jaenisch ron - power trend investing with andrews pithfork
TRANSCRIPT
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Tocontacttheauthor,[email protected]
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TableofContentsAkindreviewisappreciated
PrefaceREQUIREDLEGALSTUFFWhat’sinitforyou?TheBasisofElliottWaveandAndrewsPivotTheoryTheElliottRuleofAlternationTheElliottThrustWaveRulesTheAndrewsMedianLineMakingCorrectionsEasiertoDealWithAndrewsRulesAndrewsRulesCombinedwithElliottWaveTheoryWhySelectivelyFocusUponAPartofElliottWaveTheory?LettingtheRulesWorkforYouUsingSoftwarethatCombinesAndrewsandElliottTakingittotheNextLevelEnteringtheTrade/InvestmentExitingtheTrade/InvestmentKeepingProfitsfromVanishingGettingstartedwithminimalrisk
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TheThreeStepsImprovingPopularIndicatorsViewonRiskManagementResources
Akindreviewisappreciated
Ipurrforkindreviews.
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Preface
Thisbookisthefirstintheseries.Eachbookintheserieshasauniquetechnique.
AlanAndrewslikedtoenterapositionatthestartofanewtrend,ideallyattheendofacorrection.WhatdidAndrewsusetodetermineifamovehadended?Itappearsthathewouldlookatachartandsimplyknow.Whentheauthoraskedhimtoexplainhowheknew,hedrewseverallinesandshowedhowthemarkethadsetthingsupforareversal.Heshowedhowhedidthiswithmultiplechartsand,inmostcases,thelogicforfindingthereversalpointsvariedslightly.
Doingthisonhistoricalchartswithperfect20/20hindsightiseasy,butwhataboutdoingthiswhilethemarketisreversing?Toconvincedoubters,hedemonstratedhisuncannyabilityeachyearcoveringaperiodofseveralmonths.Hisgoalwastoturn$5,000into$50,000bytradingfutures.
Toprovidethoseobservingwithamorehands-onexperience,hesentoutanewsletteronFridaycontainingascripttobereadtothebrokeronMonday(theordersindicatedsection).Inhisnewslettershealsoexplainedthesignalsusedandexactlywhatthelogicwasbehindtheorders.
Youcanclearlyseeintheexcerptsfromhisnewsletters(sectionscutoutbelow)thattheordersweregiveninadvanceandtheprofitsweresignificant.Theseexcerptsarefromthenearly1,000pageAndrewsExpandedCourse,whichcontainsyearsofnewslettersandallofthedocumentationthatthisauthorhasfromAlanAndrews.Itisonlyavailabletoalimitednumber.
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Overtheperiodofafewmonthsinthisdemonstration,hewasupbymorethan400%.Therewereothertimeswhenhedidmuchbetter.
Thisbookisforthreedifferenttypesofinvestors:
1)ThosewhoknownothingaboutElliottWaveorAndrewstechniquesandwanttolearnaneasy-to-applymethodforpredictingfuturepricemovement.
2)TheinvestorwhohasabasicunderstandingofElliottWavebutwasfrustratedbyitbeingdifficulttoapply,andissearchingforawaytomakeiteasy.
3)TheinvestorwhohasfoundwaysofmakingElliottWavepracticalbycombiningitwithanotherindicatorandislookingtofurtherimprovehisworkingmodel.
AnexpertinElliottWavecanlookatachartandgivetwo,three,four,ormoreoutcomes.Byaddingthetechniquesinthisbook,thechartistwillhaveoneoutcome.Additionally,theprobabilityofsuccesswillbeincreaseddramatically.
Wheredothesetechniquescomefrom?
AlanAndrewsmadehisfirstmilliondollarstradingcotton.ThiswaswithinjusttwoyearsaftergraduatingwithadegreeinengineeringfromM.I.T.andHarvard.Thisaccomplishmentwasinpartwhat
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motivatedmetotravelandflyacrossthecountrytohishomeinFloridaandattendhisprivatecourseandliveseminar.DuringtheprivatetimeIspentwithDr.Andrewssittingathiskitchentable,Iwasabletoaskhimmanyquestions.Oneofthemwas“Whicheasy-to-applycoursetechniquescanbecombinedwithElliottWavetofindfuturelongandstrongmovesforinvesting?”Dr.Andrews’answerwasthatElliottWavewasunnecessarilycomplicated,butheencouragedmetocombinesomeofhistechniqueswithspecificsubsetsoftheElliottWavetheory.
R.N.Elliottbasedhiswavetheoryonmarketpsychology,Fibonaccinumbers,the.618ratio,andreoccurringpatternsofthebehaviorofinvestors,resultinginpredictablefuturepatterns.
ProfessorAlanHallAndrewsbasedhistheoriesupontheenergyandlocationofpriceactionpatterns,Newton’slawsofmotion,andprobabilitytopinpointwhenthetrendhasreversedandpredictwhenitwillreverseinthefuture.
Asyouwilldiscover,thedifferencesbetweenthetwoarebothintheoryandpractice.Thisispartiallyduetovastdifferencesbetweentheselectionsofpivots.AfivewavecountinAndrewsisnotnecessarilyafivewavecountinElliottWave.
Thiswriter’scomputer-basedresearchincombiningtheBabson,Andrews,andElliotttechniquesresultedindeterminingtimeswhentheycanbecombined.Thisbookcoverstheeasy-to-learnmethodapprovedbyDr.Andrews.
Afterthefindingsweredocumented,theywereincludedin,whatwasatthetime,thenewAndrewsBabsoncoursemanual,whichthewriterdevelopedforteachingcoursemethodsonthewestcoast.Priortohispassing,Dr.Andrewsreviewedtheentirecoursemanualandwroteonthecover,“AnInspiringdigestofthecoursemethods.”
Thisbookanswersmanyquestions.Oneofthemis,“WhatportionoftheAndrewsAdvancedcoursetechniquescanbecombinedwithspecificElliottWavepatternstofindmanyfuturelongandstrongmovesforinvesting?”ItalsoservesasanintroductiontobothElliottWaveandAndrews’“pitchfork”techniques.ThefocusistofindagoodpercentageofthelongandstrongmovesinETF’s,Forex,futures,andstocks.Asaresult,thefocusislimitedtospecificpatterns.
TofullyunderstandElliottWaveinvolveselaboratecorrectionpatternsthatarefartoodifficultformosttraders.Thesesometimescomplexpatternsarebeyondthescopeofthiswork.Theyarewelldocumentedinbooksbymanyothers.
TofullyunderstandallofAndrews’techniqueswouldrequirethereadertobefamiliarwithhiswritingspriorto1975.AlanAndrews’bestworkwasintheearly1970swhenhewassendingoutanewsletterattheendofeveryweekwithadetailedscriptforhisstudentstoreadtothebrokeronthefollowingMondaymorning.Thenewslettercontainedthereasoningbehindthevarioustrades,alongwithextensiveinstructionsandillustrations.Andrewsisknownforthemedianline;however,muchofthefocusofhiswritingswasontheBabsonReactionlines.Thereactionlinethathewrotewasbestfordeterminingthelocationoftheendofatrend;hereferredtoitas“ORE.”Thiswassomethingthathedidnotincludeinthecoursethathesold.Itisonlyavailabletothosethatarefortunateenoughtohavehiswritingsfromtheearly1970s.
