Elliottware analysis: the Contrarian way of machine learning analysis of Elliott Waves

This is another analytical tool for the trader. I have a group about this approach of the Elliott Wave analysis.

This approach is completely different from the common Elliott wave applications. The common Elliott wave software and applications are trying to put the market action in a set of predetermined rigid rules. This is quite the opposite we are using manual Elliott Wave count or even we do not need to count the waves.

What we need to do is to identify segments. And in those segments we are going to use a predictive software.
Unfortunately this is not a grail because many things are not in the price, e.g. accumulation of open orders.



http://beathespread.com/groups/profile/77/elliottware-machine-learning-extension-of-elliott-wave-principle

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New Project

I have a new project. This is not really a forum. This is trader's social network. You are welcome to join the party.

http://beathespread.com/

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Daily Swing Strategy

This strategy is somewhat between the intra - day strategies and the Trend following strategies.

I include this strategy here because it is traded intra - normally.

I will insert just one screen shot. This is intra - day swing strategy. It is a huge error to try to scalp with this.

It is difficult to say at what time frame we are going to look for daily swings. Normally it is between the 30 m. and 15 m. time frame.

The 1 h time frame is quite big and can be used in some conditions as a pronounced trend. Normally we use the 1 h time frame for an entry for the real swing trades and not for intra -day but every one has to apply common sense and act according to the situation.

The 5 m time frame is too quick for a swing strategies. But sometimes with this template there can be found very sweet opportunities, especially when we have a persistent trend movement.

OK with this template for intra-day swing trade a lot of common sense has to be applied. Lokk at the market conditions. Take care of news announcements do not try to swing trade during announcements.

The appropriate market conditions are:

15 m and 30 m red FGDI : Persistent movement and a trend probability.

Filters: JCFBaux is indicating trend (try to evaluate the levels that will indicate trend)

SSA (and the polarysed fractal efficiency) has a signal in a direction with the dot signal of the Brain Trend

Those algorithms work very well on most of the market conditions. They start to misbehave when we have a clear choppy price action. But that can be identified bu the FGDI.

Anyway a black noise movement can occur at every moment and cannot be predicted.

Example:

Look at the last signal. We had a short entry. But now it is late to go on the short side. That is why because the fractal dimension went on the 1,5 level. And on that level we have a 50/ 50 probability between continuation and reversal.

On the other hand the SSA indicated by two arrows a possible reversal. Usually this is not a signal. In fact after the screen shot the price moved 15 pips in that direction. But this was not a swing trade signal.

We have to distinguish the normal swing trade and the swing trade from the system. Normally we can go on the long side, but this system has not given a long signal yet.

This system is a very reliable swing trading system. Do not try to use it as a scalper system.

Scalping requires much more experience. And this system if applied the turtles way can bring good results.

Everything can be downloaded from there:

http://microhedgefund.blogspot.com/

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Anti-persistent movement anticipation system (AMA)

This system is opposed to the Persistent Movement Following system (PMF).

Condition:
15m time frame: FGDI Blue
30 m time frame: FGDI Blue

The market us usually range bound and we have to use a system for range.
There are many choices. Often Oscillators are used and everyone has its favorite.

From the classical oscillators my choices are:
-TRIX (this is a good oscillator)
-Normalized SSA (after a major work on Forex TSD we have end - pointed non repainting SSA)
-John Ehler's Oscillators from his book of Cybernetic Analysis for Stocks and Futures. (this is a classic, it is a big pleasure to read his books and his insights about oscillators)

In those market conditions it is a good choice to make a use of the Bollinger Bands. Usually I prefer two bands. One is a classical of 20 time period and one larger of 60 time period.

The market movement is so complex that is better to analyze it with the statistical instruments. Make your choice.

The KEY: The key of the system is that if the market makes a break-out beyond two standard deviations of the 60 Bollinger bands (sometimes even the 20, but it depends on the volatility) we have a probable fake break - out if the FGDI is far in the Blue Zone and there is not an increase in the Hurst difference indicator

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Persistent Movement Following (PMF) System

This system has nothing to do with the normal trend following system.

1. The normal trend following system

The normal trend following system normally requires to follow the trend on a bigger frame and make a precise timing on a lower time frame. This is a basis of the classic trend following system.

