Animal Farm (Renko system)

I was away a bit longer than I expected, now back to work. I hope top be around for the rest of the summer at least.

Thanks to Eurix and Blaiserboy for the Global Crosshairs and compiler. We can always use additional tools.

I see that MT4 has been up to its tricks again and builds 800 + are causing issues. For now, I have refrained from
updating my MT4 until I learn more about that issue - if it is indeed an issue as some people are suggesting. Hopefully
the changes will not impact any of the tools that we will apply here.

I will continue on with some further discussion on the HBF and LBF charts as soon as I am up to speed. Probably starting tomorrow.
Thanks for everyone's patience.

Couldn't get smiley face to appear even though renko bars were forming on the M6 once I changed the bars to candles. Recalled from the past that Common tab needs to be addressed. Experimented without success in changing face to make it smile, so searched on ff and found answer. http://www.forexfactory.com/showthread.php?t=255020 Went to tools and followed directions.

The pdf file didn't mention the common tab, unless I somehow missed the mention.

Welcome back Wab,

Looking forward to your ongoing teachings

Regards

The EURUSD has been in the news a lot because of the Greek Crisis. Let's begin by looking at that pair and seeing if the 30 -10 brick analysis helps.

This chart has a lot on it and it is worth a lot of study because it shows the thinking that goes into a much simpler analysis that I will present in a while.

If you remember algebra there was that thing called the quadratic equation. A good math teacher would show you how it was derived and that was interesting if you were a math nerd. However you only needed to know the equation in order to solve the problems. Knowing how the equation was derived helped understand what it was you were doing with the formula, but anyone who knew the formula could solve the questions.

Let's dissect the EURUSD 30 1- combo in detail then and see if we can simplify it afterwards.




First of all check the HH LH reversal on the 10 Pip brick chart. The HH in Elliott Wave terms is the zero of a new wave. AS we add our LL LH sequence, we reveal the Elliott Wave count. Some confusion occurs at what the Elliott Wave would label as wave four. Strictly speaking it is not a LH, but the advantage in EW counting is that we expect congestion in a wave four. Also note the AO indicator pulls back to zero or above in a wave four correction. I really urge serious analysts to read Bill Williams’ books and learn how the AO works in conjunction with the EW.)

In EW theory a trend line that extends through the wave two and wave four peaks creates a useful channel when a parallel trend line is drawn from the peak of wave three. Wave Five will often form near or on the parallel trend line. I have drawn these trend lines and additional ones, that also show the wave four congestion (with red lines.)

Sure enough, as price approaches the lower red channel line we see a LL HL reversal on the 10 pip bricks as a wick forms on the 30 pip bricks. The AO confirms this and a blue horizontal E line also shows up as we follow the new HH HL in the reversal. Note how a lot of things come together here. I have drawn an ellipse to emphasize the area.

The market rallies from a five wave bearish move and moves up. EW suggests that this may be wave TWO now after a wave ONE completed, but that is just a suggestion. EW is great when you get it correct but we need evidence to support the possible map it reveals.
A wave TWO would probably top out around the 61.8% level, so we can add a fib on the 30 pip bricks and monitor that Fib level for a reversal. Look for a wick on the thirty pip bricks and a reversal of the HH HL on the 10 pip bricks.

OK that is a lot to digest. If you are not Elliott Wave savvy, does it really matter? The HH HL LL LH sequence reveals the structure. The E line gets broken and a reversal occurs. The rest is fine feathers on the bird.

AO nicely confirms that which we already know. Fibonacci is great if you can understand it. (We will use it a lot.) EW channels are useful and the EW count helps with that, but again it is the E line that tells us the most important thing. We expect it to form in the 10 pip bricks inside a 30 pip wick.

Lots to study here: I want you to study it before I make it a lot simpler.
Just like the quadratic formula is easy to use, when you don’t have to derive it each time, I will try to reduce all of this to a much simpler approach.
Understanding what the formula does is important so that you can apply it correctly.

Have fun.

If some of this is baffling don't worry. We will practice lots and it will become a lot easier when we reduce it all to a very simple system.

The more simple approach:

Here is the same chart we have been looking at - just a bit further advanced.




