at 1. Secondtarget = (Thrust x 100%) + High at 1. If Wave 2 is a simple correction such as an Aleg only, then Wave 4 will be complex and vice versa.
PRACTICAL APPLICATIONS OF THE ELLIOTT WAVE THEORY
31
The practical use is to provide guidelines for overbought and oversold conditions.CORRECTIVE WAVES OR PHASESCorrections generally take the form of three waves (ABC) but occasionally only consist of a single wave (A). The following three categories inFigure 2.4 show the types of corrections: A zigzag correction, figure2.4A, is the weakest type of correction and can lead to trend reversal.Note that the high of wave B is less than the high of wave 1 and the lowof wave C isi lower than the A wave low.An irregular type has the high of B going above point 1 (Figure2.4C) It is the strongest, particularly when the low of wave C terminatesabove the low of wave A.
FIGURE 2.4
Types of counter waves or corrective phases.
Triangle CorrectionsTriangle corrections are composed of a 6-point pattern, labeled asABCDE, after an impulse move or thrust. The type and location of thispattern can often be revealing as to whether or not a trend reversal istaking place.Figure 2.5A is a flat correction with all the action above the 50%point of the 0 to 1 thrust or run up wave. Strong demand for this stockappears each time the market approaches the 50% correction point atA, B, C, D, and E. Termination of wave E generally points the directionout of the correction or congestive phase. If wave E terminates abovepoint C, be alert for an upside breakout. Figure 2.5B is a bearish looking
31
THE ULTIMATE TRADING GUIDE
FIGURE 2.5 Triangle corrections.
corrective pattern because most action is below the 50% point. A downside breakout is more likely.A-Leg CorrectionsThe first correction wave or the A wave correction to a run up wave orthrust is composed of both time and apace. The length and time of the Awave correction is of extreme importance in judging the nature of theentire corrective movement and the probabilities of a trend reversal.Figure 2.6 demonstrates the use of the A-leg (or first counter waveagainst the run down wave) in judging the type of correction and thelikely direction of the market when the correction is completed. Four
FlGURE 2.6
A wave correction.
PRACTICAL APPLICATIONS OF THE ELLIOTT WAVE THEORY
FIGURE 2.7
33
Forecast of corrections.
possible outcomes of market action are shown in Figure 2.7. If the magnitude of the A-leg rally is:• 25%-35% reaction: Forecasts a single wave correction beforecontinuation.• 35%-60% reaction: Forecasts a 3 wave correction beforecontinuation.• 50%—75% reaction: Forecasts a 5 wave correction beforecontinuation.• Greater than 75% reaction: Often is a possible trend change.This type action can lead to a trend reversal This is supply and demand forces at work. A 75% reaction away from a point established astronger point of resistance than does an anemic 25% reaction.CASE STUDY IN CRUDE OILThe crude oil chart. Figure 2.8, demonstrates the beautiful utility oftrading the A-leg correction to a thrust in a strongly trending market.This is beat traded by going to a lower time frame to aid in judging thetermination of the A-leg and timing your market entry. A simple reversal bar after several bars against the trend would have been very profitable. A reversal bar is one that reverses the direction of the prior bar.A 1.0 range stop from the low (or high for sell) of the bar of entry is recommended. Nine out of 11 examples would have been successful on ashort-term basis.
3*
THE ULTIMATE TRADING GUIDE
FIGURE 2.8 CL 99XPRN—Daily (October 14, 1999). Created with TradeStation2000iby Omega Research 1999.
Statistical studies on wave action show the following:• A-leg or single wave movement only—32%.• ABC or 3 wave movement--50%.• ABCDE or 5 wave movement—14%.• Greater than ABCDE—4%.Only 18% of the waves exceed an ABC wave counter movement. Theconclusion is obvious. Buy or sell after an ABC wave correction to athrust Only 18% of the time do markets go beyond the ABC correction.HOW TO TRADE A OR ABC CORRECTIONS TO A THRUST
This is a useful tool in your bag of technical tools. Shortcomings are:• Sometimes it is difficult to know which ABC to use.• Corrections may go to the ABCDE variety.• The thrust may be the termination of a move.Enter the market on corrections rather than on breakouts as mostbreakouts fail. Buying a pivot point penetration or breakout requires amuch larger stop to prevent loss than does buying on the corrections.
