RULES FOR REACTION LINE SETUP- Part 1of 6

OK, for several weeks, even months i have been saying that i would publish rules for my reaction line setups and charts and will now endeavor to put into words the way i setup my charts and then how i actually make a trade entry. Firstly i am using a Median line/Pitchfork indicator tool that automatically draws reaction lines and warning lines if required. The RL's can be extended as rays from the upper and lower median line parallel and you can choose the colour and style. This indicator is available on demand free from my email mediantrader@aol.com but is only available for Metatrader4 as a MQ4 file. Ensign Windows does draw RL's but not warning lines as such.
E-Signal does nothing(!- it will draw WL's but it is a cumbersome tool) and all RL's have to be calculated and entered manually as separate line segments.
1. The first thing i do is to appraise the chart in a high time frame and look for what i call a 'controlling swing'. This is what John Crane would call a Reaction Swing (there the similarity ends). It is in effect a correction/retracement against the prevailing market direction and the more substantial the better. For this blog i am going to use spot gold chart as an example. Firstly to keep things simple here is a recent e-signal spot gold 240 min chart.










For the moment forget all the other forks drawn except the RED coloured fork/ML set. This was a sharp retracement against the prevailing trend back in May onwards). This i chose as the controlling swing. Why do i call it that? Because as you will see price action is still being controlled within its RL's and warning lines many months on. There is always some debate about what pivots to use and my advice is that you should use pivots that abide by Dr Andrews rules even if price is not fully contained within the fork and price has exceeded (sometimes alarmingly so) the upper and lower MLP's. Then using your Metatrader tool set the fork to show extended ray RL's and warning lines. Choose colour and style to suit.










Above is the controlling swing seen in the green fork in a 60 minute chart TF with its reaction and warning lines in dark red- the latter dashed dark red. You can see the pivots used are classic P0,P1 & P2 and that price leaves the fork after some time and no clear interaction between the warning lines can be seen....don't worry. You can play about with different pivots depending on the results and it is not unusual for me to use two ML's in the same controlling swing if both give good results. More about this later but i would say that the more you add ML's the more cluttered your chart becomes and it will be unusable in high time frames due to the lattice of RL's & warning lines.-No worries.
Once you have drawn your controlling swing ML with it's extended RL's and warning lines you should add any important long and medium term forks with just RL's (not extended and no warning lines). Then you end up with a lattice of hexagonal squares that resemble Pyrapoint or
Gann grids etc.










The next thing you do is drop down to 15 or 30 min TF and your results should be similar to above. Price action walks up and down and seems bound by the shackles of your reaction and warning lines and provide support and resistance as price oscillates. There are several points that should be borne in mind. The resolution, accuracy and quality in high TF's is usually lost but is proportionate to the TF you originally draw your controlling swing in. ie if you are drawing on daily charts then you should see results in 60min charts but if you draw you controlling fork in a 60 min chart then you should go down to a 5,10,15 mins TF. For accuracy i suggest you draw in 60 or 240min and view results/trade in 10, 15 or 30 min charts. Remember even a small error in P1 P2 is serious and a tiny error in P0 is a disaster as you will see no correlation between price and the RL's/WL's. For this reason is drawing a fork in a high TF try going down to at least 15 to make sure they are anchored correctly and if possible down to a 5 min TF.
The controlling swing used in the above example from May is still controlling price today and here are two 15 min TF shots from yesterdays sharp drop.










If you then add in your current short term and long term forks for that market you will end up with a multi forked chart with RL's and warning lines which show a stunning correlation between price action and the energy pf your lines. It is not unusual for RL's/WL's to exert influence on price even after price has left that ML set which can seem bizarre as you must leave many old ML's which price has long left with their RL's on your chart if price could be affected by the extended RL in the future.
Another factor is the angle of the RL. The angle of slope effects price differently and it is a wise move that you should try to find both supporting and resisting RL's. RL's that slope up with price
and RL's that slope down against price.
If you try to draw a similar chart using the above technique and price does not interact with your RL's/WL's then quite simply you have the wrong pivots and must play around until you achieve the desired effect. I have tried (and am in the process) of taking this method to its ultimate conclusion which is to draw nearly all possible controlling and regular forks and produce a chart which shows maybe 'price' itself as it is pushed and pulled by the every support & every resistance offered by the RL's. Due to the congestion that arises from so many lines it is impossible to include all on a single chart but i have succeeded in going as far as i think it possible without using a software program and have produced 3 charts in 3 TFs for each major currency pair that have eye watering accuracy at low level TF's like 5 to 15 & 30 mins. These are available for a regular subscription from mediantrader@aol.com.
However as with the most accurate charting methods of reaction and warning line grids trade entry is another art and the second posting in this series will aim to show how i have incorporated tried and tested indicators to confirm setup entries.