The most common implementation is to have a moving average, oscillator and multi-time frame analysis. Normally people with basic knowledge should understand what I mean.

For example if we use the moving average and the oscillator on one time frame often the moving average has a larger time period to take into account the trend on the bigger frame, or if we have a moving average on a larger period and an oscillator on a lower generally the moving average has a shorter time period.

Traders are trying to make better those systems by two ways:

-they try to add more instruments, more moving averages and more oscillators on the same graphic. So we have a plethora of instruments of the same graph and we can be paralyzed to use them.

-they use a combination of the technical indicators with pattern recognition of the old school of technical analysis (classic patterns, Elliot waves, NEowaves, Wolf waves, Microwaves :) etc.).
This is the best the classical technical analysis can offer in fact.

On the other hand there are a few traders who are adaptive traders. They are not trying to predict anything. Their main concern is to read the market condition and adapt to it.
For example you have two systems a trend following system and a range system and the market is range bound.

According to you what will perform better? A trial of optimization of trend following system for range bound market or a unoptimized system for range.

This is an interesting question and for sure I do not have a precise answer, but I think that even an unoptimized system will work better when it operated in its conditions than to optimize an inappropriate system.

As a matter of fact that is the hype in the forex bots. System that are adaptive (they know when to stop, and they know haw to switch subsystems inside of them) can outperform the systems that cannot adapt to the environment.

The the key is to read the current market conditions and to observe any move that can cause their change.

For example recently what caused a change in the market conditions in the Euro/USD was the fact of a break-out in the short side during the beginning of the european session. That did not mean that the market had to correct to a Fibonacci ratio after the impluse, but the meaning was that the market had changed its state, the balance was perturbed. What happened after was a sharp counter-reaction. As a result many bears were trapped. The meaning of those phenomena is to warn us that the market state has changed. And the market dynamics has changed also.

2. Day trading trend following system or persistent movement following system

The persistent movement following system is different from the trend following system. The hype of this system is that we do not define it as trend is defined (as a higher high or a lower low as it is usually done.)

We define the daily persistent movement following system as a following the price time series when some conditions are met: market state of red zone in the FGDI in two critical levels: 15m and 30 m. time frame.

Those market conditions usually lead to a persistent movement. Take care the movement can reverse at any moment. Externally that can look as a trial for swings, trying to catch the bottom and the high, but in fact this is a persistent movement following system that can be used only at particular market conditions.

After that we need an optimized system of digital filters. Everyone has its choice. And we follow the signals.

Normally in the market there are cycles between anti-persistent periods (Blue FGDI) and persistent periods (Red FGDI). Sometimes that coincides with the change of the volatility sometimes not.

In fact in the Forex market in the day trading the patterns are the results in the cyclic activity of the volatility. When we have a low volatility the price time series usually forms the patterns. And when we have an acceleration in the volatility usually we have a break- out.

3. The Fractal Break-out as a signal

Often the beginning is after a fractal break-out. After the fractal break-out we follow the signals of our system.

Usually a trend is formed but this is not necessary. After the fractal break-out we have a correction. That is a good point of market entry. This is called by one of my favorite authors a Ross hook. We use this Ross hook with a Trader's Trick Entry (TTE). (make a Google search I will not explain it now, Joe Ross makes the best explanation anyway on his site there are some free resources like the Law of the Chart and a Presentation of the Ross Hook and the Trader's trick entry (TTE), I ask the reader to download them because I have some ideas for their Fractal Edition.
http://www.tradingeducators.com/ ).

The end of the system is when we observe that the market's fractal dimension goes back to the 1,5 level.

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Fractal dimension Break-out and Break-in

As Bollinger says it is always better to ask the market what is going on than trying to predict it.

Ok let see some examples with this fractal dimension method of analysis. We are going to use the FGDI to identify fractal break-outs and break-ins.

Fractal break-out

I have explained what means a fractal break-out (a transition of the FGDI from blue to red or from red to blue).

Fractal break-in

A fractal break-in means when we are in red the FGDI goes further into red territory. That means that the movement being persistent gets more persistent. In fact those are the sweetest opportunities we can get from the FGDI.

The danger of the black noise

A black noise phenomenon. The black noise is frequent in the Forex market. It can be described as a radical change of the direction of the price time series, without any reversal technical configurations like double top, double bottoms, head and shoulders etc.