You will notice a red moving average line. This the Teeth line of the Bill Williams Alligator, an 8 smoothed MA of the median price displaced 5. (The settings are visible in the Alligator and it is the same red line that is shown in the Alligator.)

Now the Teeth line has a special relationship with certain Fractals. If you look at the fractal labelled BWF 1 (Bill Williams Fractal 1) it is the last fractal to the left of the Teeth line and below the Teeth line. When price penetrates that fractal below the Teeth line it is sell signal.

Similarly, the fractal labelled BWF 2 is the first fractal where price is above the Teeth Line. When price penetrates above that fractal it is a buy signal. (I showed that buy signal with a dotted blue line to compare it with the solid blue E line that was drawn from the first HH.)

More recently on the chart, is a third horizontal blue line. By definition it is not a LH. However, if price were to drop through the Teeth line and then penetrate this blue line it would become a BWF sell signal. Chances are that a down fractal will form first and the potential BWF sell fractal would be adjusted to the new down fractal level. That fractal will then also become a LH and also mark a potential E line.

The E line and the BWF fractal entry are often one and the same. Two methods combined to give the same signal. When they are different, one confirms the other.

Now all of the stuff that I had on the previous chart, while nice and informative, can be reduced to this simple version of the same thing. HH HL LL LH and the BWF /Teeth combination tells you a tremendous about what the market is up to.

The Teeth line has another attribute which is very powerful:
A trending market avoids it and a corrective market will correct back towards it. On the second chart, counter trend lines drawn at 1, 2, 3 and 4, present opportunities for long trades. The down fractal and interaction with the Teeth line help determine where to draw these counter trend, trend lines. A break of these lines is an entry signal, or it can be an alert that the recent HH is about to be broken as well. Both breaks are valid entry signals and lead to various trade strategies.



Bonus: The Teeth line also makes a great trailing stop when you give it an extra pip or so as a buffer.

I hope this is easy enough to follow. At first it may be a bit overwhelming but soon it is a matter of eyeballing a chart and knowing what is going on. Consider that this is the present EURUSD chart in the midst of a financial crisis and I let it speak for itself.

Next, I think we should look at some chart and practice this idea.

Practice.

Wick on the 30 pip bricks. 10 pip brick trend reversal, BWF and then entries on counter trend, trend line breaks.



So how do we manage trades like this?

Thanks Wab, please keep them coming.

Ha, I have seen this before. Its starting to come together now. Jaquemate explained the same thing (breaking the trend line) in his thread.

http://www.forexfactory.com/showthre...62#post7882462

WAB

A guy wrote in another thread....... that BW indicators were 50 years old and out of date and old fashioned... and I replied...... I have a whole portfolio of stategies based on those indicators.

And then I posted the portfolio numbers showing a success rate of 82%, I think there was 27 different strategies in the portfolio. No reply..

It is most worthwhile and prudent to apply BW to projects that involve your money!

Thanks WAB, for sharing your approaches.

daveM

It makes more and more sense.
I love renko but it seems one way love. Spent hundreds of hours looking at them life. They need constant attention and 5 minutes of rest can make 2 hours of hunting go to space.
What you show us is a very clear way of analysis that limits the necessity of attention. It helps to see if price is in a critical area or not. If it isn't - rest, if it is - load your trap and rest.

When you finally figure something that works do you keep it to yourself or share it? How about if you have several things that work?

Well, I have shared several things here: Trend Reversal entries, Counter Trend Line Entries and the BWF signal. None of these are really my own discoveries. Nor, I suspect, is using higher and lower brick frames to try and discern the overall trend. I don't really think there is too much that has been missed by the many keen minds that have studied charts. I have to give credit to Bill Williams for his material and I wish I had run across Clive Pakenham a lot earlier (thanks for that link mor707.)

As for Bill Williams ideas being old, the Law of Gravity is pretty old too and it still works very reliably.


I do think that while many people have found many great ways to enter trades (and close them) there has not been as much attention paid to managing trades. That is where I will take this discussion next.

When the dog finally catches a car - what to do with it becomes the all-important question?

So I would now like to introduce the concept of what I call FOREX trade management.
FOREX is an acronym and it stands for Flat, Oblique, Reward, Entry and Extension.

