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Trading Keltner & Bollinger Squeeze
Trading Keltner Bands with Bollingter Bands SqueezeThe example above illustrates "Keltner Bands" and "Bollinger bands" trade setup from theRussell 2000 Emini chart. A 2 1 period Bollinger bands with a 2-Standard Deviation indicatorand a 10 period Keltener channel with an average of a 10 period ATR is plotted. This tradesetup shows volatility contraction within a trading channel as Bollinger bands squeeze insidethe Keltner channel. On April 30, 2007, at about 1:30 pm, Bollinger bands squeezed inside theKeltner Bands to suggest a contraction of volatility and potential expansion move. WhenBollinger bands break out of the Keltner Bands to the downside, a "short" trade is entered atthe 830 level. By the end of the day, Russell 2000 closed near 816; 14 points from the entry.
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Fibonacci BandsFibonacci Bands are derived from Fibonacci ratios expansion fiom a fixed moving average.These bands help traders find key areas of support and resistance. "Fibonacci bands" arecomputed by adding a Fibonacci ratio distance (Up and Down) from a "key moving" average(21, 34, 89 periods). An 8 period average of "True range" is computed. The multiples ofFibonacci ratios of this range are added to the fixed moving average to compute FibonacciBands (Fib. Bands formulas are provided below).One of the best ways to find trend reversals is to watch the price action near the extreme bands(both lower and higher). Markets tend to reverse when prices trade outside of the band for afew bars and again trade inside the bands. After reversals, markets also tend to trade from oneextreme band to the other end (opposite) of the extreme bands.In my view, the best results can be obtained from using multiple time-frames for the sameinstrument. Fibonacci Bands indicator may be used along with the other indicators. Whenshorter time-frames signals are aligned with a larger time-frame trade signals, the FibonacciBands signals and the market may be in sync. Trades are usually taken in the direction of alarger time-frame. The "short-term" band support/resistance areas are used for "entry" and"exit" setups. During market rallies, utilize exhaustion or trend based market indicators alongwith Fibonacci Bands. During congestion zones use non-momentum based indicators forbetter results.
Computing Fibonacci Bands
a
MA = Exp. Moving Avg. (Close,34);TR = Exp. Average(TrueRange, 8);UpperBand3= MA+4.23*TR;UpperBand2 = MA + 2.62*TR;UpperBandl = M A + 1.62*TR;Moving Average (MA);LowerBandl = MA - 1.62*TR;LowerBand2 = MA - 2.62*TR;LowerBand3 = MA - 4.23*TR;
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The example above shows Fibonacci Bands plotted from the Russell 2000 Emini 610 tickchart. The middle line shows the 89 period moving average and 1.62 and 4.62 FibonacciBands (Upper and Lower). Trades are only initiated in the direction of market reversals. OnApril 24,2007, the markets sold-off in the morning session and traded in a steep price decline.At about 11.30 am, the price closed outside the Fibonacci's extreme lower bands and signaleda potential reversal. When prices are traded inside the band, enter a "long" trade 1 tick abovethe high of the previous bar. Place a "stop" order below the low of the recent "swing low"outside the Fibonacci Band. Targets can be set using the moving average (89 periods) andextreme band range.
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Trading Fibonacci Bands.
Trading Fibonacci Bands
The example above shows Fibonacci Bands from the Russell 2000 Emini 610 tick chart. OnApril 30, Russell 2000 (ER2) experienced weaker markets and traded below the movingaverage (Center Line). At 2.30 pm, the price closed outside the Fibonacci Bands to signal apotential reversal. Subsequent bars have not produced any trades as the price did not closeabove the high of the break-in bars for a reversal. Price also quickly traded outside theextreme Fibonacci Bands to signal further weakness. Upside trade reversals did not occuruntil the price re-enters the band. Traders can use Fibonacci Bands to effectively find keyentry and exits based on the trend reversals occurring near these extreme bands.