The black noise occurs almost always when we are in a red zone of the FGDI, so be careful.

OK let see the exemple.

The first mark is the break-out the FGDI moves clearly from blue to the red zone. We have an indication that a break-out is coming.

After that we have two break-ins the FGDI goes more into red territory. We have an intensification of the trend.

I have observed this phenomena a long time before starting writting on this blog and a particular strong correlation has been observed between the changes of the estimated fractal dimension and the price movements.

We have a black noise phenomenon we see that the price reverses when the FGDI is really deep into the red zone. So when we see that it is important what the FGDI will do. If it goes back to the 1,5 level we have a decreasing probability of continuation. The odds are for a correction.

If the FGDI is still in the red zone that may be a true reversal and the price would continue to go down. In this case the multi-frame fractal analysis helps and a volatility analysis helps also.

After that we have the FGDI going back to the 1,5 point. That means we are at the brownian motion zone, the price movements are believed to be random at this point. We can go to the blue zone (inverse fractal break-out) are having a break-in back to the red zone. In fact we do not know what is going to happen.

In this case we can use are knowledge in the statistically observed volatility. We know that at this time it is normal that the Euro could get a rest, and that is confirmed by the fractal dimension giving a structure more favorable for a correction and sideway movement than for continuation.

But rember those are only probabilities. I really recommend that someone who begins with this type analysis will use in the beginning only the clearly identified patterns. After that he mays found his own patters and use it more complex way.

So this example for today shows how we can obtain a structured analysis in difficult trading conditions. I find the fractal dimension analysis particularly helpful in detecting the market state conditions. And the market state will gives us the answer what strategy to use and to trade or not to trade.

The FGDI gives us an insight what is the mood of the time price series. An original idea is to combine this analysis with the implied volatility and the correlation.

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Fractal Break - out trading system

The first system I will develop on this blog is the break - out trading system.In fact this intra-day strategy is well known and is used every day by the professional traders. It is the the same system or almost, because we are going to introduce some new techniques.

Why by the professional traders?

The explanation is simple, in fact to use this strategy you have to be at the computer terminal and to wait for the proper conditions to happen. Everything is played in seconds and if you miss your entry you miss your day.

The second reason is that break - outs often occur in the beginning of the European session and at the opening of the US session. Well during those times it is the day work of the professional traders. They are there and they are watching for their daily opportunities. During this time the casual and amateur traders are at their work, in their office or simply doing their business. When they get back home and start the terminal they just observe tons of missed opportunities and that is normal. After that they try to play a break - out strategy when it is most unlikely to happen (mostly during hours of diminishing volatility) and as a consequence the odds are against them and they fail.

Does it sounds familiar?

The third reason is that in order to use a break - out trading system you need to have an appropriate broker. If you use a normal retail broker despite of their advertisement of fixed spread you will be re-quoted or slipped. You need to have a special broker services to succeed with this strategy. For example an excellent choice is Dukaskopy, but in order to open account with them you need a large account that is beyond the possibilities of the average retail wannabe speculator. And as this blog is specially dedicated to the average wannabe retail Forex speculator it is important to note that. You will be the last guy to react. The first reason is that you are not properly trained and a professional guy will be much quicker in their response, and the second reason is that you will get a worse fill than the professional guy.

OK the good news is that as the Forex market works 24 hours a day you may be in a position to be able to use a time window appropriate for a break - out system. You have to be very motivated to do that because if you are US citizen you will have to wake up in the night to watch for break - out opportunities during the open of the European session.

Classical description of the strategy

The simplest form is a channel break - out.

Channel breakouts occur on the upside and downside.

Upwards channel break: when the price of a currency rises above the top channel line.

Down side channel break: when the price of currency falls below the bottom channel line

Just google the term price channel and you will get a plethora of technical sites explaining it and how it is traded.

Basically the ideal price movement is in a price channel. The price channel can be horizontal (range channel) or directional (trend channel). In fact it does not matter the type. When a price breaks the borders of a chart channel we have a break - out of the channel. If that happens we have a probability that the market conditions has changed and the price will further go away from the channel.

The channel can be regular but it can be irregular. All the classifications of the channels is in fact the technical analysis.

So it may appear a paradox but the technical analyse is just a classification of the extern characteristics of trading ranges without any kind of insight what is going on.