Atthepresenttime,thiswriterisinvolvedinthedevelopmentofsoftwarewiththelatesttechnologythatwilltakethistothenextlevel.
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ToseetheoriginalAndrews’papersgoto:https://www.youtube.com/watch?v=MnrxXMCwhOI
ToseeDr.AndrewsandRonJaenischgoto:https://www.youtube.com/watch?v=wgRkVFb3iLU
SeethemassiveAndrewslibraryoftoday:https://www.youtube.com/watch?v=qbGbS49bn08
Ifyoulikewhatisinthisbook,gotooursiteformoreinformation.JointhefreeemailgroupbyclickingupontheNEW?linkattheAndrewscourse.comwebsite.
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REQUIREDLEGALSTUFFGeneralTermsofUse
THEINFORMATIONPROVIDEDINTHISDOCUMENTISFOREDUCATIONALPURPOSESONLY.
ITISPROVIDEDASGENERALMARKETCOMMENTARYANDDOESNOTCONSTITUTEINVESTMENTADVICE.NEITHERTHEAUTHORNORASSOCIATES,DISTRIBUTORS,HEIRS,ORASSIGNSSHALLACCEPTLIABILITYFORANYLOSSORDAMAGE,INCLUDINGWITHOUTLIMITATION,ANYLOSSOFPROFIT,WHICHMAYARISEDIRECTLYORINDIRECTLYFROMUSEOFORRELIANCEONSUCHINFORMATION.THEREISNOWARRANTYOFANYKIND.
RequiredRiskDisclosure—theterm“securities”shallapplytoallfinancialinstruments.
SECURITIESTRADINGORINVESTINGCARRIESSIGNIFICANTRISKANDMAYNOTBESUITABLEFOREVERYONE.THEPOSSIBILITYEXISTSTHATYOUCOULDSUSTAINALOSSOFSOMEORALLOFYOURINITIALINVESTMENT;THEREFOREYOUSHOULDNOTINVESTMONEYTHATYOUCANNOTAFFORDTOLOSE.THETRADINGSTRATEGIESDISCUSSEDMAYNOTBESUITABLEFORALLINVESTORSDEPENDINGUPONTHEIRSPECIFICINVESTMENTOBJECTIVESANDFINANCIALPOSITION.INVESTORSMUSTMAKETHEIROWNINVESTMENTDECISIONSINLIGHTOFTHEIROWNINVESTMENTOBJECTIVES,RISKPROFILE,ANDCIRCUMSTANCESANDUSINGSUCHINDEPENDENTADVISORSASTHEYBELIEVENECESSARY.THEREFORE,THEINFORMATIONPROVIDEDHEREINISNOTINTENDEDTOGIVEINVESTORSSPECIFICADVICEASTOWHETHERTHEYSHOULDENGAGEINAPARTICULARTRADINGSTRATEGY.INADDITION,THEINFORMATIONPROVIDEDHEREINHASBEENPREPAREDFORINFORMATIONPURPOSESONLYANDISNOTANOFFERTOBUYORSELL,ORASOLICITATIONOFANOFFERTOBUYORSELLTHESECURITIESMENTIONEDORPARTICIPATEINANYPARTICULARTRADINGSTRATEGY.MARGINREQUIREMENTS,TAXCONSIDERATIONS,COMMISSIONS,ANDOTHERTRANSACTIONCOSTSMAYSIGNIFICANTLYAFFECTTHEECONOMICCONSEQUENCESOFTHETRADINGSTRATEGIESDISCUSSEDANDINVESTORSSHOULDREVIEWSUCHREQUIREMENTSWITHTHEIRLEGAL,TAXANDFINANCIALADVISORS.FURTHERMORE,SECURITIESTRADINGENTAILSANUMBEROFINHERENTRISKS;BEFOREENGAGINGINSUCHTRADINGACTIVITIES,INVESTORSSHOULDUNDERSTANDTHENATUREANDEXTENTOFTHEIRRIGHTSANDOBLIGATIONSANDBEAWAREOFTHERISKSINVOLVED.THEINFORMATIONORDATAPROVIDEDHEREINISBASEDONINFORMATIONGENERALLYAVAILABLETOTHEPUBLICFROMSOURCESBELIEVEDTOBE
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RELIABLE.NOREPRESENTATIONISMADETHATITISACCURATE,COMPLETEORCURRENTORTHATANYRETURNSINDICATEDWILLBEACHIEVED.CERTAINASSUMPTIONSHAVEBEENMADEINTHISANALYSIS,WHICHMAYIMPLYPROJECTEDRETURNSWOULDBEACHIEVED.CHANGESTOTHEASSUMPTIONSMAYHAVEAPARTICULARIMPACTONANYRETURNS.
RequiredDisclaimerCFTCRule4.41
HYPOTHETICALORSIMULATEDPERFORMANCERESULTSHAVECERTAININHERENTLIMITATIONS.UNLIKEANACTUALPERFORMANCERECORD,SIMULATEDRESULTSDONOTREPRESENTACTUALTRADING.ALSO,SINCETHETRADESHAVENOTBEENACTUALLYEXECUTED,THERESULTSMAYHAVEUNDER-OROVERCOMPENSATEDFORTHEIMPACT,IFANY,OFCERTAINMARKETFACTORS,SUCHASLACKOFLIQUIDITY.SIMULATEDTRADING
PROGRAMSINGENERALAREALSOSUBJECTTOTHEFACTTHATTHEYAREDESIGNEDWITHTHEBENEFITOFHINDSIGHT.NOREPRESENTATIONISBEINGMADETHATANYACCOUNTWILLORISLIKELYTOACHIEVEPROFITSORLOSSESSIMILARTOTHOSESHOWN.
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What’sinitforyou?
Thequestionmayappeartobeselfish,butwhenyourmoneyisontheline,itisaquestionthatisimportant.Theanswerisverysimpleandstraightforward.Byhavingaprofitablemethodfordeterminingwhentobelong,short,orout,onecantakeadvantageoftheupanddownswings.
Foralongonlyaccount,goingshortisnowpossibleonalimitedbasisbytradingselectETFS.Eventhoughthismethodofinvestingwillresultinmanyfast,furious,andprofitabletrades,muchofthetimeitwillalsonothavealongorshortposition.Thisisduetothefactthatitreliesuponspecificpatternstobeinplaceinordertoconsiderputtingonatrade.
Abenefitofthisapproachisthatittendstobeoutofalongorshortpositionduringtimeswhenthemarketappearstobegoingmostlysideways.
Intheabovechart,alongpositionatthe#2andanexitatthe#5wouldhaveyieldedover30%inaboutsixmonths.However,accordingtotheconceptssuggestedinthisbook,duringthetimeprior,andmostthetimethereafter,thereisnoreasontobelongorshort.Theexceptionbeingwhenthetraderisusingtime
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framesshorterthanweekly.Inthatcase,othertradescouldhavebeenidentifiedwiththistechnique.
Thistechniquehasmarketforecastingcapabilities.Asthestockmarketwascomingdownattheendof2012duetofiscalcliffworries,thismodel’sportfoliohadnoshortpositionsandaveryhighnumberoflongpositions.Thisforetoldthe2-3%adayralliesintheS&Pnearyear’sendandthenewhighsin2013.
Anotherbenefitofthisapproachisthatadiversifiedportfoliocanhavestockswhichareindifferentstagesofacycle.Thisenablesthechartisttospreadoutriskandpotentialreward.
