Elliott Wave Principle and the Stock-Market Cycles

An American accountant called Ralph Nelson Elliott studied the stock-market volatility during the 30s and concluded that certain price movements (patterns) tend to repeat themselves during different time frames. Until then investors considered market fluctuations as random events. Elliott supported that the stock market is moving in a recognizable pattern and that was called "Elliott Wave Principle".

The most crucial step in implementing the Elliott wave principle is to identify the pattern upon the market is moving today. Wave patterns consist of two phases: an impulsive and a corrective phase. Impulse phase is composed of five sub-waves (graph 1, 2, 3, 4, 5) and move in the same direction of the main trend. Corrective phase is composed of three sub-waves (graph a, b, c), and it moves against the main trend. In the graph below the basic Elliott Wave Pattern is presented.

Graph: Elliott Waves

Read more: Elliott Wave Principle

ΔMP & Σ(ΔMP) -Τhe Latest Technical Indicator by TradingCenter

TradingCenter is always striving to provide the trading community with innovative technical analysis tools and techniques. The aim is to help traders better analyze the financial markets and accurately understand the cyclicality of certain asset classes. ΔMP is the latest technical analysis tool by TradingCenter. ΔMP is an indicator that can be used on any financial asset and almost on any chart timeframe.

Introducing ΔMP -Measuring Momentum using Historical Intraday Ranges

In my latest eBook, I introduced ΔMP. The mission of ΔMP is to measure and illustrate the historical momentum of any Forex pair, or any other financial-traded asset. The book is found here:

► The Hidden Patterns Behind 15 Forex Pairs: Revealing Momentum and Seasonal Patterns Based on 18.5 Years of Daily Exchange Rates

Forming ΔMP:

ΔMP is formed by summarizing the historical divergence between closing rates and intraday ranges.

Calculation

This is how ΔMP works:

ΔMP reflects the daily difference between the Closing Price and the Mean Price

□ Where:

Mean Price = (Daily High + Daily Low) / 2

ΔMP = {(Closing Price – Mean Price) / Mean Price} %

Read more: ΔMP and Σ(ΔMP) Indicators

Forex Technical Analysis

Using Technical Analysis Tools to trade the Forex market is a complicated but common task for every Forex trader. Here are some of the major technical indicators concerning the Forex Market. 

1) Relative Strength Index (RSI):

The RSI measures the ratio of upward and downward movements on a scale of 0-100. If the RSI is 70 or higher, it’s a signal that the market is overbought (that means prices have risen more than market expectations). If the index is 30 or less it’s a signal that the market is oversold (that means that prices have fallen more than market expectations).

When trading Forex intraday, it is recommended using RSI on the 5-Minutes chart. It is recommended also to seek for divergences between the price chart and the RSI chart (H1, H4, D1). These divergences may provide very reliable reversal signals.

Key Tips when Trading with RSI:

(i) Use RSI(21) instead of the standard settings of 14-periods 

(ii) Divergences between the price chart and the RSI chart can provide powerful reversal signals

(iii) For evaluating key price reversal/continuation you can use RSI(21) on the H4 and D1 charts

(iv) When evaluating short-term overbought/oversold levels you can use RSI(21) on the 5-Minutes chart

(v) In order to perfectly time your trades, wait for RSI(21) to reverse after reaching an overbought/oversold level (20/80) 

2) Stochastic Oscillator:

The Stochastic Oscillator is used by Forex traders to indicate an overbought or oversold Forex exchange rate on a scale of 0-100%. The index is based on the assumption that in strong-upward-trend-period closing prices tend to be concentrated at the highest point on the scale shown. Conversely, if prices fall in a strong downward trend, closing prices tend to move towards the lowest point of that particular period. Stochastic calculations produce two lines (% K and % D), which used to define the levels of an overbought/oversold Forex exchange rate.