In fact a break - out of a trading range is the Bread and Butter of the technical analysis.

The form of all the technical chart patterns is a result of random events (some guys think that they are a result of Chaotic Attractors and are chaotic events). What is the truth I do not know my opinion is that they are mostly chaotic but sometimes the chaos is so great that in practice we can analyse them as random.

We can have a channel, we can have a triangle, we can have a wedge. What we have is a product of the market activity.

All the classification of the technical analysis is somewhat artificial. That is because it classifies the external traits and not the true internal characteristics that are hidden.

But do not be mis-leaded, the classification is useful, because when a pattern is identified is defines the game of play of the market participants.

Well let do some basic staff.

A channel defines a trading range. We have up limits and down limits of the channel. You need at least two points from above and from below to draw a price channel. Then just draw a line connecting the up limits and the down limits of the channel.

Well, but when the prices goes beyond the channel and the gets back to the channel often the technical guys will tell you that you have drawn the channels improperly and you need more educations. When you get more education you will draw the lines properly but again you will see the prices go beyond the channel and get back to the channel. As in the avatar the pilot says before going to battle Ain't that a shit.

This is called a false break - out that happens more often that we want to admit (50 % of the cases ;) ). Ain't that a shit again?

Anyway My idea is to get new details how to trade a Break - out.

1. Use of the volatility probability

We have a break - out probability in periods of increased volatility. So it is necessary to check statistically the volatility. This is well known by the professional players.

2. Use of fractal indicators FGDI, IVAR, FDI

We use a fractal dimension graph index indicator (FGDI). When a breakout occurs it is accompanied with a change of the fractal state of the price series.

2.1 Fractal Break - out

Conditions: We are at a blue zone with fractal dimension greater than 1.5. We move to a zone below 1.5. This is a fractal breakout

This is usually observed after a range (FGDI greater than 1,5)

2.2 Fractal Break - in

We are at a red xone, fractal dimension less than 1,5. The fractal dimension get lower.

This is usually observed in an established trend when we have a breakout in the direction of the trend

3. A peak in the Hurst Difference

Well this is a kind of measure of the change of the transition of the fractal dimension from one state to the other.

4. Use the correlation between the Forex pairs

Use an indicator to compare the correlations in real time. Do not rely only on historical correlations. This method requires much more experience.

For exemple:

EUR/USD and GBP/USD are positively correlated: when the euro goes up the pound does the same

EUR/USD anf USD/CHF are negatively correlated: when the euro goes up the frank goes down

For example in a case of a break out it is highly unlikely that the pairs are going to have a break out in a different direction.

For example you see a valid break-out in the euro with change of fractal dimension and a peak in the Hurst difference. It is highly unlikely that the pound will do a break out in the same time. There is a usually a delay. So use this to have a fill at advantage conditions in fact we still can have a good fill in the euro but sometimes in highly volatility conditions the fill will be very bad with a lot of slippage (experienced traders prefer to enter after a correction and this is especially true when you have a long break - out bar). In this case a fill in the pound or/and the frank can be a good idea, of course the spread is larger but the fill will be in normal conditions.

Do not try this during news releases. I haven't tested yet and can make any recommendation whatsoever.

EXAMPLES

OK let's now look at some recent chart. You will see how this can enhance the technical analysis and especially to confirm a technical breakout. Look at the screen shots at the beginning of the post.

You will see the conjunction between a technical analysis breakout and a fractal breakout.

This can help you to identify when a break out is a real one.

Look at the charts the trend channels are drown differently the fractal dimension analysis helps us to have a more clear picture of what is the real price state. Fore example during the Asian session you can see a clear trend. But this was not what happened. We had a treading range and a little break out. When you see the sum of it yeah, it appears like a trend but...

FRACTAL TECHNICAL ANALYSIS: New rules for drawing trend lines

According to the fractal technical analysis the rules of drawing trend lines are different.

A trend line is used to draw a channel of price range. It is logically to draw channels only when we have the same characteristics of the price time series.

Draw trend lines only for red zones or blue zones.

Do not Draw trend lines in a zone where you have a combination between a high fractal dimension (blue FGDI, antipersitent movement and range probability) and a low fractal dimension (red FGDI, persistent movement and trend possibility).

After that draw the classic trend lines. In this case we can have a clearer picture of the trend lines.

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