Technical Analysis – Finding Order in Chaos
In today’s Money Weekendâ¦ a universal patternâ¦ there are two areas outside the range where I’m looking for signs of price direction changesâ¦ the alert I sent on January 30 before the crash â¦ and moreâ¦
In last week’s Trader’s Corner, I dropped a huge amount of information on your knees on the different characteristics of expanding distributions.
A universal model
Here is the list of people who missed it:
- Amateurs buy in the upper half and short sell in the lower half
- Amateurs are uncomfortable at the checkpoint (POC)
- The market often returns to the POC to shake up traders
- The size of the false break is related to the size of the initial range
- Once the prices have doubled the size of the range, the distribution is over
- The best entry point is 61.8% outside the range against the trend and 25% outside the range is also useful
- Blurring False Breaks is a Powerful Risk / Reward Strategy
- There are areas in the range that often see POC inversions. They are known as buy and sell zones and the calculations are 12.5-25% and 75-87.5% retracements of the initial range.
- Calculations for buy and sell areas within a range also work for retracement of waves in a trend
- Prices will revisit the POC one last time before embarking on a new trend
- You can use the mean reversion feature to lower your average entry price
- After about five false breakouts of the range, the odds increase that a continuation or trend reversal is near.
This week we’re going to focus on just one of those characteristics, so you can see how powerful it is to understand why these patterns are formed and how you can take advantage of them.
In point four above, I told you that the size of the false breakout is related to the size of the initial range.
This is a pretty useful thing to know. This means that you can perform calculations based on past data to find points where you have a good chance of prices changing direction and returning to POC.
In point six above, I expand on point four by saying that there are two areas outside the range where I am looking for signs of price direction change. These two levels are 25% outside the range and 61.8% outside the range.
Many of you will recognize 61.8% as a Fibonacci level. I will not go into detail on Fibonacci levels. If you are new to trading, you can go here to find out a bit more about them.
When I tell you that there is a relationship between the size of the false breakout and the size of the initial range, what I am actually saying is that most trader stop-losses are in a certain area. outside the current range.
Once most of them come down, prices seem to soar. But the point is, the gravitational pull of the POC is still there.
When you look at the chart I’m showing you below, consider what the chart looked like when prices were 61.8% above or below the range I’m calculating from.
There are not many traders who would consider taking a position against the prevailing short term trend. The breakout looks confirmed and prices are trending strongly up or down.
What I’m going to show you with these calculations is that these situations are actually fabulous trading opportunities if you know how to spot them.
The graph I want to show you is the ASX 200 over the past 10 years.
This may sound confusing to you, so I want to explain it clearly. I make calculations based on reactions against the dominant trend.
The thin black lines represent the actual range from which the calculations are made. The thick red line is the POC of the range (midpoint) and the blue lines are 61.8% out of range.
I am numbering whenever prices change direction near the 61.8% area outside of the range and then return to POC.
Let’s look at the table …
Give meaning to chaos
You may need to zoom in on the graph to see a few, but if your focus is 9-14, it should be easier for you to see what’s going on.
Note that 14 peaked exactly before the crash earlier this year. This was one of the reasons I sent an alert to my subscribers to take profit on our biggest winners before the crash.
You might have just mumbled âyeah, sure, mateâ under one breath, so here’s the alert I sent on January 30, weeks before the crash.
My trading service was previously called Alpha Wave Trader, but we have since changed the name to Pivot trader:
Source: Port Phillip Publishing
When you look at number 15 in the chart above, it shows you that last week’s prices rose to test the 61.8% area above the range the ASX 200 has been stuck in since June and are selling again.
It will be interesting for us to watch things unfold over the next few weeks and see if, once again, the 61.8% area outside a range has hit exactly the high or the low.
In today’s article, I focused on just one aspect of expanding distributions. There is a lot more to do and as you learn more about them you will understand why most traders lose money.
If you study enough, you could become one of the traders who are making money consistently.
For Weekend money
PS: Our Money Morning post is a great place to start your investing journey. We’re talking about the megatrends that drive ASX’s most innovative actions. Learn all about it here.