Forex Secret – Trend Reversal Classical Figures in Technical Analysis at Forex Market (Part II)

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See beginning of this article under name “Forex Secret. Trend Reversal Classical Figures in Technical Analysis at Forex Market (Part I). “

Below the trend reversal figure called “diamond” is depicted.

(For view the picture see notes in end of article)

E. Neiman states that the “diamond” figure is used just as a signal of the “bull” trend reversal after receiving the confirmation on the level of the “A”-line. Consequently, it is a good position for the downwards-directed opening.

The translation of the inscriptions in the Chart given below:

The framed inscription: This chart has been already submitted before – when an example of the “head and shoulders” figures is examined. However, in the course of time it is found out that this figure is more similar to a “diamond”. One should sell after the breaking through the 2nd line of support.

(For view the picture see notes in end of article)

There arises a series of questions, addressed to Neiman, and not answered by this author.

One should with attention reread the inscription, given by Neiman in this Chart: “it is an example of the “head and shoulders” figure. However, in the course of time (?!) it is found out (!!!) that this figure is more similar (?!) to a “diamond”. One should sell after the breaking through the 2nd line of support”.

In his analysis, Neiman sticks to the analyst’s typical position. That is, according to such specialists, the auction at Forex is necessary for detecting a figure of the reversal or trend continuation post factum.

The trader’s needs are cardinally different – i.e., figures of the trend reversal/continuation are necessary for detecting the point (figure) of the trend end:

· The closing of bargains in the old trend;

· The opening of bargains in the new trend.

Elder’s position concerning the “diamond” figure of reversal principally differs. Elder describes this figure in the following way. Starting as an expanding (divergent) triangle, finally this figure takes the form of a symmetrical triangle. To recognize this figure, one must be very concentrated. The “diamond” originates directly from Rorschach chart. Looking at this figure with attention during a long period of time, one can notice the “diamond”. However, its value for a gambler is minimal. This author was looking for “diamonds” himself but the majority of them were “zirconium fakes”.

Further in his “Trader’s small encyclopedia” Neiman has agreed with Elder. Neiman confirms that the signal is weak not only for the expanding triangle but even for the taper-type (converging) one – if the breaking occurs towards the backward direction (along the old trend). The “diamond” figure construction is based exactly on this very principle: a new trend starts developing in the direction, opposite to the old one.

One can see the confirmation on the “A”-line level and an additional signal. There is a weak position for opening upwards/downwards.

(For view the picture see notes in end of article)

So, who is right – Elder or Neiman?

What must a trader do when this figure appears during the auction? Along what trend must one work – along the old or a new one?

In what point one can see

· The new trend confirmation.

· The new trend cancellation and a flat.

· The new trend cancellation and prolongation of the old one.

Will the trader stay out of the market?

· Will the trader open a long/short position?

Every trader must find clear answers to these questions. That is, one must come to know the particularities of the situation. Otherwise, a trader will inevitably leave Forex for good, which happens to 19 individuals of 20. Seemingly, Elder, Neiman and other classicists of the technical analysis don’t grasp the essence of these problems.

A problem posed by Masterforex-V Trading Academy is to determine a clear distinction between a “true (genuine) diamond” and a “zirconium fake” – the latter notion implies the false figure of reversal. A. Elder has not dwelled on this difference. What must be added to the world-known standard chart of “Diamond” in order to clearly see when Elder is right and when Neiman’s approach is correct.

Let us examine the above-given chart that depicts Neiman’s approach. Briefly to say, Neiman defines the signal as “weak” when it is leaving the triangle. According to this analyst, in the model of “diamond” the signal is “heavy”. What is the difference between the two cases? In fact, there exist no clear distinctions. Just the movements will result in different ways, and the consequences will become apparent only afterwards. At the same time, a trader needs to see such distinctions at the very beginning of the movement.

Rounded models of the “top” and “bottom”

In “Technical analysis of future markets: theory and practice”, J. Murphy describes this figure as a “saucer”, “rounded top/bottom”, “bowl (cup)”. This pattern depicts a very slow, gradual change in the tendency under the condition of changes in the trade volume, presented in the lower part of the chart. Both in the cases of the patterns of “top” and “bottom”, the trade volume diminishes in magnitude when the market performs a gradual transition. Further the trade volume starts heightening as the new tendency is gaining in strength (the corresponding graphs resemble a “saucer”).

There is an example of a “saucer” at the top of the market. The tendency towards the heightening starts gradually to weaken (subside). The rise in prices is slowing down. Further there starts the smooth movement towards a new downtrend. The reader should notice that the trade volume in the lower part of the chart forms its own “saucer”. Often this model of the top is called the “upturned (inverted) saucer”.

(For view the picture see notes in end of article)

J. Murphy denies the existence of strict rules of detecting the “saucer” bottom pattern. The reader must reflect on this statement, which will permit understanding the figure essence, missed by J. Murphy.