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ZigZag PatternsMarket prices move in a non-linear format and form "peaks" and "troughs" to signal the endof-trends and the begin-of-trends. Connecting these "peaks" and "troughs" generate a patterncalled "ZigZag," which are used in Elliott Waves to detect various waves, using Fibonacciretracement to detect "price" clustering sequences. "ZigZag" patterns are also used to detectprice patterns like "M" and " W patterns. The construction of "ZigZag" patterns includesfinding the key peaks and troughs with pivots and determining the "ZigZag" leg lengths,elapsed time and bar count. "ZigZag" patterns are eye pleasing and tempting but they provideno predictive analysis by themselves. They can be coupled with pattern recognition techniquesor some other theories like overlaying on Renko charting to assist with trading."ZigZag" patterns do help filter out noise and compare each leg's size with previous swings toget trend strength. The "ZigZag" patterns use certain variables to validate the pattern such asminimum price movement for points or a percentage, and Average True Range for volatilitymeasurement and "pivot" strengths."ZigZag" patterns are used for price cluster generation to determine potential support andresistance areas. They are automatically drawn on charts to plot Fibonacci ratios for priorswings. J.D. Hamon and Michael Gur have published some theories about "ZigZag" and"Symmetric wave" theory trading.Because "ZigZag" patterns are used only for trend indicators, there are no specific tradingrules are provided.
ResistanceResistance
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Trading ZigZag Pattern
,
Trading ZigZag PatternThe example above illustrates a "ZigZag" pattern from the Russell Emini chart. This chartuses an Average True Range of 10 bars to determine the minimum "ZigZag" move required tocompute the trend directions. At each "peak" or "trough," the number of points or pricemovement in each swing and the retracement percentage is plotted. For the last swing, theFibonacci retracement levels are plotted to spot potential support and resistance areas.
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ZigZag Pattern with Fibclusters
-.----..---------
Trading Zigzag Fibclusters"Zigzag" patterns do not have any predictability nature. They demonstrate the relative pricemovements and elapsed time to help other patterns or wave counts. However, there may besome price levels in each swing that could be important support and resistance levels. Theseprice levels can be detected using Fibonacci price clustering methods, where each level isgrouped with other price points within a price threshold. These clusters act as attractivesupport/resistance points for trading. In the chart above, price clusters are auto plotted usingthe ZigZag swings and a Fibonacci price clustering algorithm to point potential support andresistance areas (plotted horizontal lines on the right side of the chart).
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9.2. Elliott Wave
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Elliott Wave Pattern
.
In the late 1920's, Ralph Elliott discovered that markets have a rhythm and markets travel in aseries of wave patterns. Elliott suggested markets move in 5 strength wave (impulse) and 3correction waves.The Elliott Wave theory is complex and is very subjective for each trader. This pattern occursin all markets and in all time-frames. The Elliott Wave has few complex rules. The wavepatterns are briefly described below:Wave 1 (Wl): The smallest of the Elliott waves and the start of the "fractal wave" pattern.Wave 2 (W2): A retracement wave. Wave 2 should not trade below lows of Wave 1.Wave 3 (W3): Longest and strongest of the entire wave count. Must trade above the "high" ofWave 1.Wave 4 (W4): Usually called the "profit wave." Traders, who came in at Wave 1, will takeprofits. Wave 4 does not trade below Wave 2's high.Wave 5 (W5): Also called "greed wave" or "overpriced wave." Exhaustion price movementsoccur before a serious correction.
After 5 wave patterns, markets fonn an ABC pattern in a three corrective waves fashionbefore another series begins.
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Trading Elliott Wave Pattern@ER2 - 610 Tick Bars L=790.00 +2.607116.00
Source:Tradestation10:12
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780.00
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Trading Elliott Wave PatternThe basic Elliott Wave theory dictates that markets move in waves in the direction of primarytrends. There will be 5-Action and 3-Reaction waves to complete a cycle. There are manyvariations and key aspects of these waves. However, the main concept is 5 "waves" upldownfollowed by 3 downlup cycles. Wave ranges can be determined by Fibonacci numbers fortimelprice ranges. Some traders plot "wave" channels to determine the "entry" and "target"areas. The Elliott Wave theory is very subjective and requires a very careful understanding ofthe entire wave theory thesis to be successful.
