Strategies Follow Rules, But Rules Are Made To Be Broken

I have been studying about Technical Analysis for about one year now. I have used some strategies that have worked really great. But I have come to understand that successes don’t depend of the indicator or the strategy you use; it depends on how good you use the tools you have. And for tools I mean indicators, resources and knowledge. You must have the knowledge to indentify which indicator is the best to use in a particular situation and how much of your account you are willing to risk.

In order to make myself clear I give you an example. I develop a simple forex strategy. I use Bollinger Bands and a 15 EMA cross to confirm the signal and I trade under trendlines channels. So, I was trading in my 5 mins timeframe on December 1th as usual with my simple strategy. I was trading within this tunnel when I identify a very familiar pattern. At the beginning I didn’t recognize what it was, but I was shocked when I realize that I was facing a perfect Elliot’s Wave formation. I have studied about this patterns formations and honestly I thought it was something very difficult to understand and very unlikely to happen. But look at this chart!!!

So I take advantage of the situation and I enter when the 5^th wave formation was confirmed. I set my target in the support trendline. When the trend hit my take profit and it cross the support trendline. As it was expected the trend continues with a trend correction and because I had seen an old support level before, after the downtrend was confirm I set that support level as my next target. In fact, when the trend touched the support level it bounced back and the 15 EMA confirm a change of direction in the trend. As I was sure of the Elliot’s Waves I set the next target just below my old trenline recently form as a resistance trendline. At this point my feelings get into play and I decided to wait for the next wave confirmation. Sadly the 15 EMA become flat and the trend turns irregularly. However, I took a deep breath and I set my last target at the old support level. I wait in this position for at least one and a half hour when the price close under my take profit at 1,2679.

All that said I have made all those pips in this particular situation which could have only been 67 pips if I have followed just my simple strategy. A forex powerful strategy must have its rules and we must follow them strictly. However, we must have a flexible system that allows as to introduce the right tool for the right situation.

 

Alligator

This forex indicator indicates when to follow the trend and when to desist from entering the market over certain periods. In principle, Alligator Technical Indicator is a combination of Moving Averages that use fractal geometry and nonlinear dynamics.

· The blue line (Alligator’s Jaw) is a 13-period Smoothed Moving Average, moved into the future by 8 bars.

· The red line (Alligator’s Teeth) is an 8-period Smoothed Moving Average, moved by 5 bars into the future.

· The green line (Alligator’s Lips) is a 5-period Smoothed Moving Average, moved by 3 bars into the future.

When the Jaw, the Teeth and the Lips are closed or intertwined, it means the Alligator is asleep and the Moving Average Lines converge which could indicate a trend correction or just a channel period formation.

Once the Alligator wakes up, it opens its mouth and the Moving Average Lines. In this scenario, a clear trend is available when the Alligator lines are in proper order. In an uptrend, Green Line is at the top, Red Line in middle and the Blue Line is the lowest; the price is above the Alligator’s mouth. In a downtrend, the Blue Line is at top, Red is in the middle and the Green is the lowest; the price is below the Alligator’s mouth. In a channel or sideways market, the lines are mixed up.

In my experience this is a basic indicator and it can be use with several indicators. In fact, there are many forex strategies based in Alligator signal confirmation. Fractals and Resistences & Sopports Levels are the most popular mix of indicator that can use an Alligator’s principles to build a successful forex strategy in the market.

For example, as you see in the figure, I follow Alligators downtrend signal confirmation. The Alligator’s mouth is wide open and the price has already broken the support level at 1,42754. As my trendline support has been also overtaken I can anticipate the price is heading towards the pivot at 1,40345 level. That way I set a selling stop just below the trendline and another one in between the pivot and the first resistance.

 

Elliot Waves

In the financial markets we know that “every action creates an equal and opposite reaction” as a price movement up or down this must be followed by a contrary movement. Price action is divided into trends and corrections or sideways movements. Trends show the main direction of prices while corrections move against the trend. Elliott labeled these as “impulsive waves” and “corrective waves”.

Each transaction in the market, by communicating transactional data to investors, joins the chain of causes of others’ behavior which is governed by man’s social nature, and this the process generates forms. As the forms are repetitive, they have a predictive value.

The Five Wave Pattern

The interpretation of the Elliott’s Wave Theory is as follows:

• Every action is followed by a reaction.
• There are five waves in the direction of the main trend followed by three corrective waves (a “5-3″ move).
• A 5-3 move completes a cycle.
• This 5-3 move then becomes two subdivisions of the next higher 5-3 wave.
• The underlying 5-3 pattern remains constant, though the time span of each may vary.

In markets, progress ultimately takes the form of five waves of a specific structure. Three of these waves, which are labeled 1, 3 and 5, actually effect the directional movement. They are separated by two countertrend interruptions, which are labeled 2 and 4, this two interruptions are apparently a requisite for overall directional movement to occur.

Wave Numbers

As before, the termination of yet another eight wave movement (five up and three down) completes a cycle that automatically becomes two subdivisions of the wave of next higher degree.

 

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