PRACTICAL APPLICATIONS Of THE ELLIOTT WAVE THEORY
35
TRADING PLANNothing is easy in this business but the following is one possible approach. The basic idea is to purchase a stock or commodity on the A-leg orC-leg correction to a demand thrust (or vice versa for shorts). Entry ismade on a correction rather than chasing a running market, Three possible methods of exatt entry are:1. Enter a buy order at the 50% correction to the demand thrust,but never on the first bar in the correction.2. Enter the market on the C-leg correction when the market showsevidence of supply exhaustion such as a narrow range periodwith market closing off the low. Buy an opening range breakoutof 50% of the prior bar's range.3. Enter the market when the lower time frame charts give abuy/sell signal and market is in buy/sell zone.A stop loss order is entered at one average range below the low of thebar when purchase is made. The position is liquidated when marketreaches the target. If the market fails to reach target, then liquidate theposition on evidence of supply overcoming demand. If the A-leg goes tothe 75% or lower after a buy at the 50% point, forget about profits.Scratch the trade or liquidate as close to break even as possible.Figure 2.9 demonstrates these simple principles. Note that fivewaves to a top are marked on the chart. After a five wave movement to
FIGURE 2.9 Royal Dutch Petroleum, Created with TradeStation 2000i by OmegaResearch1999.
36
THE ULTIMATE TRADING GUIDE
a top, a correction is likely to occur, however, this action forecastshigher prices will he forth coming. The basic idea is to buy after a signof strength (trust), but only on a reaction to a logical support point.Buy on temporary weakness and liquidate on strength.OTHER WORKS ON CYCLES
In addition to Bob Prechter, Tom DeMark was one of the early technicians to recognize the value of Elliott's work. You might wish to take alook at his interpretation of this work (see bibliography), Tom has manyexcellent ideas in his books. They are not presented as trading systems.However, with a little imagination, many good trading systems can be developed. Others who have done excellent work on cycles include J.M.Hurst, Welles Wilder, and Walt Bressert (see bibliography). Walt was anold friend until I took him hear hunting when he visited me in North Carolina, We were in the deep underbrush when a bear startled us and weboth dropped our guns and started running. Walt remarked that we hada problem in that we had to outrun the bear. I advised Walt that hehad his facts incorrect. All I had to do was outrun him. The chase continued for some distance when I turned around to see Walt had stoppedand had his head bowed in prayer. I was deeply impressed. I also noticedthat the bear had stopped and assumed a prayerful position. I overheardthe bear saying, ''Oh Lord, thank you for this meal I am about to receive."Somehow, we both survived.SUMMARYAn attempt has been made to show how to trade with the Elliott wavetheory. Don't get hung-up on the many facts of Elliott. Put 10 Elliott students in a room with one chart and you are likely to get 10 different answers on where the wave stands. Bob Prechtey Jr. and one of the authorsspent an evening arguing this point and neither one of us convinced theother. Look at Bob's work. You may reach a different conclusion, A thrustis a very simple structure that is likely to have a correction. This chapterhas attempted to provide you with some entry techniques on the corrections. After corrections, a market is likely to have another thrust. Wehave shown the likely targets for the next thrusts and where you shouldeither take profits or at least tighten stops.