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Trading Elliott Wave Pattern@ES.D - 610 Tick Bars L= 1452.75 0 00
4/9/075:06 AMw5
Trading Elliott Wave PatternThe Elliott Wave suggests that markets are always in progress and they correspond to 5 "upwaves" and 3 "down waves" in a trend direction of "up or down." The above chart showsmajor waves consisting of smaller, minor waves in each. Trading Elliott Wave is not veryeasy. Nevertheless, when the rules are noted and the key origin wave (WO-W 1) is found, thenElliott trading could be carefully applied. The example above illustrates an Elliott Wave fromS&P 500 futures chart. Once W1 is identified, look for a retracement to W2. MostElliotticians trade W3 and W5 as their identification becomes easier to follow and establishfixed rules. W3 is the longest wave. The W4 retracement stops above W1. W5 will be anextension wave of W3. There are many other Elliott Wave trading rules that can be found inother trading books and websites.
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Crown Pattern"Crown" patterns are a variation of skewed "Head and Shoulders" patterns, and theyincorporate Fibonacci ratios in its formation. "Crown" patterns form at the end of marketrallies or market declines suggesting a major trend change. As the name suggests, "Crown"patterns look like a series of "spikes" formed with Fibonacci ratios compared to prior swings."Crown" patterns form in all markets and in all time-frames. They are moderately reliable, butneed confirmation to trade. Occasionally, "Crown" patterns form multiple spikes like"Zigzag" in a short span of time before the pattern really emerges out of the channel.
Trade: "Crown" patterns have similar trading opportunities as "Head and Shoulders" patternswith few Fibonacci based rules. In bearish "Crown" patterns, trade setup is made below thelow of the recent "swing low" and a "stop" placement is set above the recent "swing high." Inbullish "Crown" patterns, trade setup is made above the high of the recent "swing high."Stop: For short trades, if the market rally takes above the high of the pattern, the "Crown" willfail. Place an order 2 ticks above the "swing high" of the pattern. For long trades, reverse theprevious criteria.Target:The "Crown" patterns are profitable and can be trailed with a 2-bar high for "short" trades anda 2-bar low for "long" trades. Set profit targets at major "swing lows" and major "swinghighs."
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Trading Crown (Bearish) Pattern.. -. ."
Source: Tradestatinn
Trading Bearish Crown PatternThe example above illustrates a "Crown" pattern from the Russell 2000 EMini futures chart.On April 04,2007, during the morning session, ER2 traded higher and formed a "Crown"pattern based on Fibonacci ratios. The pattern continued its down trend after trading belowrecent "swing low" at 817. After a series of spikes, a "short" signal was triggered below thefirst "swing low" at "D" level.1. Enter a "short" trade below the low at "D" level (8 17).2. Place a "stop" order above the "E" level at 8 18.73. Target a major "swing low" prior to the "Crown" pattern formation at "B" level.
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Trading Crown (Bullish) Pattern
Trading Crown (Bullish) PatternThe example above illustrates a "Bullish" crown pattern from the Nasdaq futures (NQ)weekly chart. NQ made series of Fibonacci based swings to form a "Crown" pattern. Theswing BC is 1.27 of AB and CD is 1.27 of BC and DE is 0.618 of BC. After series of spikes,look for a trend reversal to close above the first "swing high" at B.1. Enter a "long" trade above level "B."2. Place a "stop" order below the low of recent "swing low" at E.3. Target a "major swing high" prior to the "crown" pattern formation.
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Chapter 10: Price-Action10.1. Cup and Handle Pattern
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Cup and Handle Pattern ."Cup and Handle" is a continuation pattern that usually forms in bullish markets. Most "Cupand Handle" patterns are very reliable and offer great trading opportunities. "Cup" formationis developed during price rallies from the round bottom. The "Handle" part forms due to aprice correction before a clear breakout to the upside.Trading "Cup and Handle" pattern is a two fold process. First a "Handle" can be traded as acorrective pattern and secondly as a continuation pattern (of the prior trend) after a breakoutfrom the top of the "Cup." The handle part (right side) usually corrects about 25% to 38% (ofdepth of the Cup) from the high pivot point to the bottom of the Cup. After the correction(handle), the pattern will pick its prior trend and trade in a breakout fashion above the 'top' of1 the 'Cup'.Trade: The best trading opportunity is generated when the price clears the top of the "Cup."A "long" trade is entered when the price closes above the high of the cup.Target: Most "Cup & Handle" patterns result from 62% to 100% the depth of the "Cup" fromthe breakout levels.Stop: Place a "stop" order below the low of the handle to protect the trade.