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TheBasisofElliottWaveandAndrewsPivotTheory
R.NElliottdevelopedauniquewayoflookingatchartsofETF’s,Stocks,Forex,andCommodities.Itisamethodofpredictingthefuturebasedonwhatoccurredinthepast.Heaccomplishedthisbyfirsthavingamentalpictureofwhattheidealpricechartlookslike,thenlabelingtheactualchartsuptothatpoint,asiftheyfittheidealpattern.Hebelievedthatwhentheinvestorcorrectlyinterpretedthepriorpricechartthenhewasabletoforecastthefuturewithgreaterease.Today,therearemanybooksthatcoverElliottWaveTheory.
OneoftheconceptsfromElliottWaveisthattheendofwavetwoisanimportantpsychologicalpoint.Thisisapointwhenmanyinvestorsareconvincedthatthemovewillgoalotfurther,butitdoesn’t.
Asaresult,theythrowinthetowelandmissoutonhugeprofits.Thisisbecausetheyareconvincedattheendofwavetwothatpriceswillnotreversebutkeepongoing.Itistheendofwavetwoandthestartofwavethreethatisthefocusofthisbook.
Asyouwillseeinthisbookandinotherpublications,theuseofAndrewsandBabsontechniquesinconjunctionwithElliottWaveTheorymakesforecastingmucheasier.WhenDr.AlanAndrewsgaveseminars,hediscussedhowtoutilizehispivottheory,whichismuchlesscomplicatedthanElliottWave.Heencouragedstudentstoavoidthemanycomplicatedlevelsofothertechniques,includingElliottWaveTheory.
Still,therearemanythathavetakentheAdvancedAndrewsCoursewhoarewavetheoryenthusiasts.Withtheirunderstandingofboth,theycombinethemanddoextremelywellintheirforecastsandinvesting.
AnimportantdifferencebetweenAndrewsandElliottWaveisthebasisoftheunderlyingtheory.ElliottWaveisbaseduponmarketpsychologyandspecific,reoccurringnaturalpatterns.Andrews’stheoryandtechniquesarebaseduponthelawsofmotionandthetheorythatenergyisproducedduringtrading.Theenergypatternscanberecognizedandusedbyachartisttogenerateprofits.ItisthesechartpatternsthatprovidethefoundationtoapplyAndrews’conceptsandforecastthefuture.
Andrewswantedtoknowhowthemarketbehavesatspecificpivotpointstobeabletoforecastfuturepricemovement.WithElliottWaveTheoryalone,itisnotpossibletodeterminetheprobablelocationoffuturepivotpoints.ElliottWavetheoriststypicallycomeupwiththreetofivepossibleprojectedoutcomesforachartpattern.Thisisbecauseofthevariabilityofthemanycorrectiveandthrustpatterns.WithAndrewsandBabsontoolsandtechniques,thisisnotthecase.Thelocationoffuturepivotsiseasiertoforecast.Withsophisticatedsoftware,onecanpredictthetimeandlocationofmostpivotsusingthreetofivepriorpivotpoints.TheES60minutechartbelowillustratesthisconcept.
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InFigure#7,aspricesaremakingpivot#2,theequidistantlinesaredeterminedtobetheonestopickmanyofthefuturepivotpoints.Thelinesinthechartaredrawnandtheprobablepivotpointsareforecastedtobenearthelines.Ascanbeclearlyseen,pivot#(1),(4),4,and(5)wereontheforecastedlines.Thisisinadditiontoothertechniquesthatareemployedtodeterminethelocationofmostofthepivots.Coincidently,withthepricesreactingproperlyonthelinepoints,theElliottWavecountisdeemedtobeaccurate.
Thiswillappeartobesomewhatpuzzlingtothenoviceatfirst.WithproperuseoftheBabsonandAndrewslines,theareaofthevariouspivotsorwaveendingpointsaremucheasiertoforecast.Thechallengethenbecomestoknowaheadoftimewhichtypeoflinetouse.
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ThesilverchartlabeledFigure#1isaperfectexampleofwhataperfectElliottWavemightlooklike.InFigure#1thereisthestandardfivewavethrustpatternandthecorrectionpatternof3waves,whicharelabeledABC.Thewaves1,3,and5arecalledimpulsewaves(inthiscase,upwardmovements),waves2and4arecorrectivewaves(inthiscase,downwardsmovement).
AnimportantpartofElliottWaveTheoryisthatafterafivewavethrustpattern,itisfollowedbyacorrectivepattern.Incertaincases,thecorrectivepatternisasimplezigzag,threewaveABCpattern.Inothers,itisadifferentpattern.
Aswillbeseeninthenextillustration,whenlookingatthebiggerpicturefromthestart,onecouldsaythatthewavethatwentfromthelowto5iscorrectedbythea-b-cpattern.Then,bylookingatamoredetailedbiggertheoreticalpicture,wecanseethattheshorterwavesareusedaspartofapatternofsimilarbiggerwaves.
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Itisthesmallwavemovementsthatcombinetocreateabigwave,whichhastheoverallappearanceofthebasictheoreticalElliottWavestructure.Eventhoughthesmallwavescombine,abigwavechartisuniversallyusedtoteachwavetheory.
WavesonmarketchartsaretypicallynotasperfectasseeninthesampleElliottWavechartandtendtobeverydifferentinappearance.Thisisduetovariousfactors,includingtheruleofalternationandthefactthatthereareoverfiveverydifferentcorrectivepatterns.ItisforthisreasonthatAndrews’techniquesaresoughtafterbytradersformakingElliottWaveaviabletheory.
TheAndrewspivottheoryacknowledgesthatsomecorrectionsaresimplethreepivotwaves,astheElliottWavesuggests.Itisthesecorrectionsthataresignificantinthepowerwavethreestepmethod.
Thetypesofcorrectionwavesthatapplyinlookingforwhathappenspriortolongandpowerfulwavesareoftenzigzag,doublezigzag,andflat.Theothercorrectivepatternsareirregular,running,doublethree,triplethree,andtriangles.Someofthetypesoftrianglesareascending,descending,contracting,symmetrical,expanding,andreversesymmetrical.Whenconsideredasawhole,itisenoughtomakeyourheadspin.
ItisthisincrediblecomplexitythatAlanAndrewssoughttohavehisstudentsavoid.Afterall,ifhecanmakemillionswithhismuchlesscomplicatedtechniques,thenotherscantoo.
Typically,thereisanextendedwaveinafivewavepattern.Extensionscomeinvariouslocations.Intheperfectwavechartspreviouslyshownhere,theywerethelongerwavesthatwentfromthewavepointmarked2tothewavepointmarked3.Factis,theseextendedwavepatternsoccurinallthreeofthethrustwavesandalsohaveatendencytoalternate.
Itisverycommonforoneofthethreethrustwavestobemuchlongerthantheothertwothrustwaves.Itisthelongeronethatisconsideredtheextendedwave,andinthepreviouschartlabeledfigure#1youcanseethesubwaveslabeledas(1),(2),(3)etc.Manybelievethatthethirdwaveismostoftenthelongestofthethreethrustwavesandthatitisalsothemostlikelytobetheextendedwaveofthethreethrustwaves.Thepowertrendinvestingthreesteptechniqueisdesignedtotakeadvantageofthethirdwavebeingthelongest.
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Infigure#3,onecanseeanexampleofwave4-5beingtheextendedwave,whichcaneasilybebrokendownintoseveralsubwaves.