3BAR CHARTS AND THEIRFORECASTING ABILITY
This chapter presents a road map for constructing and interpreting barcharts. How do you know where you are going if you do not know whereyou have been? Charts are only a history lesson. The technician attempiH to take this history and build a viable trading plan. This chaptertakes the basic bar chart formations and uses a computer to see if thereis a trading edge from the many common patterns. Only the buy side isconsidered in the stock tables.In studying market action, nothing is more fundamental than barcharts reflecting a history of past market action. There is, however, nolife in the charts: they do not give you information about the psychologyof investing. The charts come to life when past market action is used toproject the future course of price movement. Bar charts are like, a roadmap. showing you how to travel from one point to another. Bar chartsdepict the actions, emotions, and ideas of mass speculation.All of nature is controlled by innate laws. There is also an inexorable law of price. We might use the medical profession to explain this.Starting with the human foody and studying the needs of each functionof the body, medicine built up date that became an action-reaction concept, we can apply the same thinking to price and market action. This iswhere a bar chart of past market action comes into play. Fluctuations inprice movement lead to logical conclusions that these actions and reaction were caused by the psychology of the masses. The student of market action w i l l find that a certain sequence of events on a bar chart willnormally lead to a given response. Such actions occur with enough frequency that they suggest a law. It is not absolute because a person'smind cannot he reduced to an exact science. However, recognition of theprobability of a market response places the student ahead of the vastmajority of traders.37
38
THE ULTIMATE TRADING GUIDE
Speculation is anticipation. Market action discounts coming eventsbefore they happen. The function of price is to integrate supply-demandrelationships.Since the beginning of time, man has been largely controlled by fearand greed. When a student of market action allows these emotions toinfluence his or her market response, many opportunities in the marketare lost. These two emotions must be resisted. Confidence and courageare required to overcome fear and greed. Courage is inborn. Confidenceif gained by study, study, and mure study.One of the great little books on this subject was written by GeorgeCole in 1936. The authors are indebted to this man and his work.Figure 3.1A represents one day's price action. The horizontal bar tothe left represents the opening and the bar to the right is the close. Thedashed line is the 50% point on the day's price range. This one day's action tells you:• The opening was above the halfway point and above the close.* The close was in the lower part of the price range.From these two factors you might conclude that the market shouldsell lower the next day. as the available evidence indicates a heavymarket.Figure 3.1B shows the same day; the previous day's action is alsoshown. We now know that the entire day's price action is above the previous day's action and. also, it closed above the previous day's range.These factors would be considered bullish and might warrant a purchase instead of a sell on a lower opening the next day.In another example, suppose the action of the two days is as shown inFigure 3.1C. This indicates momentum building up for a down move, andit may be a candidate for a short sell, depending on other conditions.This typo of discussion could continue under various assumed conditions and with many days added. The main idea here is to encouragethinking about supply/demand and dominant force or trend.
FIGURE 3.1
Daily bar chart analysis.
BAH CHARTS AND THEIR FORECASTING ABILITY
39
HOW TO USE SHORT-TERM PATTERNS FOR PROFIT
The primary key to successful use of single-day patterns is that theyare only used when other market factors support the one bar indicationof a movement. This simple idea w i l l not work in isolation. That is whythe big picture was presented first. To use these short-term patternssuccessfully, you must be cognizant of the overall market picture. Twobasic ideas are suggested:1. Trade only in the direction of the trend when the market is in therun up or run down stage.2. When in congestion, buy when the market is in the support zoneand sell when the market is in the resistance zone.Remember that these short-term patterns are generally valid for nomore than 3 to 5 bars. When trading with short-term patterns, it iswise to have a target and exit order in the market, unless, you are usingthis as an entry technique for a bigger movement. Otherwise, anotherreversal pattern may set up and quickly erase any profit that may havebeen taken.Closing Price GraphA closing price graph is very necessary in proper market analysis.Some market students feel this isthe most revealing of all graphs.The closing price is the most important one of the day. This representsthe final sentiment after the totalday's activities. At a later time, aclose becomes a support or resistance point. The more closing prices
FIGURE 3.2
Closing price charts,
there are in a zone on the chart, themore important this level becomes as an area of support or resistance.There are two types as shown in Figure 3.2. In Figure 3 2A, a verticalline is continuous until a price closes in the opposite direction. Figure3.2B plots each day's closing price on alternate vertical lines.Pivot Points and SwingsA top pivot point is the highest price in a movement prior to penetrationof the low of the top bar. A bottom pivot point is the lowest price in amovement prior to penetration of the high of the low bar. A top pivot
40
THE ULTIMATE TRADING GUIDE
FIGURE 3.3
Pivot points and swings.
point becomes a resistance point. A bottom pivot point becomes a support point. The movement from one pivot point to the next is called aswing (Figure 3.3).Trend DirectionTrend is up as long as new price highs and higher price lows are beingmade. It changes from up to down when the last low prior to the newhigh is broken (Figure 3.4).