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Trading Cup and Handle Pattern
Trading Cup and Handle PatternThe example above shows a "Cup and Handle" pattern formation from the Russell Emini( E m ) 30 minute chart. In January 2007, a "Cup and Handle" pattern has formed after E m ' suptrend. During the Cup formation (January 24 to January 29) the "Cup" pattern made highsat 798.6. A "Handle" part is formed from January 29 to January 3oth between798 to 792. OnJanuary 3 1 St, prices closed above the high of the "Cup" level at 799 to signal a "long" trade.1. Enter a "long" trade above the top of the "Cup" level at 799.2. Place a "stop" order below the "Handle" at 792.3. Place a target at 62% to 100% of "cup" depth (12 to 18 points) from the breakout.
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Trading Cup and Handle PatternCup and Handle
Trading Cup and Handle PatternThe example above illustrates a "Cup and Handle" pattern from the S&P Futures (ES) 6 10tick chart. On April 13,2007, during the morning session, ES formed a "Cup" formationbetween 1452 and 1453. Around 10.38 a.m., a correction in the trade resulted in a 38%"Handle" formation to the 1455.5 level. A breakout above the top of the "Cup" level signaleda "long" trade.1. Enter a "long" trade above the high of the breakout bar at 1458.2. Place a "stop" order below the low of the "handle" at 1455.3. Target from 62% to 100% depth of the "cup" above the breakout level (1461 to 1464).
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Head and Shoulders Pattern"Head and Shoulders" patterns are reversal formations that usually form at the market tops."Head and Shoulders" patterns are very reliable, but failures do occur. When Head andShoulders patterns fail, they reverse the pattern and trade in an explosive manner. Most "Headand Shoulders" patterns can be detected using volume patterns. During the left shoulder andthe beginning of the "Head formations, the volume will be heavy. While forming, volumedissipates on the right shoulder, and the volume increases during the breakdown.A trend line or neckline is drawn connecting the "Head and Shoulders" pattern to determinethe potential trade opportunities and targets. The neckline can be also formed in an angle(slanted).Trade:Connect "Head and Shoulders" bottoms in a trend line or neckline. When the price closesbelow the neckline, a potential short trade is signaled. Short one tick below the breakdownbar's low.Target: Compute the vertical distance between the "apex" of the "Head and Shoulders"pattern and the neckline. The target is set below this distance from the neckline.Stop:After a trade entry, if the price closes above the neckline, a potential failure of the pattern issignaled. Place a "stop" order above the neckline.
GOOG - 30 mln L=489 96 -7.32
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Trading Head and Shoulders Pattern
Trading Head and Shoulders PatternThe example above shows a "Head and Shoulders" pattern formation from the Russell Emini(ER2) 30 minute charts. From January 1 1 to January 17,2007, the pattern formed "Head andShoulders" pattern. A neckline was drawn connecting the bottom of the two "shoulders" tosignify the potential breakdown trade. On January 18, ER2 closed below the neckline toconfirm a breakdown.1. Enter a "short" trade below the low of the breakdown bar at 794.2. Target 62% to 100% of the pattern depth (14 points) from the breakdown level at 794.3. Place a "stop" order above the neckline at 796.
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Trading Inverse Head and ShouldersI1
MSFT - DailyInverse Head and Shoulders
Target
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-27.00
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Trading Inverse Head and Shoulders PatternThe example above illustrates the "Inverse Head and Shoulders" pattern formation fromMicrosoft Corporation's daily chart. In anticipation of Microsoft's Vista Operating System,investors drove the stock upside from August to December 2006. A neckline is drawnconnecting the "Head and Shoulders" swing highs. In late July, Microsoft traded above theneckline and signaled a potential long trade.