OneofthemanyadvantagesofAndrewsandElliottWaveisthatthesamerulesthatapplytoETFS,stocks,andcommoditiesinabullmarketalsoapplyinabearmarket.
Thisiswhywhenmarketsareinabear(downtrend)mode,theyarelabeledwithlettersandnumbersinasimilarfashiontothebullish(uptrend)mode.
IfonetakesthedistancefrompointCtopoint1andthencalculatesthepullbacktopivot#2inpercentageterms,itis50%ormoreinmostcases.Manybelievethatthemarketwillactuallyfindimportantsupportatvariousspecificpullbackpoints.Theyare38%,50%,62%,and78%.
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Infigure#4,thecountisinthedownwarddirectionandonceagaintheextendedwaveisthe2-3wave.Thisisverycommon.Whenmyfriend,AlanAndrews,taughthisseminarsinFlorida,hementionedtheElliottWaveasarathercomplexmethodologyandsuggestedhispivottheoryasbeingaloteasiertoapply.However,sinceAndrewsdidnotunderstandsomeoftheeasy-to-applyconceptsofElliottWaveTheory,hemayhavemissedoutonsomeeasywaystocombineElliottWavewithhisowntechniques.Ifoneistobecomeanexpert,thereismuchmoretolearnaboutElliottWavethaniscoveredinthiswork.Here,asyouwillseebyaddingmarketgeometrydevelopedbyDr.AlanHallAndrews,onecanmoreeasilyutilizeElliottWaveTheoryasaninvestmenttimingtool.
TheobjectofthisworkistointroducethereadertoElliottWaveandAndrews’techniquesinamannerthatwillimmediatelybeperceivedaspractical.
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TheElliottRuleofAlternation
TheElliottWavehasfewrulesandlotsofpatterns.Arulethatisspecifictopatternsisanimportantaidinselectingwavesforthewavecount.Theruleofalternationsuggeststhatthe1-2correctivepatternwillnotbethesameasthe3-4correctivepattern.
ThiscanbeseenintheApplechartlabeledfigure#5.Therearethreenumericalcorrectionsinthischart:3-4,(1)–(2),and(3)-(4).
Theruleofalternationwouldbeappliedheretothelasttwocorrectionpatterns.Notethattheydiffergreatlyinpattern,time,andpercenttothe1-2wave.
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Figure#7isaneminisixtyminutechart;ithasitsvariouslabelsonitspivotpoints.Therearewaveswithinwavesinthischart.Thatiswhysomewavetipsarelabelednormallyandsomehaveanadded().Notethatthe(1)-(2)waveisverydifferentfromthe(3)–(4)wave.Moreover,the1-2waveisalsoverydifferentinpatternandtimethanthe3-4correctionwave.
Theseareexcellentexamplesoftheruleofalternation;theydifferintermsofduration,pattern,andpercentofthemovecorrection.
ThereareagoodnumberofdifferenttypesofcorrectionpatternsinwavetheoryandmostofthemarenotthesimpleABC.Inactualmarketconditionsyouwillseemany,withtheexceptionofstep1;theentireElliottWavepartofthisprocessissimplytofindABCcorrectionwaves.
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TheElliottThrustWaveRules
WhenreadingthemanybooksabouttheElliottWave,itiscommontorunacrossvariousadditionalrules.Theseruleswillhelpyouidentifythrustwavesandareonlyappliedtothosetypesofwaves.
Theruleswillaidyouinidentifyingthrustpatterns.Thethrustwaveisusuallyeasytoidentify.Thecorrectionpatterncanbeextremelymorecomplextoidentify.
Thrustrule#1:Thethirdwaveisnevertheshortestthrustwaveinafive-wavestructure.IhaveseenthisrulemanytimesandIwouldadd“exceptwhenthewavestructureisnotidentified.”Typically,thisiswhenamoveisninewaves,anditisimpossibletoidentifyafive-wavestructure.
Figure#8showsninewavesupinapatterninwhichselectingthewavepointsisimpossible.Notethatwave6-7isthelongestand4-5isprobablytheshortest.Ifoneweretolabelthewavecountdifferently,asinfigure#9,thenitwouldbeinviolationofElliottWaverules.
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Anotherthrustpatternruleiswhenpivot4occursattheendofthe4thwaveandisnotlowerthantheendofwave2,exceptwithinadiagonaltriangle.Thiscanbeseenclearlyineveryexamplepostedsofar.Whatcanalsobeseenineverythrustwaveexamplesofaristhatpivot#2isnotbeyondthelowpivotif,asinfigure#9,alowisbeingmadeorbeyondthepriorhighpivotwhenpivot#2isahighpivot.
Waveequalityissortofaruleinthatthetwonon-extendedwavesareclosetoequaleitherintimeand/ordistanceorhave.618relationshipstoeachother.
OriginalElliottWaveTheoryhasmanymoreconceptsthatarenothardandfastrules,suchaswaveequality,volume,andthe“rightlook.”Theseconceptsarecoveredindetailbyexpertsinwavetheoryinotherbooks.
Inthisbook,thefocuswillbeprimarilyononesetupthatiseasyforthenovicetoAndrewsorElliottWavetograspandapply.ThisonesetupistofindtheABCcorrectionpattern.Inorderforittobevalid,thepivotCmaynotbeexceededbyprice.IftheABCpatternisvalid,itwillbefollowedbyafiveormorethrustwavepattern.Inmanycases,anextendedwaveoccursaftertheABCpattern.
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TheAndrewsMedianLine
Myfriend,AlanAndrews,toldmethatthemedianlinecamefromastudentinoneofhiscivilengineeringclasses.TheclasswasdiscussingwhatProfessorAndrewsdidafterhegraduatedfromM.I.T.andHarvard.
AndrewsworkedforhisfatherintheInvestmentbusiness.Duringthistime,helearnedatechniquefromRogerBabson.ItwascalledtheAction-ReactionMethod.TheAction-ReactionMethodisbasedupontheideathatpriormarketactionforecastsfuturemarketturningpoints.Withclear20/20hindsightonoldcharts,thiswasrelativelyeasy,butwhenforecastingfutureswingreversalpoints,thiswasdifficultatbest.Threelineswerenecessaryforthistechniqueandthemostcriticaloneisknownasthecenterline.Thecenterlineismostcriticalbecauseitdeterminestheanglesofthelinestobeusedfordeterminingfuturereversalpoints.
AstudentinProfessorAndrew’scivilengineeringclasssuggestedthatamedianlinebeused.Inthecharttheywerestudying,themedianlineprovedtobetheoptimalcenterline.
Andrewsdidalotofresearchwithmedianlinesandfoundthattheywereextremelyusefulfordeterminingthetrendthatpriceswillmovein.
Themedianlineisveryeasytocalculate.Takethreeconsecutivepivotpoints,infigure#10theyarelabeledA,B,andC.
ThemedianlineisdrawnfromthefirstpointAthroughthemidpointofthedistancebetweenpointsBandC.Whatmakesthemedianlinesousefulinpriceforecastingisthat,accordingtoDr.Andrewsandotherstudies,pricesmakeittothemedianlinein80%ofthecases.
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ThelinesparalleltotheML(medianline)aredrawnfrompointsBandC.