Thus, what a trader must do when this figure emerges in the terminal graph?

The reader should try to understand why Elder, Schwager et.al. don’t relate this figure to figures of reversal. What’s the reason?

V-type patterns or “spikes”

The local maximum in the “bull” trend (or the local minimum in the “bear” trend) is another figure of reversal. After this figure comes into existence, a sudden steep reversal occurs.

The trend reversal “spike”-type pattern according to J. Murphy.

Here Chart 5.9c from “Technical analysis of future markets: theory and practice” by J. Murphy is depicted. This chart represents an example of V-type turns, bearing resemblance to spikes. This author writes that abrupt V-type turns are inherent in the market of black oil. The absence of the transitional period substantially hampers the trader’s work. One should pay attention to the number of days, after which there occur the radical turn and insular (local) ones.

(For view the picture see notes in end of article)

Chart 5.9a from the same book presents an example of V-type pattern of the “top” (or “spike”). As a rule, patterns of this kind appear after a feverish “bull” trend – when the market “overstretches (overextends)” upwards. A radical turn (sudden change) in the tendency dynamics can occur at the key-turn day. Otherwise, an insular turn can come into existence. The market reverses “on tiptoe”. The movement direction undergoes U-turn.

(For view the picture see notes in end of article)

In the same book, Chart 5.9b serves as an example of V-type pattern of the “top” (or “spike”) for the market “bottom”. The downtrend immediately changes for the rising tendency. This happens without any preventive signal or a period of transition. It is one of the most complicated (intricate) patterns for the detection and speculations at the stock exchange. Most often the V-type turn is preceded by a rash development of the market. Intermediate modifications are almost absent in the tendency – alterations that come into existence are totally insignificant. As a rule, in dynamics of such tendency several gaps (blanks) in prices are present. It looks like the situation at the market gets out of hand (becomes uncontrollable). The market has exceeded all conceivable and unthinkable expectations. An experienced trader knows that one must be very careful under such conditions.

Drawbacks of criteria of the “spike”-type trend reversal pattern, presented by J. Murphy

According to J. Murphy, it is most difficult to identify (recognize) the “spike”-type reversal figure during its formation. At the same time, one can encounter it rather frequently (it is quite commonly encountered).

Surely, every trader is day-dreaming about the victory in this maddening competition. At a certain moment in the course of the tendency development, even an experienced trader can sense that something is going wrong. In a way, it is analogous with “riding on a tiger”. However, to catch a tiger and sit down on his back is just half the work. It will be much more difficult to safely dismount from this dangerous animal.

One should reread Murphy’s description of this reversal figure once again. The goal is the following.

1. To understand that Murphy is completely incapable of understanding the essence of the given figure of reversal and regularities inherent in it.

2. To understand why traders lose their game.

That is, a trader must see

· when this “rather common” figure arises,

· at what point it may (and must) be detected,

· what instrument of the analysis can prompt that the deal may be held upwards/downwards almost all over the course,

· at what point the trend is over – as well as many other aspects.

However, Murphy just recommends “to be very careful” and “to sense the danger in time”. What precise criteria these are!

The “spike”-type pattern of the trend reversal according to Schwager

Schwager goes to the other extreme. In “Technical analysis. Complete course”, he tries to examine the “spike” figure of the trend reversal purely from the viewpoint of mathematics.

In his book, Schwager gives an example of the upward-turned spikes (Chart 6.4; cocoa, March, 1995). This author submits the following explanations:

(For view the picture see notes in end of article)

Ht-1 denotes the maximum of the previous day;

Ht+1 denotes the maximum of the next day;

k is a numerical coefficient (arbitrary or to be determined???) (e.g., k=0.75);

ADTR implies the average daily true range during the last 10 days;

2Ht-Ct > 3(CI-LI)I;

CI is the price of closing at a given day; LI is the minimum at a given day;

Ht exceeds the highest maximum in N previous days (N is a prescribed constant (for instance, one can choose N=50).

The 1st of the mentioned conditions guarantees that the upward-turned “spike” exceeds the neighboring tops – at least by three-quarters of the average true range during the last 10 days (when k=0.75). In accordance with the second condition, the closing of the day is located in the lower quarter of the daily price range (from the maximum to the minimum). The 3rd condition stipulates that the maximum of a given day must exceed the highest maximum within the last 50 days. This guarantees that the rising movement in prices preceds the given day. Generally speaking, the higher is the value of N, the more intensive must be the previous growth.

This description of the “spike” demonstrates the possibility of constructing a mathematically-precise graphical pattern. Other definitions are possible as well.

Drawbacks of Schwager’s trading system in detecting the “spike”-type trend reversal pattern

Issuing from Schwager’s description of the “spike”-type trend reversal pattern, a trader will rather lose than gain profit. To understand the reason, we will “translate” Schwager’s explanations into the language, more eligible for traders.