1. Enter a "long" trade above high of the breakout bar at $24.2. Place a "stop" below the right shoulder at $22.3. Target the depth of the "Head and Shoulders" pattern ($3) from $24 to $27.
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Trading Head and Shoulders Failure
Trading Head and Shoulders Failures PatternThe chart above illustrates an example of a "Head and Shoulders" pattern failure. A trend lineI is drawn connecting the bottoms of the "Head and Shoulders." The "Head and Shoulders"
failures occur when prices failed to close below the trend line.I
1. Enter a "long" trade above the "high" of the right side shoulder.2. Place a "stop" order below the neckline for trade protection.3. Target the depth range from head to the neckline from the trade entry.
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1
Trading Head and Shoulders FailureHead and Shoulden
Trading Head and Shoulders Failures Pattern
The example above illustrates a "Head and Shoulders" pattern failure from the Russell 2000Emini chart. On April 4 2007, ER2 formed a "Head and Shoulders" pattern with inclined(slanted) neckline. On April 5 2007, a trend line breakdown is anticipated for a "Head andShoulders" pattern. This pattern is an example of reversal formation as "Head and Shoulders"pattern failed and continued in a reverse direction from the previous trend.1. Enter a "long" trade above the high of the right side shoulder.2. Place a "stop" below the low of the prior swing before the trade.3. Target 100% of the depth of the "Head and Shoulders" pattern from the trade entry.
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these "Parabolic Arc" patterns go straight up and then come straight down. Other examples ofthis market types are the NASDAQ bullish markets during 1999-2000 and Gold prices from
"Parabolic arc" is a reversal pattern and has a very predictable outcome. Although they arepredictable, they are relatively difficult to trade since the market sentiment is bullish and maybe relatively tough to point reversals to trade. Most "Parabolic arc" patterns have a significantcorrection of 62% from the top.Trade: After a parabolic base, prices move up vertically and eventually the acceleration comesto a stop and then reverses. Prices start showing lower-lows and may attempt to regain the topagain. Enter a "short" trade at the second failed attempt to test the peak or at the trend linebreakdown connecting the major swing lows.
retracement.Stop: Protect the trade by placing few ticks above the high point of the Parabolic Arc.
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Trading Parabolic Arc
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Trading Parabolic ArcThe example above illustrates a "Parabolic Arc" formation from the Silver futures chart. In2005, Silver gained momentum as the metals sparked an interest in the world-wide markets.Silver futures rallied from the mid 7 to 15 range in a 12 month period. Prices rallied verticallyduring the beginning of 2006 setting up for a correction. From April 2006 to July 2006, silverfutures corrected 62% to trade near 10.1. Silver prices made a failed attempt to test previous "Swing High" (similar to 2BSell setup).2. Enter a "short" trade below first peaks' low at 14.50.3. Place a "target" at 62% of the entire range to the first peak to 10.4. Place a "stop" order above the close of the second peak at 15.5.
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Trading Parabolic ArcI@HG(D)
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Trading Parabolic Arc Pattern
"Parabolic arc" trading is rare, but does occur in both extreme bull and bear markets. Thechart above illustrates an example from the Copper futures daily chart. From the bottom of1.4000, in July 2005 to April 2006, copper futures rallied to 3.8000. Copper futures retracedto 62% by January 2007 in a corrective "Parabolic arc" form to close near 2.4000. The"Parabolic Arc" resulted in another corrective phase (to the upside) to bounce back to 62%level near 3.3800. Trading the parabolic curve is not an easy proposition, but long term tradesmay be profitable. Parabolic arcs also form in intra-day trading, displaying much more violentmoves and may be difficult to trade.