Thisisanimportanttool,andtherearevariouswaystouseit
Afterthetestofthebottom,apossibleendofwave2isreached,andthemedianlinesaredrawnfromthethreepivotsthatarepriortopivot#1andpivot#2.ThiswillbecomeclearinFigure#13.
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Infigure#13,itcanbeclearlyseenthatpriceszoomedthemedianline.Thesecondpartofthesetupwillbepresentedinthenextchapter.Inorderto“test”thechartpatternsforthis,themedianlinesaredrawnwiththeElliottABCpivots.
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MakingCorrectionsEasiertoDealWith
WiththeElliottWave,onecaneasilycomeupwithtwentydifferenttypesofABCcorrections.Besidesthestandardzigzagpatternthathasbeenpreviouslyshowninthepriorcharts,thereareothersthatarecommon.
InfigureABC-1,therearetwoABC’sthatcanbeclearlyidentified.ThefirstABChastheBbeyondthe5.ThisissomethingthatisallowedunderElliottWaverules.Itisthewave2thatisnotallowedtobepastthe5.
Ascanbeseeninthesecondabc,thecisa2andislowerthanthea.ThisisalsoallowedunderElliottWaverules.Itisclearlyevidentthat,asthepriceszoomedthroughthemedianlinemarkedML,theywenttopivot#1and,atpivot2,theydidnotclosepasttherelevantredmedianline,whichoriginatedfromB.
ElliottWavetheoristssuggestthatwaveshaveamathematicalrelationshiptoeachotherthatcanbecorrelatedwithFibonaccinumbersandasortofwaveequality.Thiscanbeveryhandyfortryingtoguessthelocationoftheendofwavepoints.
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Figureabc2showsthelengthofthewavethatendedatpointcwasabitover100%ofthewavethatendedatpointa.HavinganunderstandingofthiscanbehandyforapplyingtheAndrewsrulesthereaderislearninghere.The100%areaisusedbymanynovicesasatargettotakeprofits.Aswillbelearnedinlaterchapters,therearefarbetterwaystodeterminewhentotakeaprofitbecausethemarketwilloftenmovetoapointthatisfarbeyondthe100%point.
Probablythemostimportantruletorememberforselectingtheabcpivotpointsisthattheyareatalternatepoints.Therefore,iftheAisalowpivot,theBwillbeahighpivot,andtheCwillbealowpivotatalaterpointintime.IftheAisahighpivot,thentheBmustbealowpivot,andtheCpivotwillbeahighpivot.
LabelingthewavepointswiththepropernumbersandlettersseemstobeaproblemmanychartistshavewhenapplyingElliottWaveTheory.WiththeadditionofonlytwooftheAdvancedAndrewsRules,thereaderwillfindidentifyingwavepointsmucheasier.
Ifachartistcanidentifyafive-wavesequence,followedbyanABCcorrectionofsomesort,andthenthepossibleendofwavesoneandtwo,heiswellonhiswaytobeingabletoforecasttheremainderofthefive-wavesequenceinprogress.Sincemostextendedwavesarethe2-3wave,thechartistshouldacceptthefactthathenolongerneedstodealwiththecomplexityofcorrectlyandpreciselyidentifyingeachandeverywave.Ifthechartistcanidentifythestartofathirdwavethatleadstoafive-wavesequence,thenhisabilitieswillbesignificant.
ElliottWavehaslotsofflexibilityintherelationshipofwavelengthstoeachother.Italsohasarulethatwavefourdoesnotoverlapwaveone,whichwetendtoignore,withAndrewsstylepivotlabeling.
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Insomecases,theb-cwaveisverylongandcaneasilybesubdividedintofivewaves.Andthenthereareothercaseswheretheb-cwaveisveryshort,evenshorterthanthe5-awave.Inspiteoftheallthesevariability’swithinthewavetheoryofRobertElliott,AdvancedAndrewsTheorygivesyoutwostraightforwardruleswithwhichyoucandeterminethecto1waveandthe1to2wave.
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AndrewsRules
Afteridentifyingapossiblepivot#2thatisabouttogointoathirdwave,therearetwoteststhataregiventothepatternutilizingthemedianline.
First,determineifpriceszoomedthroughthemedianlineastheymadepivot#1.Anexampleofthisisseeninfigure#13andfigure#14.
Anotherexampleof“onlythezoom”isseeninfigure#14.Inmostcases,whenpricesmakepivot#1,theyzoomthemedianline.Andrewstaughtthatpricesmadethemedianline80%ofthetime.Ifpricesmakeittothemedianlinein80%ofthecases,itwouldmakesensethat,inmostcases,theyaremakingitwhenatpivot#1.Ifpivot#1isareversaloftrend,thenpriceswillbemorelikelytoclosebeyondthemedianline.InanElliottWavecontext,theyarezoomingthemedianlineattheendofwave#1byspendingoneormoveclosesbeyondit.Examplesofthiszoomareseeninfigures#14and#15.Afterzoomingtopivot#1,thepricegoestoapossiblepivot#2.AccordingtoElliottWaverules,inordertoqualifyasapivot#2,thepivotcannotbepastthepriorextremeofapossiblefive-wavemovement,withthethirdwaveoftenbeingthestrongestandlongestwave.Andrewsconsideredpricepatternstobeademonstrationofthemovementofenergy.Ifapivot#2isnotbeyondthestartofwave#1,thenitisverylogicalthatthepricewillnotbeabletomakeittothemedianlinebecauseachangeintrendistakingplace.
ElliottWaveTheoryallowsawidevarietyofpatternsfortheendofamultiplepivotswing.Andrewshasvarioustoolsandrulesfordeterminingtheprobablelocationofthepivot.WiththeAdvancedAndrews
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Techniques,thesearepattern-dependentandanABC,followedbythetwotestsusingAndrews’slines,isoneofthem.
Intheparticularpatterndiscussedhere,thefirststepwithAndrews’slinesistodetermineifthereisaZoomofthemedianlineatpivot#1or,inwavetheory,theendofwave#1.
Afterthiscomesthesecondstep,whichistolookforpricesfailingtomakeittothemedianlineastheymakepivot#2.Sincepricesmakeittothemedianlinein80%ofthecases,theyalsowill,onoccasion,maketheMLatpivot#2.Andrewsheldthatwhenpriceswereunabletomakeittothemedianline,theywouldmakeitupaftertheyreversedandgopastthenextmedianline.Ifthethirdwaveistobethemostpowerful,asitisinmanycases,thenthisislikelytooccurwhentheydonotmakeittothemedianlineatpivot#2andleaveaspacebetweentheendofthemoveandthemedianline.
Figure#15clearlyshowsthatthereisaspacebetweenpivot#2andtherelevantmedianline.
BothAndrewsandBabsonlinesmaybecombinedwiththeElliottWaveandothertechnicalanalysistechniques.DuringdiscussionswithAlanAndrewsin1982,hehintedthattheendoftheElliottWave“C”pointcanbefound,orverified,withsomethingcalledan“Oreindicator.”AfterDr.Andrewspassedon,Icameacrosssomeofhiswritingsfrom1974regardingthe“ORE”technique.Andrews’writingshowedthathelikedusingtheoretechniquetofindtheendofcorrections.Fromthestudiesheshowedinhiswritings,thiswasusedtofindtheextremesofcorrections,especiallywherepivot#2islikelytooccurorattheElliottCpoint.