1. A “spike” becomes formed under the condition of the previous trend prolongation, accompanied by the breaking through the resistance (a local maximum during the ascending movement) or support (a local minimum during the descending movement). Thus, it is the trend prolongation pattern. After this, the currency pair unexpectedly and steeply reverses.

Neither Murphy nor Schwager mention points of reversal, which could become a border between

· the recoil, after which occurs the trend continuation;

· the trend reversal towards the backward direction.

2. Instead of giving points of reversal, Schwager tries to determine “the maximum within the last 50 days (why exactly 50 but not 51 or 100?).

3. Can you imagine the intensity of a trend that is moving in the same direction during 50 days, maximums being formed one after another? Precisely at the 51st day one must “catch” a peak and open a bargain against the actual trend! And what if the trend will last out a year longer (or even several years more) – see Chart that depicts USD/CAD movement, 2002-2006. Besides, the closing of the day can be located in the lower quarter of the price daily range. In this case, it is common recoil, after which the trend will go on again, and no reversal will happen.

In other words, one may try to find a local maximum (minimum) at the 51st day and, starting from it, to open a deal against a heavy tend. The reader can easily guess what will be the results of such experiments.

Below one can see Chart w1 – USD/CAD, 2002-2006.

(For view the picture see notes in end of article)

In smaller-scale timeframes (H1-4), one can find a great number of “spikes”. In a timeframe of a larger scale (w1), such “spikes” don’t change the “bear” trend of USD/CAD pair during 4 (!) years.

It is USD/CAD movement in the timeframe H1 during 23.08-12.09, 2006.

Below USD/CAD movement in the timeframe (H4) is depicted.

Can the reader imagine how many traders lose their money due to Schwager’s technique – those who expect the “spike” pattern (the trend reversal) to develop in a heavy trend at the 51st day?

(For view the picture see notes in end of article)

Apropos, Schwager himself agrees with this estimation (characteristic) of such “scientifically-mathematical” techniques. He writes that in the given examples at least one “day of reversal” is reported in vicinity to a real maximum. However, often several upper reversals occur during the ascending tendency (buoyancy) but only false signals are generated. The day of the upper reversal in vicinity to the actual top doesn’t come into existence. One can state that in the days of the upper reversal 100 signals are generated per every 10 maximums. In other words, sometimes days of reversal produce perfect signals. However, more often such signals are false.

Below one can see Chart “Days of reversal: a signal that indicates the “coming of bears” – cotton; June, 1994.

Here R denotes the day of reversal

Spikes and days of reversal, plotted simultaneously – coffee; September, 1994

(For view the picture see notes in end of article)

In order to understand the “spike”-type reversal pattern, one must come to know the particularities that have remained unclear to D. Schwager.

1. What is the difference between the “spike” of correction (the lower one in Chart from Schwager’s book) and the “spike” of the trend true reversal?

2. What is the mechanism for realization of this reversal in small-scale timeframes?

3. When the reversal in small-scale timeframes

· is transformed into a reversal in timeframes of larger scales;

· turns into correction, after which a new wave of the old trend arises.

Reversal patterns according Masterforex-V Trading System

1. At Forex, all patterns of the trend reversal serve for the only purpose – i.e., they must indicate when to close a deal in the old trend and to open a deal towards the opposite direction.

2. In their essence, all figures of the trend reversal are the same – classicists of the technical analysis did not pay attention to this fact.

3. Perusing charts of the recoil in books by Murphy, Schwager, Neiman and other classicists of Forex, one can come to a depressing conclusion. That is, the analysts either don’t understand the essence of the tendency reversal or their charts are on purpose plotted in such a way that the reader cannot get the core of the tendency (trend) reversal.

4. The reversal patterns can be conditionally divided into the following groups

· There are very intensive (heavy) signals – the figures “head and shoulders”, “spike”, “diamond”.

· Just intensive signals – the “triple/double top/bottom”.

· The reversal figure features in common – it’s the reversal inner nature.

· The difference between reversal figures consists in the form of reversal.

5. Each reversal starts in small-scale timeframes. According to Masterforex-V Trading System, there exists a certain binary regularity, characterized by very clear criteria. The movement in small-scale timeframes can turn into a reversal in a timeframe of a larger scale. Otherwise, just a correction can happen, after which a new wave of the same trend starts.

Masterforex-V Trading System doesn’t recommend opening a real account before one can clearly understand all these aspects.

Note: Full text of this article and pictures of examples you can see on http://masterforex-v.su/002_009.htm

If you wish to be trained on Trading System Masterforex-V – one of new and most effective techniques of trade on Forex in the world visit http://www.masterforex-v.su/



Source by Vyacheslav Vasilevich

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