Tuesday, March 30, 2010

Supplementing Elliott - My Triad of Technical Tools

Taking a break from the regular posts and discussion surrounding the ins and outs of bullish or bearish longer term counts to focus on 3 supplemental technical indicators that lined up this morning on the 30 min EUR/USD charts, providing an excellent opportunity to hone in some trading skills.

The 3 indicators are:

Price Trend Channels - Lines drawn in parallel to each other connecting price peaks (upper line) and valleys (lower line). Helpful in determining potential price trending. Strongest trends indicated by 3 or more touchpoints on each channel, however, I have found that in the real world of trading, waiting until 3 touchpoints happen to enter a trade usually ends up in the trend changing. In Elliott wave, trend channels are absolutely invaluable in mapping out probable moves of impulsive and corrective moves alike.

Relative Strength Index (RSI) - A momentum indicator comparing the magnitude of losses to gains. Useful in determining overbought vs oversold conditions. Also very useful in determining the end of Elliott wave patterns by watching for places where prices reach new highs or new lows, but RSI does not follow (divergence). I use a fairly standard duration period of 14.

Moving Average Convergence/Divergence (MACD) - A momentum indicator using the diference between a shorter term and longer term moving average, and comparing to a "signal". Crosses of the signal by the moving average difference may be signalling a shift in momentum. I use duration periods of 5 and 35 for the moving averages, and a standard 9 for the signal. I find 5 and 35 work very well to determine momentum changes helpful in determining the most probable Elliott wave pattern in effect.

I use these "tools" so frequently in my Elliott wave analysis, that if one or two are not giving me a signal and my primary Elliott count is, I automatically lower the risk profile of my trade as a result. If none of them are firing me a signal and yet my Elliott count is, it typically means that my Elliott count is wrong. Is this case, I am usually in "wait" mode until signals start firing on these 3 or my Elliott count is proven incorrect.

Is it a perfect method? No way! No trading method is perfect all of the time if you trade professionally... no matter what those marketing it tell you. The best methods are those that assist you in managing risk, tell you to get out of positions with a sizable gain instead of a small gain, or a small loss instead of a big one.

Using these 3, I have found that false signals tend to be rare because of the use of all 3 plus the Elliott wave. More often, I anticipate the signals trying to jockey for a better price position for my trade, and the market winds up not giving me the signals that I anticipated. This last tendancy is my particular achilles heel in trading... I am often early. My 2009 trading results last year reflect both my use of these 3 indicators, Elliott Wave analysis, and my achilles heel.

Ok... on to the charts...

Todays action on the 30 min EUR/USD was a great example of Elliott wave, and the 3 signals firing off. Using the alternate Elliott wave count from yesterday which gave us a count that would eventually begin to retrace its move up from last week, and each of the indicators above, a clear signal is given. First in the RSI and MACD.... new highs in price with divergences, and a MACD rollover... followed by a trend channel break at about 1.3490. This was followed by a drop to 1.3395 after the 3 signals fired... 95 pips potential profit! And this without having positive confirmatiuon yet as to whether the very bearish allternate Elliott wave count is in play or not! The move down after the trend channel break looks like it may be a small degree wave 3, but in the meanwhile, I have a strong position to either wait for the Elliott count to take hold
(for longer term trading), or take profits if I am trading the short term charts only.

Later on today I will update the EUR/USD short term counts, likely with the alternate from yesterday shown above (bearish) as the primary, but want to wait until the action from today has time to tell us more of its secrets.
blog comments powered by Disqus
Ping your blog