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Can You Predict More Than Just a Pattern?

Harmonic Patterns can reveal potential market turning points—but recognizing a pattern is only the beginning.

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Explore the Key Concepts of Harmonic Pattern Book
Pattern Completion Interval

https://algotrading-investment.com/2020/06/01/the-concept-behind-the-pattern-completion-interval/

Trading Setup with PCI

https://algotrading-investment.com/2020/06/01/trading-setup-with-pattern-completion-interval/

Understanding Turning Points

https://algotrading-investment.com/2020/06/01/insignificant-turning-point-local-turning-point-and-global-turning-point/

Trading & Investment Risk

https://algotrading-investment.com/2020/06/01/various-risks-in-trading-and-investment/

Rolling Ball Effect

https://algotrading-investment.com/2020/06/01/rolling-ball-effect-and-harmonic-pattern-trading/

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https://algotradinginvestment.wordpress.com/2026/08/15/harmonic-pattern-book-you-are-looking-for/

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https://algotradinginvestment.wordpress.com/2026/08/07/23723/

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Human Behavioral Aspects of Support and Resistance


In the context of Forex, support and resistance have different meanings compared to their use in human geometry recognition. In Forex trading, these terms refer to price levels on a chart, but there might be some conceptual crossover when considering how traders react to these levels, which could potentially be analyzed through human behavior and geometry recognition. Here’s how these concepts apply:

1. Support and Resistance in Forex Trading
Support:
Definition: A support level in Forex is a price point where a currency pair tends to stop falling. It is often seen as a “floor” that price does not easily break below. Traders look for these levels to identify where buying interest is strong enough to prevent further declines.
Behavioral Aspect: When a currency reaches a support level, traders may react by buying, expecting the price to rebound.
Resistance:
Definition: A resistance level is a price point where a currency pair tends to stop rising. It acts like a “ceiling” that the price struggles to break above. Traders look at these levels to identify where selling pressure is strong enough to prevent further gains.
Behavioral Aspect: When a currency reaches a resistance level, traders might react by selling, expecting the price to fall back down.
2. Geometry Recognition of Human Behavior in Trading
Human Reactions to Support and Resistance:
The way traders react to these key price levels could potentially be analyzed using geometry recognition, which is more about understanding physical movements and emotional cues.
Facial and Posture Recognition: Analyzing the physical cues of traders, such as tension in facial muscles or body posture, might indicate their confidence or hesitation when prices approach support or resistance. For instance, traders may lean in or sit up straighter when a price reaches a critical level, signaling attention and anticipation.
Eye Movement: Traders’ eye movements could be tracked to see how closely they monitor price action near support and resistance. Rapid eye movements might indicate scanning for quick opportunities, while focused gazes may show intense analysis at these critical levels.
Use of Technology:
Machine Learning & AI: In trading firms, AI might be employed to recognize patterns not just on the charts but also in trader behavior, which could include reading physical cues. By identifying how traders physically react to key levels, algorithms might make predictions about market sentiment.
Behavioral Finance: This field studies how psychological factors influence trading decisions. Combining this with geometry recognition could lead to insights on how human emotions manifest during trading, especially around significant price points like support and resistance.
Practical Applications in Trading
Automated Trading Systems: Advanced trading algorithms could incorporate not just price data but also human behavioral data to make more accurate predictions. If physical cues suggest heightened anxiety or confidence, it could be an additional input for trading decisions.
Trader Performance Analysis: Geometry recognition of a trader’s movements and expressions could be used to understand how they handle stress and make decisions under pressure, especially when trading around key price levels. This could lead to improved training programs.
In conclusion, while support and resistance in Forex refer specifically to price action, there’s an interesting potential for combining these concepts with human geometry recognition. Understanding how traders physically react to these key levels could enhance trading strategies, risk management, and even automated trading systems.


https://algotrading-investment.com/2020/06/04/support-and-resistance/

Horizontal Support and Resistance


Support and resistance techniques are one of the most popular trading strategy for many day traders. Support is the price level at which buying is stronger than selling. Hence, the declining of the price below the support levels is often refused. Typically, support level is located below the current market price. Likewise, resistance is the price level at which selling is stronger than buying. Hence, the rising of the price above the resistance level is often refused. Typically, the resistance level is located above the current market price of the instrument. In fact, several support and resistance techniques are the direct pattern recognition techniques to deal with the equilibrium fractal waves in the price series. However, trader should note that not all the support resistance techniques are the valid tool to deal with the equilibrium fractal waves. For example, the pivot levels derived from the pivot analysis can be used as support and resistance for your trading. In fact, many textbook will introduce the pivot analysis as the kind of the support and resistance tool. However, consider how to derive the pivot levels from the standard pivot calculation equations below:

Pivot Point (P) = (High + Low + Close)/3
Support 1 (S1) = (P x 2) – High
Support 2 (S2) = P – (High – Low)
Resistance 1 (R1) = (P x 2) – Low
Resistance 2 (R2) = P + (High – Low)
, where High, Low and Close are the High, Low and Close of the previous candle bar.


As you can see, the median price, Pivot Point, of the previous candle bar is calculated first. Then the median price is used to derive the support and resistance 1 and 2. We can clearly see that this pivot analysis have nothing to do with any pattern recognition from your chart. It rather uses the concept of averaging and volatility from the centre of the pivot point. One can extend the standard pivot analysis using Fibonacci ratio. However, the extended pivot analysis is still not the direct pattern recognition either.