Before I start, if anyone is familiar with similar studies please give us links to look at them. What I propose here may not be unique or even original, but it is my explanation of what I do in my own terms. I hope that you find it useful and if it is an original approach allow me to claim it, before all the hucksters jump all over it and try to sell it.

"FOREX" trade management is my methodical approach to both the identification of a trading opportunity and management of any trade taken. It is price action based and evolves from the HH HL LL LH reversals and subsequent corrections that we have already studied and drawn E lines and counter trend lines on. I hope to make it very mechanical in nature, following rules each time and thereby reducing the emotional component of taking and managing a trade.


As always, lets begin with a chart example, one that has a reversal pattern, or in this case, two reversal patterns.




By now you should be able to identify the E lines where a HH HL LL LH trend reversal can take place and where it actually does. Entering a short trade on the Red E line is an acceptable strategy. We draw a flat (horizontal blue) line there and extend it to the right. When the LL fractal forms below the E line break we expect a LH fractal to form on what is now a count trend. We draw an oblique line (also blue) from the LL fractal to the LH fractal.
We are using Renko bars with wicks and we know a wick just about always forms on a Renko color change reversal pattern, so we can pretty much pick out that LH fractal as it forms by looking for a wick. Our oblique line joins the LL and LH fractals and while we wont always get his right until after it forms we will get good at it with practice and a little help from the AO.
We know indicators lag, so we need to give the AO a bit of time to catch up. (More on that in a minute.)

Next we construct the vertical component of the figure four. This is done by dropping a vertical line from the LH end of the Oblique line through the flat line. This is the reward line. The middle of the Reward Line must be on the Flat line as shown. This will graphically locate the reward that we hope to gain from this structure. (In this case the reward was 135 pips when the price target at the end of the reward line was hit.)

Now, back to the problem of the lagging AO, if we wait to enter our trade at the midpoint of the Oblique line, the AO has changed color. This is a confirmation of our strategy if you give credence to indicators.

By the time price has moved to the middle of the Oblique Line we have our Entry. A brick reversal pattern formed earlier and we enter at the 50% level as the AO confirms momentum. I left the Oblique line selected to show its midpoint and placed a dotted red line to the right of the midpoint, to show where the entry is achieved.

A stop is placed just above the top of the oblique LH fractal. (More Bill Williams stuff.)

The whole thing is done by drawing three lines on the chart, at the correct places, to make a figure four.
Orders, stops and take profit levels are intuitive after that.

We have a Flat an Oblique a Reward an Entry and an eXtension. (I have not discussed the extension yet. This is already a pretty big post.)

"FOREX."

Further to the right on the chart the process is repeated with a bullish trend reversal. Here we have an inverted figure four. Reward this time is 161 pips at the end of the vertical reward line. The price level was hit off the right hand side of the chart but I did not compress the chart to show this.

For now, there is a lot to digest here. Do some homework. Try it out on a lot of charts and see how it works. Strategy is next and coming up there is also a very neat dynamic tool to do this with.

Have fun.

Excellent post WAB thankyou!

Thanks Batavier.

Lots more info to come over the next few days - including the X.

Hallo Wab

Thank you for your explanations. This stuff is very helpfull .

Am I right or wrong in this picture? Its EURUSD

I just moved you to top of the class eurix. Same trade that I took and it has nearly reached the target now.
The AO on the 30 brick chart is still red, so it still has a good chance of forming an up fractal on the 10
pip bricks and going all the way to it.

This is also actually a good example to use the Teeth line for a trailing stop.

Isn't it nice when theory and practice actually cooperate? You made my day. Good work!

... and this is how that trade finished ...



Price just about hit the Reward level then pulled back. I took two lots, closing one at the Flat line to guarantee a profit.
I moved my stop to the Flat line for the second lot, locking it a profit on that lot. I mentioned that the Teeth line was a
good place to move a trailing type stop when nervous, but I didn't do it on this trade. If I had also been watching this trade,
I would have see a new E line form and that would definitely had me close the second lot. As it was I was not able to monitor
it and have to be satisfied with two lots closed at the Flat line.