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InOreexample#1,itcanclearlybeseenthatthetimebetween“c”and“2”wasseveralweeks.ItistheElliott#2pointthatwillbethefocusinthenextchapter.AndrewslikedtoenterusingtheOREpoint.Itoftenpinpointedtheendofcorrections.InOreExample#1,the#2wasbackataboutthesamepriceasthe“C”severalweekslaterandgettinginatthe“C”wouldnotnecessarilyhavebeenmuchofanadvantage.
Theanalystgainsmuchmoreconfirmationutilizingthetechniquelearnedhere.Ascanbeseen,priceszoomedthemedianlineandleftaspacebetweenthemedianlineandpivot#2.
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AndrewsRulesCombinedwithElliottWaveTheory
Andrewsheldthatifpricesdidnotmakeittothemedianline,theywerelikelytocompensatebygoingpastthenextmedianline.
WhenthisiscombinedwithElliottWaveTheorycoveringthethirdthrustwave,thetraderhastheopportunitytoparticipateinamovethatbothElliottandAndrewswouldconsidertobeaprobablestrongorlongmove.
Figure#16showsthatpriceszoomedthemedianlineastheyweremakingpivot#1andthenfailedtomakeitdowntothenextmedianlinewhentheymadepivot#2.Priceleftalargespacebetweenpivot#2andthemedianline.
Eventhoughthemoveupfollowingpivot#2ischoppy,itisalongone.
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Figure#17isaweeklyS&PchartthatshowstheconceptofthezoomoftheMLatpivot#1withpricesfailingtomakeittopivot#2noted.
Ascanbeseeninthechart,pricesonceagainmadeanextendedthirdwave.Othertechniqueswouldbeusedtodetermineexactlywhentoenterorexitthetrade.
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WhySelectivelyFocusUponAPartofElliottWaveTheory?
Granted,AndrewsAdvanceCoursetechniquesprovidespecificwaystofindtheendofmostcorrections.
Andrewswantedhisstudentstoworkfortheknowledgeandstudychartstolearntoapplyhismethods.Tothatendheputverygeneralrulesinhistradingcourseandencouragedhisstudentstosendhimtheirchartworkorcomeandvisitwithhim.
Thepatternthatisthefocusofthisbookcomesinmanydifferentforms.However,aswillbeseen,thereareafewveryspecificcommonalitiesthatthechartistcanfocusuponinordertoseeallofthesepatternsasessentiallythesame.
Figure#19showsthatevenaftertheendofanElliottWave(labeled#5),theremaybeasuccessfulzoomandfailure.Thereasonthisisnotemphasizedasaplacetofindalongorstrongmoveineverycaseisbecause,inmanycases,theresultingmovesthatarecorrectionsaresidewaysandchoppy.
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BylookingforABCmovesatthestartratherthantheendofafifthwave,onehasahigherprobabilityoffindingthelongorstrongmoves.
Thenextfourexamplesfurtherillustratethetechniqueunderavarietyofconditions.
TheABCpivotsareusedtodrawthefirstML,tolookforthezoom.ThentheBC1pivotsareusedtolookforthefailureofpivot#2tomakethemedianline.Thiswaytheendofwavetwooffiveisfound.AccordingtoElliottWaveTheory,itisthethirdwavethatismostoftenthelongestandstrongest.
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LettingtheRulesWorkforYou
ElliottWavepatternswillprovidesomeinterestingopportunities,ifyouareflexible.Itisimportanttorememberthatthereisoftenanotherextendedthirdwavewithinanextendedthirdwave.
Thissecond2-3wavemaybethewavetofocusinonwithinthewaveitself.
Anotherimportantfactisthattheextendedwavecanalsobeinthefirstorfinalwave.
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Thismeansthatifthetraderisvigilantandwillingtotrade2-3wavesthatareinsidethefirstorlastwave,additionalopportunitiesexistforfindingtheextendedwave,whichinthiscasewasthethirdwaveofawaveofsmallerdegree.IfthechartistfoundanABCpatterninsidethe(1)–(2)waveusingasmallertimeframethanonthechart,thenquitepossiblyhewouldhaveseenthisasaviablepattern.
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UsingSoftwarethatCombinesAndrewsandElliott
Overtheyears,thewriterhasexaminedvarioussoftwareproducts.Manyhaveloadsofimpressivefeaturesandevenattempttoforecastfuturewavepatternsbaseduponvariouswavetheories.
ThefirstsoftwarethatcontainedAndrews’lineswas“Orion,”buildbyPaulRabrichfortheApple2+computer.ThefirstversionsofPrecisionTraderwerebuiltbyLorenPage.ThemostpopularisPrecisionTraderversion3.0,whichwasdesignedandbuiltbyMichaelandPavelRada.TheyweremotivatedtogointosoftwaredevelopmentbytheresultsofMichael’smaster’sthesis.
MichaelRadaconductedaUniversityofViennastudyinthe1990’s,inwhichhepolledsuccessfulfundmanagersinVienna.Heaskedthemabouttheirtrainingandtowhattheyattributetheirsuccess.Beinggoodmoneymanagers,theyallhadgoodstories.However,theonecommonfactortheyallsharedwashavingtakentheAdvancedAndrewsCoursethroughliveseminarsconductedbytheauthorofthisbook.
MichalandPavelbuiltasophisticatedcomputerprogramsaidtorivaltradestationinsomeofitscapabilities.Theymadeanarrangementwiththewriter,wherebytheywoulddistributethegraphicschartingportionoftheirsoftware.
Thesoftwaretheybuilthasvarious,uniquecapabilities.Thecapabilitiesincludedbeingabletotraintheuser,auniquepivotlabelingmethod,andatrendforecastingmodel.Allofthesewerecapabilitiesbeyondthoserequestedbythewriter.Michaelwentontobethevicepresidentofr&dforamajorLondon-basedhedgefund.
Aproductisunderdevelopmentthatwillhavefeaturesthattakeadvantageofthechangesincomputertechnologyandthemanyinsightsthatoriginatefromthehundredsofpagesoftheoriginalcoursematerialthatwehavebeenresearching.AyoutubevideoshowsthewritingsofDr.Andrews.
ToseethemassivecollectionoforiginalAndrewspapers,gotohttps://www.youtube.com/watch?v=MnrxXMCwhOI
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TakingittotheNextLevel
Whenmedianlinesaredrawnoncharts,itisacceptabletotakeittothenextlevelintermsoftheElliottswing.
Ascanbeseen,alargemedianlinewasdrawnfrompivots4-5-1.Thisisalargermedianlinethantheonesthatwouldhavebeenusedtodeterminewhetherornottherewasazoom,andthemedianlinewasnotmadeatpivot(2).Notethatthe“c”pointisalsoaPivot2.Thiscouldbeathirdwaveinsideathirdwave.Theseareofinteresttomanywavechartists.Note,inaddition,thattheABCcorrectiondidnotmakeittothemedianlineasoccursin20%ofthecases.Intheory,pricesthencompensatewhentheygoup.
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Figure#24showsbothofthelargermedianlinesdrawnandtheABCiswithinoneofthem.
NotethatthedownslopingmedianlineisnotmadeattheCpointofthesecondABC,buttheup-slopingmedianlineismadewhenpricesgoupagain.Wavescomeinvarioustimeframesandtheremaybeseveraltimeframesavailableatanytimefordrawingmedianlinesanddoinganalysisonthecharts.