When we say the support and resistance as in the direct pattern recognition, we are talking about creating support and resistance levels by connecting peak to peak and by connecting trough to trough in your chart. For example, Figure 2-1 shows the support example on GBPUSD H4 timeframe. By connecting three troughs in the chart, we could identify the important support level and we can project the level for the next point for our trading. When the price was approaching to the support level fourth time, the price made a reversal (turning point) movement on the support level. This is what happened at least on the surface. However, what is exactly going on behind the scene? In fact, the support levels are the manifest of the propagation of the Equilibrium Fractal Wave through the price. To demonstrate the propagation of the Equilibrium Fractal Wave, we have added the Zig Zag line on each trough in Figure 2-1. When the price touches the support level each time, new triangle is added to the price wave. The price can continue like this making few more touches on the support level. Sometimes, it is common to see the support with five or more touches. In general, when the vertexes of several non-overlapping triangles are aligned through a straight line below the market price, the straight line becomes the support level.

In our first support example (Figure 2-1), we have visualized the reversal price action around the support. However, it is possible that we can have the support predicting the breakout movement instead of the reversal. For example, the USDJPY in Figure 2-2 penetrated through the support making the breakout on its fourth touch. When the price breakout below the support level, we can see that the size of the last triangle was transformed to be bigger. This is the typical price action when the new equilibrium source is introduced to the market.




Figure 2-1: Support example as in the direct pattern recognition on GBPUSD H4 timeframe.




Figure 2-2: Support Example as in the direct pattern recognition on USDJPY H4 timeframe.


Now let us have a look at the resistance example. As before, we can identify the important resistance levels by connecting peak to peak. In Figure 2-3, we have connected three peaks to identify the resistance level. The price made a reversal (turning point) in its fourth touch on the resistance level. As in the support level, the resistance levels are formed when the vertexes of the several non-overlapping triangles are aligned near the same horizontal level. In this time, the horizontal levels will be located above the market price. As in the support example, it is possible to have a breakout through the resistance too. For example, the EURUSD in Figure 2-4 made a clean breakout on its seventh touch on the resistance level. In this example, the last triangle was transformed in its size as in the support example of Figure 2-2. By summarizing both support and resistances examples, we can identify four different horizontal support and resistance patterns for your trading as shown in Table 2-1.




Figure 2-3: Resistance example as in the direct pattern recognition on GBPUSD H4 timeframe.




Figure 2-4: Resistance example as in the direct pattern recognition on EURUSD H4 timeframe.


Support and resistance Price Action Direction Example
Horizontal Support Reversal Buy Figure 2-1
Horizontal Support Breakout Sell Figure 2-2
Horizontal Resistance Reversal Sell Figure 2-3
Horizontal Resistance Breakout Buy Figure 2-4

Table 2-1: List of horizontal support and resistance patterns for your trading.



What is the main catchy behind the above support and resistance examples for our trading? In the practical trading with support and resistance levels, we are betting on the transformation of the last triangle, equilibrium fractal wave in fact. In another words, we are betting on the size of the last triangle. When you are trading with support and resistance levels, you are literally asking the questions like: Would the last triangle will transform in its size to make the breakout move? Or Would the last triangle will not transform in its size to make the reversal move? In our practical trading, how the size of the last triangle will end is the matter for our profit. If we are not using any other supplementary techniques to trade, then we can set a threshold level to trigger for buy and sell entry as shown in Figure 2-5. Y Buy and Y Sell in Figure 2-5 is the price level to trigger the buy and sell entry respectively. If the last triangle is transformed in its size, then the price will penetrate the threshold level for sell. If the last triangle is not transformed in its size, then the price will reverse back through the threshold level for buy. To measure the distance Y Buy and Y Sell, we can use few different methods. Firstly, we can define Y Buy and Y Sell in proportion of the height of the last triangle (Y Height). For example, Y Buy and Y Sell can be expressed using the following formula for Figure 2-5:

Y Buy = Proportion (%) x Y Height and

Y Sell = Proportion (%) x Y Height, where Y Height = the height of the last triangle and Proportion is fraction of the height of the last triangle expressed in percentage.


The typical proportion to calculate Y Buy and Y Sell can range from 5% to 20%. When you choose the proportion, you might have to consider few points. If you choose to use small proportion, then you might experience the false signal frequently. In addition, you might be suffering from the price pull back due to the tight stop loss. If you choose to use large proportion, then you might be reducing your reward/risk ratio. Therefore, you have to win more frequently to maintain your profits.

Another method to set the buy and sell threshold level is using the Fibonacci ratio. Again, the Fibonacci threshold level will be calculated in terms of the height of the last triangle. For example, Y Buy and Y Sell can be expressed using the following formula for Figure 2-5:

Y Buy = Fibonacci Ratio x Y Height and

Y Sell = Fibonacci Ratio x Y Height, where Y Height = the height of the last triangle and Fibonacci ratio include the typical Fibonacci ratios like 0.236, 0.382, 0.500, and 0.618, etc.


Both the proportional threshold method and the Fibonacci threshold method are valid for your entry. You can pick up one between them according to your own preferences. Fibonacci threshold method tends to provide the entry with greater distance from the stop. Hence, it should be noted that the Fibonacci threshold method could reduce your rewards/risk ratio. However, if the size of the last triangle is too small, then you might prefer to use the Fibonacci threshold method because too tight stop loss can be hunted too easily. You can set your stop loss at the support or resistance level for your trading. However, it is possible that the price can come back to the support or resistance level for retesting. It is sensible to place your stop slightly greater than the support and resistance level. Hence, the support or resistance level can be only minimum stop for your trading. You should always set your stop loss slightly greater than the minimum stop level.


https://algotrading-investment.com/2020/06/04/horizontal-support-and-resistance/

Diagonal Support and Resistance


In the financial market, we can observe the diagonal price patterns frequently. Diagonal support and resistance are the typical price patterns we can observe as the results of the combined effect of Equilibrium and Fractal Wave process. Diagonal support and resistance are not different from the horizontal support and resistance. When the connected peaks and troughs provide the diagonal slope rather than the horizontal line, then that slope can be considered as the diagonal support and resistance. However, there can be more variations comparing to the horizontal case. Firstly, we can have the ascending diagonal support and resistance. Secondly, we can also have the descending diagonal support and resistance. For your convenience, we have listed all the possible diagonal support and resistance patterns in Table 2-2. We have also listed the corresponding example for each pattern from Figure 2-6 to Figure 2-13. How to trade diagonal support and resistance levels are the same as the horizontal support and resistance. You can apply the proportional threshold method and the Fibonacci threshold method for your entry for the case of diagonal support and resistance too. The trading example is shown in Figure 2-14. How to calculate the threshold level for Y Buy and Y Sell are identical to the case of horizontal support and resistance. As in the horizontal support and resistance, it is sensible to set your stop loss level greater than the minimum stop level.