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10.4. Three Hills andA Mountain Pattern
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Three Hills and A MountainThe "Three Hills and A Mountain" is rare, but a very reliable pattern. This pattern is similar tothe "3-Drives (Bearish)" pattern. However, the "Three Hills" pattern is not of equal magnitudehills, and consists of another reversal trade in the original trend direction. The pattern also hasa close relation to Elliott wave theory. The pattern supports Fibonacci retracement andextension concepts for key support and resistance areas. This pattern has two trade setups; one"short" and one "long."Each hill retraces to a minimum of 0.5 to 0.618 (Fibonacci ratio) of its height before expandinjinto the next hill. After completion of the "Three Hills," a trend line is drawn in the chartbelow connecting the bottoms of the "Three Hills." A close below the trend line gives a shorttrading opportunity. After completion of 62% of the prior range, it has another importantreversal to the upside, the "Mountain" which rallies about 100% to 127% of entire hills range(AB).
Trade: The first trade occurs on the close below the trend line. The second trade occurs aftercompletion of a 62% retracement to the downside-"AB." The second trade is a "long" tradefrom "C."Target: The first trade target (Short) is 62% of prior swing length-"AB." The second tradetarget is from the "C" level, which is 100% to 127% of "AB" to the upside.Stop: Place the "first trade" stop above the "B" level and the "second trade" stop below the"C" level.
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3 HilIs and A Mountain
The example above shows the "Three Hills and a Mountain" pattern from the daily Silverfutures chart (ZI). From July 2006 to September 2006, Silver futures traded from 10.800 to13.300 in a "Three Hills and A Mountain" pattern. A trend line was drawn in the chart aboveconnecting the bottom of the "Three Hills." In September 2006, Silver futures closed belowthe trend line at 12.000, signaling a potential short-trade. The short trade target is set for 62%of "AB" at 10.975.1. After reaching level "C"at 62%, a "long" trade is triggered above the previousbar's high at 11.500.2. The target is set at AB=CD range at 14.400.3. Place a "stop" order below level "C" at 10.970.
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The chart above illustrates a "Three Hills and A Mountain" pattern from the NASDAQfutures (NQ) 305 tick chart. On February 22,2007, around noon, the pattern started to emergeas NQ made "Three Hills" and with Fibonacci proportionate retracements. A trend line isdrawn connecting the three hills for a potential breakdown. At around 2.15 pm, NQ futuresclosed below the trend line and retraced to 62% of AB at level "C."1. After confirming level "C" at 62% of AB, a "long" trade is entered above previousbars' high at 1844.2. The target is set at "AB" length from level "C" at 1854.3. A "stop" order is placed below level "C" at 1840.
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10.5. Three Valleys andA River Pattern
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Three Valleys and A RiverThe "Three Valleys and A River" pattern is similar to the "Three Hills and A Mountain"pattern but in a reverse sense, and it is also similar to the "3-Drives (bullish)" pattern. The"Three Valleys and a River" pattern is very rare, but it is also very reliable pattern. It doeshave 3 distinct valleys as prices making three thrusts to go up and succeed in the third attempt.Usually this pattern occurs near the market bottoms. The "Three Valleys and a River" patternfurther supports Fibonacci ratios among the three drives. Each valley retraces to a minimum0.5 to 0.618 Fibonacci ratio of its height before expanding into the next valley. Aftercompletion of three valleys, a trend line is drawn connecting the top of the three valleys. Pricesclosing above the trend line signal a "long" trade. After completion of 62% of the previousrange, it has another significant reversal to the downside (River).Trade: The "Three Valleys and a River" pattern presents two trade setups. First trade: Aclose above the trend line signals a reversal. Enter a "long" trade one-tick above the high of thebreakout bar. Second Trade: After completion of 62% of the AB range, enter a "short" trade atpoint "C."Target: Target setups for the above two trades. The first trade setup is "long" from the threevalleys. For this trade setup, set a target at 62% to 78% of the AB range. The second traderesults in 100% of the AB range retracement from point "C."Stop: For the first trade, if prices close below the trend line, close the trade. For the secondtrade, if prices close above level "C", close the trade.
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Trading Three Valleys and A River
Trading Three Valleys and A River PatternThe example above shows a "Three Valleys and a River" pattern from the ZLC weekly chart.ZLC established a 3-Valley pattern from July, 2005 to April, 2006. A trend line is drawn theconnecting the tops of three valleys. In June 2006, ZLC closed above the trend line to confirma "long" trade