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Figure#26isaForexEURUSDchartshowingthatatanytimetherearemultiple,possiblemedianlinesdrawnandmultiplepivotsofdifferentswingdegrees.Notethatatpivot#1pricezoomedthemedianlineandatpivot#2pricesdidnotcomeclosetothemedianline.WhatpricesoftendoatpivotsC,3,4,and5isdiscussedinotherpublicationsbytheauthor.HecanbecontactedatAndrewscourse.comhisemailaddressisronj@san.rr.com.
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EnteringtheTrade/InvestmentTherearevariousstylesthatareusedtoenteraposition.
1)Breakaway-breakout.Thisiswhenpricesbreakoutofatrend,inmostcasesinthedirectiontheanalysisispointingwhereitwillgo.
Abreakawaytothedownside,pastthetrendline,isalertedontheESchartasanexample.
2)Pullback.Afterthedeterminationhasbeenmadethatatrendinagivendirectionisinplay,thensometraderswaitforapullbackof50%to81%beforetheygetonboard.
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TheEURJPYexampleshowstwodifferenttechniquesforenteringonapullback.Oneiswhenpricesreturntoamedianlineandtheotheriswhenthereisa61.8%pullback.
Theexactvalueofthepercentageofapullbackissetbythechartist.Itiscommonforpricesatapivot#2togotothe50%to81%pullbacklevel.
3)Athemeapproach.Thisiswhenthereisabeliefthatsomethingwillgoinasetdirectionforthelongtermandentriesarefoundthatwouldhavetheinvestorprofitfrommovesinthatdirection.
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Inentryexamplechart1,thelinescanbeseenthatwereusedforthethreestepsandthe
possibilitiesforanentrythereafter.
Entryexample2isaForexeurochart.Onceagain,youcanseethepowertrendmovesetup,whichisthethree-stepssetup.Thereafter,therewasthebreakawayandthepullback,asnotedonthechart.
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Aweeklygoldchartshowinganentryexample,abreakawayandpullback.Noteinthiscase,goldisinadowntrendandgoingshort;itisinordertotakeadvantageofthis.
TheNewmontminingexampleshowsthelinesneededtodeterminethatthethreestepswerecompleted.Notedalsothepullbackthatoccursafterthebreakaway.
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ExitingtheTrade/Investment
Takingprofits,withthistheoryistypicallyduringthefifthwave.
Theremayalsobeothercriteriaforexitingthetrade.
1)Amaxdollaramountorpercentagehasbeenmetandastoplossistriggered.
2)Pricesappeartobeinsomethingotherthanastandardthrustpattern.
3)Pricesareneartheendofwhatappearstobeafifthwaveornearaprobableendpoint.
FigureX1showsthegoinglongindicationnearthebottomofthechart.Noticethatexitismarkedwherethedistanceofwave(4)-(5)isthesameasthefirstwave.TheperfectElliottWavetradecouldhavebeenmadenearthehightickbecausethisiswhereapivot5(5)wasmade.
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FigureX2showstheexactsamesoybeanchartdrawnwiththemedianlinedrawnaspricesheadtowardspivots#5and5.Notethattheywerenotabletomakeittothemedianlineandweresoweakthattheyreversedatthelowerparallel.
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KeepingProfitsfromVanishing
Afterridingthethirdwave,manyanalystsrecognizethenotionoftakingprofitsbecausethethirdwavemayturnouttobeaCwaveofanABC.Thisisaneffectivewayofkeepingasubstantialportionofprofitsevenifpricesgoupforafifthwave.Whenthethirdwaveisanextendedwave,itisoftenthecasethatafterafourthwavecorrectionthemarketwillgointothefifthwave,whichistypicallybeyondtheendofthethirdwave,butnotnecessarilybymuch.
Wefoundthatwhentradingstockswithasinglemethod,itisusefultousethefreeservicenotedinthenextchapter.Asaresultofdoingthatwefoundwithsomesystemsafteramonthortwoyoucanlookbackatyourtradesandseean80/20relationshipfactorintermsofyourmostprofitabletrades.Inadditionitbecomesveryeasytodeterminehowmuchcapitalisneededtoworkasystem.
Forexampleafteralongrealtimeparalleltestwefoundthatoneparticularsystemonlyneededamaximumof1/3ofthecapitalwesetupforit.Thefirstsystemmadeanaverageofabout3.3%amonthwithamaxdrawdownof1.5%.Afteradjustingforthe80/20relationship,wearelookingforwardtothenextrealtimeparalleltestyieldingahigherpercentage,withanevensmalleramountofcapitalneeded.
Whentradingtherearevariouscostsinvolvedincludingcommissions,chartservicesandequipment.Tokeeptradingcostsmanageablechartingservicesandcommissionsaretwoimportantvariables.Besuretocomparethecommissionsandservicesprovidedbyatleastthreebrokeragefirms.WhenitcomestochartservicesweuseeSignal.WeutilizeeSignaldataforoutcharts.
AllchartsonourwebsiteandthisbookarecourtesyofeSignal.Thisfirmhasaninterestingservicethatcomeswiththeirdatafeed,itcansaveyouhundredsinmonthlyexchangefeesfordatafortheasking.Thisiscoveredingreaterdetaillater.
Hint:Youdonotneedtoactivelytradetotakeadvantageofthis,justhaveanaccountwithoneofmanydeepdiscountfirmlikeinteractivebrokers.
Howeveritisprobablyavailablewiththebrokeryoualreadyhaveanaccountwith.
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Gettingstartedwithminimalrisk
AccordingtotheAuthorofthebestseller“TheBlackSwan”,whenitappearsthatthereisnorisk,iswhenriskisgreatest.Thisisthepointwherewhatthetraderorinvestorperceivestobeawhiteswanisreallyablackswan.Hesuggeststhatitismoreproductivetohandlevariousrisksininnovativewaysthatleadtobetterlongtermresults,thantolookonlyforsituationsthathavenorisk.Evenputtingassetsincashhasrisk.Inthiscaseitisinflationrisk,wheretheuseofthemoneywillturnlessvaluableovertime.
Perhapsthisiswhystrongmarketsareknowntoclimbawallofworry.Theygoupforreasonsunknowntomostinvestors,inspiteoftherisksknownbymany.Inthischaptertherewillbeadiscussionofwaystoeliminatevariousrisksintradingandtheinvestorwillbeshownandencouragedtoutilizetoolsthatresultinnorisktotheirtradingcapital,initially.
Therearevariousstrategiesthattheinvestorortradercanusetodealwiththevariousriskfactors.Forexample,afterdevelopingatradingstrategy,it’stimetotradewithoutcapitalriskbyusingatradingsimulator.Theobviousbenefitisnotriskingyourcapital,onlyyourtime.Probablythemostimportantreasonisthatitgivesyoutheopportunitytotestvariousstrategiesandlearnwhattheweaknessesare.Performingtestsonhistoricaldatabydevelopingthemethodonanearlytimeperiodandthentestingitonalatertimeperiodisusefultoseewhatmighthaveoccurredinthelatertimeperiod.Whenthatsystemdevelopmentstageiscompleteditisvitaltodowhatisoftenreferredtoasrealtimepapertrading.
Withtheadventoftheinternetthepapertradinghasturnedintousingparalleltradingsimulators.Investopedia.comisoneofmanyfreeservicesthatgivestraderstheopportunitytoinvestparalleltotheactualmarketinamannerthatrequiresthetradertodoeverythingthatwouldnormallybedone,inazerocapitalriskenvironment.Thereareotherfreeservicesthatpermitparalleltradingsothatthetradercanproperlyprepareandhaveaclearersenseastowhenitisproperforhimtouseriskcapitalintrading.