Support and resistance Price Action Direction Example
Ascending Diagonal Support Reversal Buy Figure 2-6
Ascending Diagonal Support Breakout Sell Figure 2-7
Ascending Diagonal Resistance Reversal Sell Figure 2-8
Ascending Diagonal Resistance Breakout Buy Figure 2-9
Descending Diagonal Support Reversal Buy Figure 2-10
Descending Diagonal Support Breakout Sell Figure 2-11
Descending Diagonal Resistance Reversal Sell Figure 2-12
Descending Diagonal Resistance Breakout Buy Figure 2-13
Table 2-2: List of diagonal support and resistance patterns for your trading.



Figure 2-6: Support example as in the direct pattern recognition on EURUSD H4 timeframe.



Figure 2-7: Support example as in the direct pattern recognition on EURUSD H4 timeframe.



Figure 2-8: Resistance example as in the direct pattern recognition on EURUSD H4 timeframe.



Figure 2-9: Resistance example as in the direct pattern recognition on EURUSD D1 timeframe.



Figure 2-10: Support example as in the direct pattern recognition on EURUSD H4 Timeframe.



Figure 2-11: Support example as in the direct pattern recognition on EURUSD H4 Timeframe.



Figure 2-12: Resistance example as in the direct pattern recognition on EURUSD H4 timeframe.



Figure 2-13: Resistance example as in the direct pattern recognition on GBPUSD H4 timeframe.



Figure 2-14: Resistance Trading example as in the direct pattern recognition on GBPUSD H4 timeframe.


https://algotrading-investment.com/2020/06/04/diagonal-support-and-resistance/

Horizontal and Diagonal Support Resistance Explained


In Forex trading, understanding and correctly identifying support and resistance levels is crucial for making informed trading decisions. These levels help traders anticipate where the price might encounter obstacles and potentially reverse or break through, influencing entry and exit points in trades. Support and resistance can be either horizontal or diagonal, each type playing a significant role in technical analysis.


1. Horizontal Support and Resistance
Horizontal support and resistance levels are the most common types used by traders. These levels are drawn across historical price points that have repeatedly acted as a barrier to price movement, either on the downside (support) or the upside (resistance).

Horizontal Support:
Definition: A horizontal support level is a price level where the price tends to stop falling and reverse direction. It represents a concentration of buying interest strong enough to prevent the price from moving lower.
Characteristics:
Price Floor: Acts like a floor preventing the price from dropping further.
Multiple Touches: The more times a price level is tested without being breached, the stronger it is considered as support.
Psychological Levels: These are often found at round numbers (e.g., 1.2000 on the EUR/USD pair), which tend to be psychologically significant to traders.
Horizontal Resistance:
Definition: A horizontal resistance level is a price level where the price tends to stop rising and reverse direction. It represents a concentration of selling interest strong enough to prevent the price from moving higher.
Characteristics:
Price Ceiling: Acts like a ceiling preventing the price from moving higher.
Reversal Points: Like support, multiple touches at a resistance level without breaching it signify its strength.
Psychological Resistance: Resistance levels can also be at psychological round numbers, often where traders set sell orders or take profits.
Trading Strategies with Horizontal Support and Resistance:
Range Trading: In a ranging market where the price moves between horizontal support and resistance levels, traders can buy at support and sell at resistance.
Breakout Trading: When the price breaks above a resistance level or below a support level, it can signal the start of a new trend. Traders might enter a position in the direction of the breakout.
False Breakouts: Traders can also anticipate false breakouts where the price temporarily breaches support or resistance but then quickly returns, indicating a failed breakout and potential reversal.


2. Diagonal Support and Resistance

Diagonal support and resistance, often referred to as trendlines, are sloped lines that represent dynamic levels of support and resistance. Unlike horizontal levels that stay constant, diagonal lines move in the direction of the trend.

Diagonal Support (Uptrend Line):
Definition: A diagonal support level is a sloping line that is drawn along a series of ascending lows in an uptrend. It acts as a support level where the price tends to bounce higher.
Characteristics:
Trend Indicator: Diagonal support indicates an uptrend, with higher lows suggesting increased buying interest at higher price levels over time.
Line of Ascending Lows: Drawn by connecting at least two lows in an uptrend; more points of contact strengthen the trendline.
Dynamic Support: As it slopes upwards, the support level rises over time, indicating bullish momentum.
Diagonal Resistance (Downtrend Line):
Definition: A diagonal resistance level is a sloping line that is drawn along a series of descending highs in a downtrend. It acts as a resistance level where the price tends to reverse lower.
Characteristics:
Trend Indicator: Diagonal resistance indicates a downtrend, with lower highs suggesting decreased buying interest and increased selling pressure at lower price levels.
Line of Descending Highs: Drawn by connecting at least two highs in a downtrend; more points of contact strengthen the trendline.
Dynamic Resistance: As it slopes downwards, the resistance level falls over time, indicating bearish momentum.
Trading Strategies with Diagonal Support and Resistance:
Trend Following: Traders might enter long positions when the price bounces off a diagonal support line in an uptrend, or enter short positions when the price reverses down from a diagonal resistance line in a downtrend.
Breakout Strategy: A break above diagonal resistance in a downtrend or below diagonal support in an uptrend might indicate a trend reversal or acceleration.
Retest Strategy: After a breakout of a diagonal trendline, the price often retests the trendline, now acting as a support or resistance. This can provide a secondary entry point for traders.