A bullish, new, Flat line is shown with an HH fractal. Now we watch for the Oblique line to end on a down fractal draw an inverted
Four and repeat.

so I see in your picture, it´s not necessary that the price is under the teethline to go short., right?

today eurusd we got the first target and if the second lot run into the stop we are nearly at BE with this trade. and if we close the trade when price crosses the teethline we got a win trade.

do you use only 10 pip bricks or smaller ones too?

do you know how high your hitrate is on this system?

thank you for your effort.

Here is how I played the inverted four; which was the next reversal trade.

Once again you nailed it with your inverted Four eurix. Good job.



When price hit the Flat line it closed my first lot. I Moved the stop on the second lot up to protect it from losses and at that
point left it to its own devices. A one win, no loss possible, situation. As it turned out, that is what I got. One win at the Flat
line and a stop loss hit just above the 50% level.
In both of these trades, I was looking for a trend reversal. As we go along we will learn how to use the Four in other places.

Bear with me on the Teeth line and you will see how I use it. In both of the trades so far the Teeth line has not really been that useful.
It will make sense as we go along.

As for brick size, it works on any chart, not just Renko Charts. Renko is a lot easier though. A 10 pip brick size is my preference here as it
moves along at a nice pace for teaching purposes. With smaller brick sizes you will get Fours that give very small Flat line targets. As we
get into the extension aspect you will find that smaller Fours have their appeal. The basic FOREX trade is there but how it is used will depend
on each trader.

Think of a 1,2,3 or an A B C D or a Ross Hook or an Elliott Wave trader. They all basically trade the same thing based on different understanding
of the same chart. My Four is an attempt to make the trading process very visual and achieve comparable results to other proven methods. Is it
different, or does it overlap those other methods? Yes to both questions.

You will find your own comfort level and adapt how you use this.

Here are some order strategies to consider:

Early entry when the bricks change color this has the advantage of a small stop loss, but will be difficult to catch if the correction has more than one wave in it. It is best to avoid this depending on your risk aversion. If you are wrong, a smaller Four will result which can still be profitable but may get stopped out.
Enter at the 50% level of the Oblique - often has the advantage of a confirmation from the AO. Sometimes this entry is actually only slightly beyond the color change of a brick reversal in a very tight four. I prefer to see a bit of separation there but that is a matter of preference.
Enter at a 61.8% level instead of a 50% level. (Or enter at both if you are really aggressive.) The 61.8% entry is built in to the Extension tool. Along with the extended target, X, at 161.8%
Logic behind taking multiple trades:
Always T.P. on one lot at the Flat then move your stop up to the entry level plus a pip or two. This covers costs and generates a secured profit. This makes the second lot a free trade and guarantees a profit if the Reward Target is not reached. This is a very important strategy. The object is to take a profit and protect your account first and then try for the larger profit if/when the market reaches the Reward level.
Set your target just a bit before the Reward level. If a lot of people ate looking for a double it is good psychology to exit just before the rush.
If price action is a concern trail a stop a pip or so above the Teeth line. Anytime you get into a trade with a small four and price is quite well removed from the Teeth line, it can move along way before it moves back into the Teeth line.

As for success rate, you will just about always hit the Flat line if you have read the trend correctly and trade the trend reversal patterns, however there iare more situations that we have yet to discuss, where the four can be applied.

In my next post I am going to give you a neat little tool that really makes the study of Fours a bit easier - as if it wasn't easy enough already.

Okay, as promised:

There is a neat little tool that already exists in MT4, the Fibonacci Expansion Tool. Just change the settings like this.



Now you can use the Extension Tool to draw a Four, or an inverted Four, on a chart. It does have the advantage of displaying a 61.8%
early entry level and the 1.618 Extension - the X of the FOREX acronym.

Personally, I find the Four easy enough to draw with trend lines but most traders enjoy any shortcuts that are available
and this displays the labels and prices that are important.

Some examples of Fours that are not based on trend reversals:

I call these Correctional Fours. These are based on corrections against the trend. The price crosses the
Teeth line and forms a fractal. As long as the AO is below the zero line these work well.
(Of course you reverse that rule for Bullish Fours, where you will want the AO above the zero line.)



Each Four shows the pips it wins on one lot, with all calculations from the 50% level. Trades that have an
X are ones that went to the extension level at 161.8%

Each trade at least made the Flat line.

Look for a trend reversal. trade it and then trade the counter trends that come along. Keep adjusting the
potential E line and then go the other way.