► Technical Analysis Indicators at the Trading Center

Read more: Forex Technical Analysis

Chart patterns are distinct formations on a price chart of a financial-traded asset. There are many different types of chart patterns that are distinguished by a wide variety of unique features. When a chart pattern is confirmed, there is a high probability that a certain (upward/downward) price movement will occur, in the near future. A chart pattern is not able to predict with certainty a future price movement, however, it can indicate a high-probable trend reversal or continuation. Chart patterns are very useful in confirming the indications of other technical analysis tools such as MACD or RSI.

Two Categories of Chart Patterns (Reversal and Continuation Chart Patterns)

There are two major pattern categories -the Reversal and the Continuation Patterns. Reversal patterns signal the end of the current trend and continuation patterns signal that the price trend is likely to continue in the same direction.

(Α) MAJOR REVERSAL CHART PATTERNS

(1) Head and Shoulders Patterns

• Reliability: 7/10

The Head and Shoulders pattern is widely used among traders and is considered one of the most reliable reversal patterns. The timeframe of these patterns includes a few weeks to many months. There are two types of head and shoulders chart patterns (top/bottom).

(i) Head and shoulders top is a chart pattern that signals the end of an uptrend (on the left of the following chart)

• Success rate (≥ break-even): 81%
• Average decline: 16%
• Percentage meeting target: 51%

(ii) Head and shoulders bottom, or inverse head and shoulders, that signals the reversal of a downtrend (on the right of the below chart)

• Success rate (≥ break-even): 90%
• Average rise: 45%
• Percentage meeting target: 71%

Read more: Chart Patterns & Probabilities

Harmonic Price Patterns

Harmonic trading is based on geometry and fractals. The core of this trading practice incorporates the primary ratio and its derivatives (1.618, 0.618, etc.). Harmonic price patterns work as a sign of potential trend retracements. These patterns can be combined and confirm trade ideas deriving from other technical analysis tools.

The best book for understanding harmonic patterns is “Harmonic Trading” by Scott M Carney.

Introduction to Harmonic Patterns

The harmonic patterns generate signals of upcoming sharp reversals in the currency rates, stocks, indices, etc. In general, these reversals cover a price zone between two Fibonacci ratios, and this is commonly called a Price Reversal Zone (PRZ). Harmonic trading can be seen as high-probability trading. Harmonic patterns are more reliable in M30 and higher timeframes. The general win/loss ratio of harmonic trading strategies is above 70%.

Read more: Harmonic Price Patterns

Being able to measure and quantify risk/return is a top priority when trying to evaluate investment portfolios. There are a lot of sophisticated tools that can help investors evaluate risk-adjusted portfolio performance. These tools are also useful to compare investment strategies, indices, or even the historical performance of different money managers and hedge funds.

Combining Risk and Return into a Single Comparable Value

There are two main investing goals: (i) get the highest annual payout (Return), by (ii) minimize the chances of losing money (Risk). By combing risk and return into a single value, investors can compare the real performance of different portfolios. This combination is called risk-adjusted portfolio performance. This analysis includes the following risk-adjusted portfolio performance ratios:

(1) Sharpe Ratio

(2) Sortino Ratio

(3) Treynor Measure or Traynor Ratio

(4) Jensen Measure or Jensen Alpha

(5) Calmar Ratio

(6) MAR Ratio

(7) Omega Ratio

(8) Information Ratio or Appraisal Ratio

(-) Key Points of the Analysis

Three Key Investment Concepts Before Moving On

Before moving on with the ratios that measure risk-adjusted performance, it is important to mention some basic concepts. These concepts include the risk-free rate of return, the standard deviation (SD), and the maximum drawdown. Most of the following performance ratios are partially based on these three important components.

(i) The Risk-Free Rate of Return

The risk-free rate refers to the annual return an investor can earn without taking any risk. Generally, the risk-free rate of return is based on the annualized interest paid on a 3-month Treasury bill. Any investment that is expected to offer lower returns than the risk-free rate of return is an unacceptable investment.

• You can use the annualized return of the 3-month US Treasury Bill in the US or the 3-month Euribor in the EU

Read more: Risk-Adjusted Portfolio Performance Ratios