Point then that is my clue to look closer.

(2) Fractal Channels -- in the other thread @parisboy introduced the use of channels for Focal Points. I've taken the liberty of using Fractal Channels in their place. I'm a lazy coder and I had a nice Fractal Channel indicator that serves the same purpose and which I incorporated into the Focal Points indi. If you look carefully at the chart you'll see the fractal channel in dotted gray lines. Here's what I look for:
(a) Bearish trend -- the SMA lines are within or below the fractal channel
(b) Bullish trend -- the SMA lines are within or above the fractal channel

Here's why the fractal channel can be your friend -- it is your one link to reality. Remember -- the SMA lines ended many bars ago and as you look to the right they may not reflect current market conditions. However, the fractal channel does reflect current market conditions. So, if the SMA extensions align with the fractal channel then that should give you a warm fuzzy feeling...

How to find the main Focal Point of a Swing for the Dummies !

I tried to be empirical !

@parisboy -- you are too quick -- I'm still working on post #1!! Thank you for jumping in...

A Focal Point is the label given to the Price Bar where converge several Centered Moving Averages of period linked by a factor 2

To fully understand how Focal Point are built and how to trade them, you need to know :

how work Moving Averages
what are their characteristics

what consequences for trading have these characteristics



The key is in the "theory" which allows us to understand how Moving Averages really work and what are their real qualities.

Let me be clear up to 2006 I was like everyone else, looked at my screen and saw the MA's going up or down.

Then I discovered Hurst through a booklet of TradingFive where they explain the CMA crossing of a Full Period CMA (ex: 32) with a Half -Period CMA (ex: 16) to calculate a target price.

After 5 / 10 minutes I told myself "I can do it" Then I bought Profit Magic, then the course. where all you have to know about CMA's and MA's is explained in detail.

You are a coder, a computer kid era. I began to draw chart in 1972 - pencil, paper , rubber, ruler. You missed that. Because charting manually this way, you HAVE to think BEFORE you draw your chart what you want exactly on your chart, which parameters to use etc otherwise you have to start a new chart manually if it does not fit your requirements. Hence your have to weigh your options.

It was exactly similar for Moving Averages. Do you imagine yourself calculating all these MA's manually ? every minute ?
To facilitate your work techniques were created and published in newsletter or sold in seminars in the seventies.

For example let's take a MA 5. Data are 3,4,5,6,7 = 25. Average = 25/5 = 5. For a CMA you position your average 5 under the number 5 of the data serie which in the middle of the serie , in the center, in third position of 5

Let's now add a new number 8 . As it is a new additional number you add 8 to the total of the previous sum of 5 data (25) and you substract the first number of the data serie (3)

Hence we have (25+8-3)/5 = 30 /5 = 6 If you chart that 6, being bigger than 5 your MA goes Up
Let's assume your new additional number is 3 , you have (3+25-3) = 25/5 = 5 . Your next average number is 5 . Your charted MA is flat
Let's assume your new additional number is 2. you have (2+25 -3) = 24 = 24/5 = 4.8. Your next average number is 4.8 . Your charted MA goes down

Your data serie is 3,4,5,6,7. Let's assume that 7 is your last price. In this example as long as your additional price is greater than the price you substract from the total (3) your MA goes up.

Your MA goes Up even if your new additional price is lower than your last price as long as this price is greater than 3.

This chart was posted yesterday evening by Robots4me.

It is a beautiful chart.

"Beautiful charts" are easy to analyze

"Beautiful charts" are easy to trade

on this thread you will find the right tools to trade and the right concepts to analyze Price Action

2 Focal Points
A Centerline, a Midline
A Sinewave

Intuitively you understand now why you have so many 50 % retracements in Price

Learn to simplify things to understand and analyze Price Action

Observe the W Patern

What is a W Pattern

It is a Double Bottom

Yes -- very nice...

You will see tons of Double Bottoms and Double Tops

Observe how is built a Double Bottom

The red Centered Moving Average 16 travels from Focal Point A to Focal Point B buildind 2 Lows.

As Trend is up the second Low is higher than the First

Yes, I see that. They aren't all as pretty as this one, but I am getting better at spotting them...

Simultaneously the Centered Moving Average 32 (blue) travels too from Focal Point A to Focal Point B and makes its Low more or less in the Middle between the 2 Lows of the Centered Moving Average 16.

That is logical.

Think of these Centered Moving Averages as Simplified Cycles of Price Acttion (a Moving Average "smoothes" Price Action)


You do not need to be a rocket scientist to understand that you can have 2 Cycles of 16 Time Unitsperiod within a Cycle of 32 Time Units Period

Then you have a "robust, but not bad" explanation de how are built Double Bottoms and conversely Double Tops

You know what -- I'm beginning to understand what you write, and that scares me...

observe the intermediary low inside the Double Bottom.

It is an example that Cycles are additive.

Centered Moving Average 64 (lila) and Centered Moving Average 32 (blue) make their Lows in the same area where Centered Moving Area 16 (red) makes its Top.

The addition of 2 minus , 1 plus explains this Low of lesser amplitude

Are you familar with Fourier Transform?

A little bird asked me a question -- what's with all these power-of-2 SMA lines? Why power-of-2? Why not power-of-3 or power-of-1.5? What's "magical" about power-of-2? I haven't read the original research papers from 60 years ago, but I have a good idea why power-of-2 is used.

Back in the 1960's computers didn't have the benefit of today's floating-point processors. Those guys at the Jet Propulsion Laboratory were working on missile guidance systems and the computations had to be fast, fast, fast. Computer processors think in binary, and computations using integers that are a power-of-2 don't need to be converted to doubles, or floats. The CPU's used back then would have bogged down if they had to perform a lot of floating-point computations. Integers that are a power-of-two fit perfectly into the CPU's instruction set and don't require time-consuming conversions.

Well it is a French guy! I have some knowledge of his work and tons of papers on its use in cycle analysis. (frequencies in time series). Spectral Analysis , Periodogram.