3. Combining Horizontal and Diagonal Support and Resistance

Confluence Zones: When horizontal and diagonal support or resistance levels converge at a similar price point, it forms a confluence zone. These areas are considered stronger because they combine two different types of support/resistance, making them key levels to watch for potential reversals or breakouts.
Example Strategy: If the price is near a horizontal support level that aligns with a diagonal support line (uptrend line), this could be a strong buying signal as it suggests a stronger support zone.


https://algotrading-investment.com/2020/06/04/identification-of-support-and-resistance-with-the-template-and-pattern-approach/

Practical Trading with Equilibrium Fractal Wave (EFW) Channel


Trading with the EFW channel is almost identical to the support and resistance trading. The main trading principle is that we are betting on the potential size of the equilibrium fractal wave. If the equilibrium fractal wave does not extend, the price will make the reversal movement. If the equilibrium fractal wave extends due to any surprise in the market, then the price will likely to show the breakout movement. To catch either reversal or breakout move, we can apply the threshold approach again from the concept of support and resistance trading in the previous chapter as shown in Figure 3-17 and Figure 3-18. Figure 3-17 shows the trading setup for the bearish turning point. Figure 3-18 shows the trading setup for the strong bullish momentum with the upwards EFW Channel. Trader can use the proportional approach to execute buy and sell. Since we are dealing with angle, it is much easier to use the proportional approach. To calculate the trigger level for buy and sell, we can use the same formula as before:

Y Buy = Proportion (%) x Y Height and

Y Sell = Proportion (%) x Y Height, where Y Height = the height of the channel and Proportion is fraction of the height of the channel expressed in percentage.

Some proportions you can use include 20% and 30% for your trigger level. You can even use greater proportion like 50% if you wish. The upper and lower channel lines can be used as the minimum stop loss level. To avoid the tight stop loss, you should always have the greater stop loss size than the minimum stop loss level. You can set the take profit according to your preferred rewards/risk level. With the EFW channel, it is possible to achieve Reward/Risk ratio greater than 3. We also show some trading examples in Figure 3-19, 2-20, 2-21 and 2-22.

Figure 3-17: EFW Upwards Channel trading setup for the bearish turning point.

Figure 3-18: EFW Upwards Channel trading setup for strong bullish momentum.

Figure 3-19: EFW Upwards channel sell trading setup on EURUSD D1 timeframe.


Figure 3-20: EFW Upwards channel buy trading setup on EURUSD H4 timeframe.

Figure 3-21: EFW Downwards channel buy trading setup on EURUSD D1 timeframe.

Figure 3-22: EFW Downwards channel sell trading setup on EURUSD D1 timeframe.


Some More Tips about Fractal Wave Channel

Using a Fractal Wave Channel in Forex trading involves applying the broader idea of fractals and wave analysis to identify and trade within price channels. This approach focuses on the fractal nature of market movements and the identification of wave patterns.

Key Concepts of Fractal Wave Channel
1. Understanding Market Fractality
Fractals in Nature: In the context of trading, fractals refer to the self-similar patterns that repeat at different scales within the market. These patterns can be seen on various timeframes and reflect the underlying market structure.
Wave Patterns: Price movements are composed of waves that can be analyzed at different levels or degrees. These waves are fractal in nature, meaning smaller waves are part of larger waves, and this repetition can be exploited to identify trends and trading opportunities.
2. Identifying Wave Patterns
Impulse Waves: Strong directional movements that typically consist of five sub-waves. These indicate the direction of the primary trend.
Corrective Waves: Counter-trend movements usually composed of three sub-waves. They represent pauses or corrections within the overall trend.
Connecting Waves: By identifying key turning points in these waves, traders can create channels that represent the boundaries of price movement.
3. Drawing the Fractal Wave Channel
Step 1: Identify Key Highs and Lows: Look for significant turning points in the market where price changes direction, forming peaks (highs) and troughs (lows). These points will help in constructing the channel.
Step 2: Connect Peaks and Troughs: Draw a line connecting the significant peaks (for the upper channel) and a line connecting the significant troughs (for the lower channel). This forms the Fractal Wave Channel.
Step 3: Extend the Channel: Project these lines forward to form a channel within which you expect the price to oscillate.


https://algotrading-investment.com/2020/06/04/practical-trading-with-equilibrium-fractal-wave-efw-channel/

Superimposed Equilibrium Fractal Waves


Third characteristic of equilibrium fractal wave is that smaller equilibrium fractal waves can combine to form a bigger equilibrium fractal wave (superimposed). This third characteristic is often used by a professional trader to improve the predictability of the financial market. For example, instead of puzzling with a set of small equilibrium fractal waves, it is much more accurate to puzzle with both small and big equilibrium fractal waves together to predict the market direction. Now we show some examples of our reversal prediction using this superimposed equilibrium fractal waves. In Figure 3-23 and Figure 3-24, a large Equilibrium fractal wave is overlapping with a small equilibrium fractal wave. We can make the bullish reversal prediction after the last candle is completed. Making the prediction based on the two Equilibrium fractal waves can increase the probability of winning marginally over just using one equilibrium fractal wave.



Figure 3-23: Superimposed Equilibrium fractal wave for bullish reversal trading setup (EURUSD D1).



Figure 3-24: Superimposed Equilibrium fractal wave for bullish reversal trading setup (EURUSD H1).

Likewise, we can use these superimposed equilibrium fractal waves to make the bearish reversal prediction too as shown in Figure 3-25 and Figure 3-26. You can even use three or four equilibrium fractal waves for your prediction. However, the superimposed patterns with three or four equilibrium fractal waves are rare. If they do appears then they can provide a good trading opportunity.



