Friday, 14 December 2012

Historical Median/Reaction lines and build yourself price structure with organic support and resistance-EurUsd-irrefutable proof

Build/show price structure...To do this I use my own pivot 'rating agency'. I evaluate-initially visually, and then mathematically every pivot on my chart. I start in the higher time frames simply because intra day charts are meaningless for this purpose as intra day closing prices are a completely arbitrary construct in which a discrete time structure is imposed on continuous price data. Remember all charts are just data presentation mechanisms and the market does not have a concept of any of them; they are purely our creation. The close of a bar is a snapshot of a price traded in the flow of market activity but with 24 hour trading there is only one really true close which is now the weekend. I suggest you start with the weekly chart or better still the monthly. Remember, it stands to reason that the 'king' pivot of a monthly chart is more important the king pivot of a daily chart. My monthly Ace trumps your daily Knave/Jack. Get it? So it stands to reason and it is confirmed that the higher the time frame your reaction/Median line originates the greater the potential influence it will have on price. Also my research and observations revealed that recent price activity has a greater influence on current price. This is a relative argument and may seem like an oxymoron in relation to my previous comment  but simply put the most important pivots in the weekly TF are the most recent in the series.
Lets take an example: Heres the monthly chart of cash/spot  EURUSD:
I have in the above chart added a simple modified Schiff fork. The mid point of the swing ( blue line) is P0 and then use the most recent two swing highs and lows. Now we manually add the reaction lines and hey presto!!!
Now  below we drop down to the 240 min ( remember the dynamics of your/all charting platforms distort line locations)

 OK now back to the weekly and draw this fork( below)
Now drop down to the 240 min and add these recent pivot values and relationships which express three pivots each. This D/sloping fork has 2 warning lines....
Now two upsloping forks off these two moderate (recent) low pivots
Now add this fork plus RL's in the 60 min TF
Well, That shows us where the recent trend came from.
FINALLY drop down to 10 or 14 mins and you get this....

and this is the log scaling version ( note the difference)
 we have only drawn a few forks and if you give the forks different values ( ie thicker lines for the higher times frames) you can see the highest probability support and resistance

CONCLUSION: So, what we have done here is i believe reveal perhaps .01% of true market structure. I have wrestled with this problem for some years and yes i have tried to draw dozens of forks and reaction lines to attempt to reveal more but what i found was that apart from loosing clarity by having an over cluttered chart was that some forks are more important than others and have a greater effect on price. The higher the time frame the reaction line and median lines originate in the higher the probability of them offering support/res ie a new pivot but each time frame is relative to its study; after all a weekly pivot can take days or weeks to form and yet within that single weekly bar there are another set of pertinent ML'sRL's. After many years of observing price within these linear studies I now create multiple studies for example the e mini S&P. I add forks/RL's in time layers as i drop down from daily to 240 to 120 to 60 to30 etc. What is really needed is a new data presentation system such as this 3D graphical illustration of price as seen here on Nanex website and to get away from using bars, candles, tick charts. It is sadly beyond my skills or intellect to create such a program to show price action around a linear study such as a ML or RL in 3D -let alone an animated one such as the NANEX link above.
Lastly remember one thing about charts with pitchforks and reaction lines. It is what i call the 'Russian Doll' theory. Every fork drawn expresses a series of pivots that are contained within a wave but that wave is part of a greater/larger wave and thus is contained in another fork and that fork will be within another fork etc. The most important relationship is between the major pivot and the next immediate pivot ( before any retracement) and then the most recent pivot. In other words P0 is a big Low then take the first high ( end of wave 1) and not the highest high as P1 then the most recent low as P2..... the results will astound you. The lattice effect that is created of these reaction and warning lines is never definitive but this selection of what i call the FIRST and LAST pivots or FNL forks is the best to describe price action and deals with the awful problem presented by using an Andrews fork on pivots that create a Andrews forks at absurd angles. In the FNL fork the first 2 or 3 sets of reaction lines have the greatest effect but as you can see in the example this is the fork that just keep giving!!

So some years ago I asked myself these questions.
1. How, using new observations and understanding do i best build a chart and use pitchforks (all types) and reaction lines that best expresses price and that has the greatest correlation and shows the highest possibility/probability organic framework ( rather than just multiple random studies)?
2. How do I construct a new (and any existing) set of rules for trade entries and recognised trade setups and how do i build and integrate them purposefully and  profitably into a unique trading system?
If you wish to know more about what i developed (and despite being a 'naked' trading system is consistently profitable over the last 3yrs 4 months) you can either contact me directly or view our existing website.
I believe I am one of the few sites to publish our weekly equity curve, trades and P&L-warts and all!!

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