Howlongshouldonetradeaspartofproperpreparationwithasimulatortradingparalleltoactualmarketactivity?Theamountoftimeandtradeswillvarydependinguponavarietyoffactorsthefirstofwhichisthefrequencyoftrades,butinanycaseitwouldtakeaminimumofsixmonthforanewtraderandabareminimumoffiftybuyandselltransactions.
Duringthatperioditiscommonforthetradertofindgoodreasonstomodifysomethingthatisinvolvedwithtrading.Atthatpoint,theclockandnumberoftradesneedstostartalloveragain.Forsometradersitmeansbacktotheoriginaltestingtimeperiodtoseehowthetradingmethodwouldhaveworkedoutyearsago.Someinvestorsfindthattheyneedtodothisafewtimesinordertohaveamodelthatfitstheirpreferencesandstyle.Thismakesperfectsensebecauseifoneputscapitalatriskduringthistimeperioditismostlikelylost.
Evenwithararewhiteswantradingsystemthathasnothingbutwinningtrades,weaknessessuchasdistractionsorothereventsthatcauseimproperactioncanhinderthetraderandcauselosses.Eventsthatcauseimproperactioncanbeanythingfrombadpricedatatospillingcoffeeonakeyboard.Topreventmarketmovessurprisingyouanddestroyingexcessivecapital,placeastoporder.
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TheThreeSteps
Step1;findasimpleABCzigzagpattern.
Step2,AftertheABCdetermineifwhilemakingthepivot#1priceszoomedthemedianlineandwhilemakingthepivot#2priceswerenotabletogopastorclosepastthemedianline.
Step3,Utilizeavirtualtradingaccountinrealtimeforasubstantialperiod,withlowriskandsubstantialvirtualprofitson30ormoretrades.Afteryouhaveasolidtrackrecordandfeelconfidentinyourabilitiesconsiderstartingtotradewithrealmoney.
AtthestartofDecemberof2012theauthormadeavideothatdemonstratedthethreeeasystepstotaketobecomeseasonedatfindinghighprofittrades.Thethirdstepwasanoriskwaytotradeaportfolioofthirtyormorestocksforabareminimumofatleastamonth.
Atthetimeinadditiontotradingthestocksinmybrokerageaccounts,avirtualrealtimethirdpartyaccountwasusedthattracksthetimeandsalesoftradesinrealtime.Thechartisfromthataccount.
ThereminderofthischapterwillshowchartsfromtheS&Pindex,2010through2012.Youwillalsoseethelabelingofthepivots,alongwiththetwosetsofmedianlines.Notethatineachcasetheruleswerefollowed.
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ImprovingPopularIndicatorsAnindicatornotedbymanytradersisreferredtoasthegoldencross.Thisiswhenthe50-day
movingaveragecrossesabovethe200-daymovingaverage.Afterthisoccurs,pricewilloftentravelabovethefifty-daymovingaverage,indicatingastronguptrend.
Manytradershavenoticedthatpriceswillcorrectdowntothefifty-daymovingaverage,wheretheybounce.Theconceptisalsonotedindowntrends,ascanbeseenintheNewmontMiningchart.
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Newmontminingisinadowntrendandpricesgouptoandreversenearthe50dayMA.
Thecorrectionbacktothefifty-daymovingaverageisoftenenoughtothenbethereversalpointforafurthermovethatgoes15-50%oftheprice.
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Thisconceptofusingthemovingaveragecanbeveryusefulasaninitialindicatorforacomputerizedscanningtool.Thereafter,anAndrewsindicatorisaddedtodeterminethegeometriclinewherepricesshouldreverseandcontinue.
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TheAndrewsOreindicatorwasunveiledinAlanAndrews’writingsinMarchof1974.Itisarelativelyunknownindictor.WhatwasthesourceofAlanHallAndrews’marketgeometry?Thisandmorewillberevealedintheanotherbook.
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ViewonRiskManagement
Tradingissomewhatlikewalkingindeepgrasscarryingeggsinyourhandsinthatyouneedtopayattentiontoseveralthingsatonce,sincetherearerisks.
Knowhowdeeptheriskforeachtradeyoutakeisandkeepitunderasmallpercentagesothatifyoudropaneggortwo,youwillnotbewipedout.
Themethodsweteachwillgiveyoumoreopportunitiestohavegoldeneggtradesandkeeptherisklow...bepatient,themarketwillprovidemoretradessoonenough.
Ifyouneedmoreopportunities,youcanexpandthenumberofinstrumentsyouaremonitoringratherthanincreasetheriskpertrade.
Keepthemaximumatriskatanymomenttoareasonablenumber.Limitrisktoonethatwillnotrequireachangeinlifestyle.
Anexampleofriskmanagementfromagreattrader:
IfyouintendtotradeleveragedETF’s,knowthattheyareverydifferentfromfuturescontractsandnon-leveragedETFSinmanyways.Onanoutrightpurchase,theriskappearslimited;however,theydonotalwaysfollowthemarketlikethefuturesortheunderlyingtypicallydo.Duringthemarketdownmoveof2008thereweremanyinvestorswhohadlongpositionsin“3xshortindexETF.”Thiswasduringaperiodwhenthemarketwentdownconsiderably,which,intheory,wouldbeaprofitabletrade.Forsomereasonitwasn’tforthem.Itappearsthatthisisnotuncommonduringperiodsofwildmarketmovements.
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Resources
Tojointhefreeyahoobaseddiscussiongroup,gotoAndrewscourse.comandclickupon...NEW?
Avideowascreatedafterthisbookwaswrittenthatcoversthematerialinthisbookandmore.
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Aprivatediscussiongroupwherestockswiththepatternsshowninthisbookarediscussedisavailable,[email protected].
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WhatiscoveredintheAdvancedAndrewsCoursebyRonJaenisch?PleasegototheAndrewscourse.comwebsitefordetails.
ThiscoursecoversthemanyaspectsoftheAndrewsandBabsontechniquesandpresentstheminover25videos.
Thelarge,colormanualhasadditionaltechniquesandgoesfrombeginningtoadvancedlevel.Themanualhasinittheonerulethatisusedforfindingallthird(#3...expandedornot)waves,whilethethirdwaveisinprogress.
Beingareaderofthisbookentitlesyoutoadiscount.AskforthePowerTrendDiscount.
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TheExpandedCourseisalimitededition;ithastechniquesnotfoundelsewhere(suchastheOREindicator)andalsohasseveralvideoscoveringhowthecoursemethodsinteractwiththevariousElliottWavepoints.
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AllchartsonourwebsiteandinthisbookarecourtesyofeSignal-Qcharts.Thisfirmhasaninterestingservicethatcomeswiththeirdatafeed;itcansaveyouhundredsinmonthlydataexchangefeesjustfortheasking.WehaveanarrangementwithScottFitzgerald,asalesrep.Ifyoucallhimat1.800.322.0940andmentiontheAndrewscourse,youwillbechargedatleast$25belowthemonthlyservicechargelistedontheirwebsite.Hint:Youdonotneedtoactivelytradeormakeapurchasefromustotakeadvantageofthis,justhaveanaccountwithoneofthemanybrokeragediscountfirmssuchasinteractivebrokers.