Figure 3-25: Superimposed Equilibrium fractal wave for bearish reversal trading setup (EURUSD H1).



Figure 3-26: Superimposed Equilibrium fractal wave for bearish reversal trading setup (EURUSD M15).

Trader should not assume that he could predict the reversal every time. Increased probability does not mean that you are guaranteed to be right every time. Based on the second characteristic of Equilibrium fractal wave, extension, the price can still penetrate these superimposed equilibrium fractal waves for the breakout opportunities. When they do, they can penetrate the superimposed level with even higher energy than the level projected by single equilibrium fractal wave. To trade with the superimposed level, you have to project the shape ratios from several equilibrium fractal waves in advance. Once you can identify the overlapping level between several Equilibrium fractal waves, you can trade for the breakout opportunity. When you trade the breakout opportunity, you can use the idea of trigger level we taught you before in the support and resistance trading.


https://algotrading-investment.com/2020/06/04/superimposed-equilibrium-fractal-waves/

Introduction to the Wave Principle


Ralph Nelson Elliott was one of very first person who believed that he could predict the stock market by studying the repeating price patterns in the price series. The Wave Principle from Elliott states that the wave patterns in different scales are repeating and superimposing on each other forming complex wave patterns. If harmonic pattern directly focuses on the short patterns made up from five points, the Wave Principle, developed by Ralph Nelson Elliott, describe how the financial market evolve to meet the equilibrium with the repeating wave patterns, equilibrium fractal waves. The advantage of Elliott Wave theory is that it is comprehensive as the theory provides multiple trading entries on different market conditions. With Elliott Wave theory, traders can perform both momentum trading and mean reversion trading. The disadvantage of Elliott Wave theory is that it is more complex comparing to other trading techniques. In addition, there are still some loose ends in detecting Elliott wave patterns. For this reason, many traders heavily criticize the lack of scientific methods of counting Elliott Waves.

Elliott Wave theory received good attention from many traders and investors for several decades. Elliott Wave theory is a useful technique to deal with the financial market with the dominating Equilibrium Fractal-Wave process. For the financial market with strong Equilibrium Wave process (2nd, 3rd and 4th columns in the Price Pattern Table), traders must use alternative methodology over Elliott Wave techniques because Elliott Wave Theory is not meant to deal with Wave process. Seasonality or other cyclic fluctuations can be dealt better with other techniques. For example, Seasonal Exponential Smoothing, Fourier Transform, Principal Component Analysis or Wavelet Transformation might do better job for such a case. Some literature review and empirical research can yield helpful insight on which market trader can trade better with Elliott Wave Theory. In our Book, we will introduce the fundamentals of the Wave Principle. At the same time, we will introduce the template and pattern approach towards more scientific wave counting for traders.

The Wave Principle states that the crowd or social behaviour follows a certain wave patterns repeating themselves. The Wave Principle identifies two wave patterns. They are impulse and corrective wave. Often, the term impulse wave is interchangeably used with the motive wave. Two terms are identical. Both motive and impulse wave progress during the main trend phase whereas the corrective wave progress during the corrective phase against the main trend. In general, the Impulse Wave has a five-wave structure, while the Corrective Wave have a three-wave structure (Figure 5-1). It is important to understand that these wave structures can override on smaller wave structure to form greater wave cycle (Figure 5-2). Elliott Wave theory is useful in identifying both trend market and correction market. As the Elliott Wave Theory already assumes that price progresses in the Fractal-Wave form, they do not suffer from lagging of price like the smoothing algorithm based technical indicators do.


https://algotrading-investment.com/2020/06/04/introduction-to-the-wave-principle/

Scientific Wave Counting with the Template and Pattern Approach


Elliott Wave theory can be beneficial to predict the market movement if they are used correctly. Junior traders are often fear to use Elliott Wave because their complexity. From my experience, Elliott wave is not a rocket science, anyone can probably learn how to use the technique with some commitment. However, not all the book and educational materials will teach them in the scientific way. If we are just looking at the three rules from the original Wave principle only, then there are definitely some rooms where subjective judgement can play in our wave counting. This makes starters to give up the Elliott Wave practice too quickly. Fortunately, there are some additional tools to overcome the subjectivity in our wave counting. First tool but the most important tool is definitely the three wave rules from the original Wave Principle. They can be used as the most important guideline for the wave counting. Below we describe the three rules:

Rule 1: Wave 2 can never retrace more than 100 percent of wave 1.

Rule 2: Wave 4 may never end in the price territory of wave 1.

Rule 3: Out of the three impulse waves (i.e. wave 1, 3 and 5), wave 3 can never the shortest.

Second tool is the Fibonacci ratio. As in the Harmonic pattern detection, Fibonacci ratio can play an important role in our wave counting because they describe the wavelength of each wave in regards to their neighbouring wave. For example, the following relationship is often found among the five wave of the impulse wave. Depending on which wave is extended among wave one, three and five, the Fibonacci ratios are different. Most of time, the extension of wave 3 is most frequently observed in the real world trading.



Figure 5-3: Fibonacci relationship of impulse wave structure.

Unless wave 1 is extended, wave 4 often divides five impulse waves into the Golden Section. If the wave 5 is not extended, the price range from the starting point of wave 1 to the ending point of wave 4 make up 61.8% of the overall height of the impulse wave. If wave 5 is extended, then the price range from the starting point of wave 1 to the ending point of wave 4 make up 38.2% of the overall height of the impulse wave. These two rules are rough guideline. Sometime, trader can observe some cases where these two rules are not hold true. Personally, I normally place the Fibonacci ratio relationship in Figure 5-3 before this Golden Section rule. However, the priority between these two rules might depend on the preference of traders.



Figure 5-4: Golden Section division rule with wave 4.

For the case of the three waves in the corrective wave, typical Fibonacci ratios are shown in Figure 5-5. The corrective wave is often retrace 61.8% or 32.8% against the size of previous impulse wave. In general, Elliott suggested that corrective wave 2 and wave 4 have the alternating relationship. If wave 2 is simple, then wave 4 is complex. Likewise, if wave 2 is complex, then wave 4 is simple. A “Simple” correction means only one wave structure whereas a “Complex” correction means three corrective wave structures. Furthermore, if wave 2 is sharp correction, then wave 4 can be sideways correction. Likewise, if wave 2 is sideways correction, then wave 4 can be sharp correction.


https://algotrading-investment.com/2020/06/04/scientific-wave-counting-with-the-template-and-pattern-approach/

Some More Tips about Impulse Wave Structural Score and Corrective Wave Structural Score


In Elliott Wave Theory, the Impulse Wave Structural Score (IWSS) and the Corrective Wave Structural Score (CWSS) are advanced analytical tools that help traders evaluate the quality and reliability of impulsive and corrective wave patterns. These scores aim to quantify the structural integrity of the waves, aiding in accurate wave identification and forecasting.

Impulse Wave Structural Score (IWSS)


Concept
The IWSS measures the structural integrity and adherence of an impulsive wave (waves 1, 3, 5) to Elliott Wave principles. It assesses how well the wave sequence fits the characteristics of a typical impulsive wave.

Components
Wave Formation: Consistency with the 5-wave structure (1, 2, 3, 4, 5).
Wave Relationships: Fibonacci relationships between waves, especially between Wave 2 and Wave 4 retracements and Wave 1, 3, and 5 extensions.
Wave Proportions: Proportionality and symmetry among waves.
Wave Behavior: Price action and momentum characteristics typical of impulsive waves.
Calculation
The IWSS can be calculated by scoring each component on a scale (e.g., 0 to 10) and then combining these scores to derive a total score. Higher scores indicate a stronger and more reliable impulsive wave structure.

Example Scoring Criteria:

Wave Formation:

Perfect 5-wave structure
Minor deviations
Significant deviations

Wave Relationships:

Close adherence to Fibonacci levels
Moderate adherence
Poor adherence
Wave Proportions:
Well-proportioned waves
Moderately proportioned waves
Poorly proportioned waves
Wave Behavior:
Strong momentum and clear price action
Moderate momentum and price action
Weak momentum and unclear price action

Application

High IWSS: Indicates a strong and reliable impulsive wave, suitable for trading continuation strategies.
Low IWSS: Suggests potential wave misidentification or weak impulsive structure, warranting caution or re-evaluation.


Corrective Wave Structural Score (CWSS)

Concept

The CWSS measures the structural integrity of a corrective wave (waves A, B, C) within the Elliott Wave framework. It evaluates how well the wave sequence conforms to typical corrective wave patterns.

Components

Wave Formation: Adherence to the 3-wave structure (A, B, C).
Wave Relationships: Fibonacci relationships and retracement levels.
Wave Patterns: Common corrective patterns (e.g., zigzag, flat, triangle).
Wave Behavior: Price action and momentum characteristics typical of corrective waves.

Calculation

Similar to IWSS, the CWSS can be calculated by scoring each component and deriving a total score. Higher scores indicate a stronger and more reliable corrective wave structure.


Example Scoring Criteria:


Wave Formation:

Perfect 3-wave structure
Minor deviations
Significant deviations
Wave Relationships:
Close adherence to Fibonacci retracements
Moderate adherence
Poor adherence
Wave Patterns:
Well-defined corrective patterns
Moderately defined patterns
Poorly defined patterns


Wave Behavior:

Typical corrective behavior
Moderate corrective behavior
Atypical corrective behavior

Application

High CWSS: Indicates a strong and reliable corrective wave, suitable for trading reversal or continuation strategies.
Low CWSS: Suggests potential wave misidentification or weak corrective structure, warranting caution or re-evaluation.


https://algotrading-investment.com/2020/06/04/impulse-wave-structural-score-and-corrective-wave-structural-score/

Channelling Techniques with Elliott Wave


During the development of the Wave Principle, Elliott suggested that channelling technique could be useful devise to anticipate the future wave movement. Elliott developed the three channelling techniques when Wave 2, 3 and 4 is completed respectively. We explain the steps of drawing the channels from the case of wave 2 completion to wave 4 completion.

When wave 2 is completed, trader can draw the first upper channel line and base line to anticipate the location of wave 3 (Figure 5-14). Drawing upper channel line is simple. Firstly, draw the base line by connecting the starting point of wave 1 and the ending point of wave 2. Then draw the parallel line to the first base line passing through the ending point of wave 1. Elliott suggested that wave 3 can be completed near the first upper channel line. Practically speaking, this upper channel line provides only the rough guideline for the location of the wave 3. Wave 3 can be completed below or above this upper channel line.

When wave 3 is completed, we can draw second upper channel line and base line to anticipate wave 4 (Figure 5-15). Firstly, draw second upper channel line by connecting the ending point of wave 1 and the starting point of wave 3. Then draw second base line parallel to the new upper channel line passing through the ending point of wave 2. The second base line can be used to anticipate the rough location of wave 4.

When wave 4 is completed, we can draw the final base line and upper channel line to anticipate the rough location of wave 5 (Figure 5-16). Firstly, draw new base line by connecting the ending point of wave 2 and wave 4. Then draw the final upper channel line parallel to the final base line passing through the starting point of wave 3. With the new upper channel line, trader can anticipate the rough location of wave 5.



Figure 5-14: Drawing base line and upper channel line when wave 2 is completed.



Figure 5-15: Drawing base line and upper channel line when wave 3 is completed.



Figure 5-16: Drawing base line and upper channel line when wave 4 is completed.



Some More Tips about Channelling Techniques with Elliott Wave


Channelling techniques with Elliott Wave in forex trading involve using trend channels to help identify and confirm the wave structures, target potential price movements, and manage trades more effectively. This method enhances the understanding and application of Elliott Wave Theory by providing visual boundaries within which the waves operate.

Elliott Wave Theory Recap

Basic Structure
Impulsive Waves:
Consist of five sub-waves (labeled 1, 2, 3, 4, 5) that move in the direction of the primary trend.
Corrective Waves:
Consist of three sub-waves (labeled A, B, C) that move against the primary trend.
Principles
Wave 1, 3, and 5: Move in the direction of the trend.
Wave 2 and 4: Are corrective and move against the trend.
Wave A, B, and C: Form the corrective phase following the impulsive wave.
Channelling Techniques
Concept
Channelling techniques involve drawing parallel lines (channels) around price movements to help identify the boundaries within which Elliott Waves develop. These channels help traders visualize the wave structure and set potential targets and stop-loss levels.

Types of Channels
Standard Channels:
Drawn by connecting the ends of impulse waves and extending them forward.
Base Channels:
Constructed at the start of a new trend by connecting the beginning of Wave 1 and the end of Wave 2 and projecting a parallel line from the end of Wave 1.
Acceleration Channels:
Used when the trend accelerates, drawn by connecting the end of Wave 2 and Wave 4 and projecting a parallel line from the end of Wave 1.
Deceleration Channels:
Used when the trend decelerates, drawn by connecting the end of Wave 3 and Wave 5 and projecting a parallel line from the end of Wave 4.


https://algotrading-investment.com/2020/06/04/channelling-technique-elliott-wave/

Some Useful Articles about understanding Equilibrium Fractal Wave

If you want to become a successful trader, understanding Fractal Wave is a must. Below articles explains the general characteristics of Equilibrium Fractal Wave. In addition, these articles explains how to use the general characteristics of Fractal Wave for your trading.

● Introduction to EFW Index for trading

https://algotrading-investment.com/2020/06/04/introduction-to-efw-index-for-trading/

● Trading with the Shape ratio of Equilibrium Fractal Wave

https://algotrading-investment.com/2020/06/04/trading-with-the-shape-ratio-of-equilibrium-fractal-wave/

● Introduction to Equilibrium Fractal Wave (EFW) Channel

https://algotrading-investment.com/2020/06/04/introduction-to-equilibrium-fractal-wave-efw-channel/

● Practical Trading with Equilibrium Fractal Wave (EFW) Channel

https://algotrading-investment.com/2020/06/04/practical-trading-with-equilibrium-fractal-wave-efw-channel/

● Superimposed Equilibrium Fractal Waves

https://algotrading-investment.com/2020/06/04/superimposed-equilibrium-fractal-waves/

● Combining the Shape Ratio Trading and (EFW) Channel

Elliott Wave Trading

The purpose of Elliott Wave Trading is to use the patterns of price movements that reflect the psychology and sentiment of investors to forecast market trends and identify potential entry and exit points for trading. To use this sophisticated tools, you need to understand what Elliott Wave Theory is. Ralph Nelson Elliott was one of very first person who believed that he could predict the stock market by studying the repeating patterns in the price series. To prove this idea, he created the Wave Principle. Many years later, the Wave Principle was reintroduced in the Prechter’s Elliott Wave books to investors. The Wave Principle states that the wave patterns are repeating and superimposing on each other forming complex wave patterns. The advantage of Elliott Wave theory is that it is comprehensive as the theory can provide multiple trading entries on different market conditions. Elliott Wave theory can be used for both momentum trading and mean reversion trading. The disadvantage of Elliott Wave theory is that it is more complex comparing to other trading techniques. In addition, there are still some loose ends in detecting Elliott wave patterns. For this reason, many traders heavily criticize the lack of scientific methods of counting Elliott Waves.

The Wave Principle states that the crowd or social behaviour follows a certain wave patterns repeating themselves. The Wave Principle identifies two wave patterns. They are impulse and corrective wave. Often, the term impulse wave is interchangeably used with the motive wave. Two terms are identical. Both motive and impulse wave progress during the main trend phase whereas the corrective wave progress during the corrective phase against the main trend. In general, the Impulse Wave has a five-wave structure, while the Corrective Wave has a three-wave structure. It is important to understand that these wave structures can override on smaller wave structure to form greater wave cycle. Elliott Wave theory is useful in identifying both trend market and correction market.

Elliott Wave theory can be beneficial to predict the market movement if they are used correctly. Junior traders are often fear to use Elliott Wave because their complexity. From my experience, Elliott wave is not a rocket science, anyone can probably learn how to use the technique with some commitment. However, not all the book and educational materials will teach them in the scientific way. If we are just looking at the three rules from the original Wave principle only, there are definitely some rooms where subjective judgement can play in our wave counting. This makes the starters to give up the Elliott Wave Theory quickly. Fortunately, there are some additional tools to overcome the subjectivity in our wave counting. First tool but the most important tool is definitely the three wave rules from the original Wave Principle. They can be used as the most important guideline for the wave counting. Below we describe the three rules:

• Rule 1: Wave 2 can never retrace more than 100 percent of wave 1.
• Rule 2: Wave 4 may never end in the price territory of wave 1.
• Rule 3: Out of the three impulse waves (i.e. wave 1, 3 and 5), wave 3 can never the shortest.

Second tool is the Fibonacci ratio. As in the Harmonic pattern detection, Fibonacci ratio can play an important role in our wave counting because they describe the wavelength of each wave in regards to their neighbouring wave. For example, the following relationship is often found among the five wave of the impulse wave. Depending on which wave is extended among wave one, three and five, the Fibonacci ratios are different. Most of time, the extension of wave 3 is most frequently observed in the real world trading.

Unless wave 1 is extended, wave 4 often divides five impulse waves into the Golden Section. If the wave 5 is not extended, the price range from the starting point of wave 1 to the ending point of wave 4 make up 61.8% of the overall height of the impulse wave. If wave 5 is extended, then the price range from the starting point of wave 1 to the ending point of wave 4 make up 38.2% of the overall height of the impulse wave. These two rules are rough guideline. Sometime, trader can observe some cases where these two rules are not hold true. Personally, I normally place the Fibonacci ratio relationship before this Golden Section rule. However, the priority between these two rules might depend on the preference of traders.

The corrective wave is often retrace 61.8% or 32.8% against the size of previous impulse wave. In general, Elliott suggested that corrective wave 2 and wave 4 have the alternating relationship. If wave 2 is simple, then wave 4 is complex. Likewise, if wave 2 is complex, then wave 4 is simple. A “Simple” correction means only one wave structure whereas a “Complex” correction means three corrective wave structures. Furthermore, if wave 2 is sharp correction, then wave 4 can be sideways correction. Likewise, if wave 2 is sideways correction, then wave 4 can be sharp correction.

Below articles will provide a guide to count Elliott Wave using scientific approach. Applying the scientific approach helps to reduce the subjectivity involved in Elliott Wave counting. Hence, you can reproduce your trading outcome over and over.

● Introduction to the Wave Principle

https://algotrading-investment.com/2020/06/04/introduction-to-the-wave-principle/

● Scientific Wave Counting with the Template and Pattern Approach

https://algotrading-investment.com/2020/06/04/scientific-wave-counting-with-the-template-and-pattern-approach/

● Impulse Wave Structural Score and Corrective Wave Structural Score

https://algotrading-investment.com/2020/06/04/impulse-wave-structural-score-and-corrective-wave-structural-score/

● Channelling Techniques

https://algotrading-investment.com/2020/06/04/channelling-technique-elliott-wave/

Breakout Trading with Fractal Wave and Stochastic Cycles


Statistical regularity is useful to set the basic rational for our trading. Turning point probability is the good statistical regularity detection tool to go with most of the price action strategies. First reason for this is simply that turning point probability was invented for the financial trading. Second reason is that turning point probability was invented for predicting Fractal wave in their original purpose. In the previous chapter, we have shown how to use this statistical regularity to predict the reversal movement in your trading. As you might guess, it is possible to use the same trading idea for the case of the breakout. This idea is hardly not surprising if you just understand how the probability works. For example, in the reversal trading, we were looking for the mother wave at its mature development stage. The mature mother wave is often found in the high probability area.

In case of breakout trading, we just need to reverse this logic. For example, we just need to look for the mother wave at its early formation stage. The young and fresh mother wave is likely to be found in the low probability area in the probability graph. To help your understanding on this, we provide some examples in Figure 4.9-1 and Figure 4.9-2. Figure 4.9-1 shows the probability graph drawn from the trough. When the turning point probability graph is drawn from the trough, we will look for bullish breakout in the low probability area. Then we can look for bearish turning point (i.e. reversal) in the high probability area.



Figure 4.9-1: Bullish breakout and bearish reversal example

Figure 4.9-2 shows the probability graph drawn from the peak. When the turning point probability graph is drawn from the peak, we will look for bearish breakout in the low probability area. Then, we can look for bullish turning point (i.e. reversal) in the high probability area.



Figure 4.9-2: Bearish breakout and bullish reversal example

The key point to detect the good breakout opportunity is to detect the young and fresh mother wave with reasonably low turning point probability. Although it is not easy to pin point the exact cut-off, the probability should be below 50%. I guess the 60% probability could be the maximum to detect the mother wave at its early formation stage.

As in the case of the reversal trading, we will be making the trading decision using two steps below for breakout trading:

Step 1: Detect statistical regularity in price series

Step 2: Confirm the statistical regularity with geometric regularity

In step 1, we will be detecting the mother wave with relatively low probability. In step 2, we could apply several different methods to detect the geometric regularity. For example, some candidate methods for step 2 can include support and resistance, Fibonacci retracement, Elliott Wave theory, Triangle and other price action strategies. In fact, your knowledge of Elliott wave trading could be useful in this case because detecting the breakout point after the first child wave is very similar to riding the Wave 3 during the Elliott Wave 123 pattern formation. However, Elliott wave theory could be complex for some audience. Hence, we will not use them in this book. For the demonstration purpose, we will be using the simple support and resistance to detect geometric regularity in step 2. Support and resistance method is an effective tool to detect geometric regularity.

Let us begin with some bullish example first. When we detect the mother wave for the breakout, it should have the first child wave identified in the low probability region. In Figure 4.9-3, we show an example of mother wave detected at 32.8%. You can tell that amplitude of the first child wave is 32.8%. We can draw the breakout line on top of the first child wave. This is step 1.



Figure 4.9-3: Bullish breakout trading example in USDJPY H1 timeframe (Step 1)

Now in step 2, we will be looking for some valid resistance line. To find the resistance line, we need to look back to find a higher peak. With the higher peak, the peak of first child wave can form a resistance line. The important point here is that to look at the gap between the breakout line and resistance line. The gap indicates the angle of resistance line in regards to the breakout line.



Figure 4.9-4: Bullish breakout trading example in USDJPY H1 timeframe (Step 2)

If you inspect the chart carefully, you will find that the resistance line provides the upper outline of triangle pattern. Hence, the breakout is in fact identical to the triangle breakout. In classic triangle breakout, your entry might start after the price moved outside the triangle. However, we recommend using the breakout line drawn from the first child wave for your entry. Additionally, watch out the angle of the resistance line. It is better if the resistance line is close to the peak of the first child wave rather than the trough of the first child wave. This is only rule of thumb though.

https://algotrading-investment.com/2020/05/29/breakout-trading-with-fractal-wave-and-stochastic-cycles/