FIGURE 3.4
Trend signals.
Price ClosesA number of closes in a relatively narrow range is a market that is in aslate of equilibrium. Movement away from this band of closing pricesrepresents disequilibrium with demand overcoming supply or viceversa. Patterns can be developed based on this idea. They can give atechnical edge when trading with the trend. Caution must be exercisedin using this pattern as an entry against the prevailing trend. Minimum risk is accomplished by taking action on pull backs after closespoint the direction.
BAR CHARTS AND THEIR FORECASTING ABILITY
FIGURE 3.5
41
Close direction.
FIGURE 1.6 Tight closings Followed by thrust
Two-bar close reversal with widening spread is likely to signal asignificant reversal if it is in the trend direction. Odds increase whenthe close is below the low of the previous bar (Figure 3.5).When several closing prices occur together in a light range, the latest closing price often points the direction of the move out of the state ofequilibrium (Figure 3.6).The first thrust out of a tight formation of several closes by a widerange bar generally points to the short-term direction of the market.
Figure 3.7 shows tails in closeproximity on three price bars thatoverlap. The close each day is below theopening and mid-range. This is calleda tail. Supply occurred each day afterthe market opened. This is a sign ofdistribution with a strong possibilityof lower prices.Figure 3.8A shows a four-bar re- FIGURE 3.7 Tails—close<open.versal that is not as strong an indicator of a reversal as the preceding examples. It may be just a one-barcorrection.Figure 3.8B is a weak appearing four-bar pattern. The first threebars show weakness. The fourth bar is a correction.
*2
THE ULTIMATE TRADING GUIDE
FIGURE 3.8
Indecisive closes.
Closes with Non-Overlapping BarsA still weaker pattern is the threebar movement which includes a nunoverlapping bar (NOL)—one wherethe high of the current bar is lessthan the low of the most recent pivotpoint high bar (Figure 3.9).
FIGURE 3.9
Non-overlapping bars.
Trend DirectionA price bar that reverses fourprior closes may be a trend reversal. If the four closes are in closeproximity and not all up, the shiftis to down. If four prior closes areall up, the one-bar reverse mayonly be correcting an overboughtcondition, thus, the shift is to neuFIGURE 3.10 Trend direction.tral (Figure 3.10).Once the market reaches a target, profits may be protected by:1. Liquidating at objective.2. Carrying a stop under each bar's low by at least three ticks.3. Carrying a stop one tick below a reaction equal to the precedingreaction.4. Hold on to the position and wait for a four-bar close reversal before liquidating.
BAR CHARTS AND THEIR FORECASTING ABILITY
43
5. Liquidate on any three to four bar higher close.6. Liquidate on pattern reversals in a lower time frame.
ENTRY TECHNIQUESAfter a sign of strength enter the market by one of the signals shown inFigure 3.11:• Buy on stop above three-bar high if this point is below the high ofprior movement (Figure 3.11A).• Buy on close of a pullhack bar (Figure 3.11B).• Buy on a 50% reaction after the sign of strength (Figure 3.11C).• Buy on a 50% movement off the opening of the prior bars rangeonce the market has a correction to the sign of strength (Figure3-11D).Another possibility is to buy on entry signals in a lower time frameonce market corrects the thrust. For instance, if trading the daily bar,look for an entry pattern in the 30-minute bar.Initial stop is below the four-bar low or one average bar range belowlow of entry bar A potential loss of this magnitude is livable. Our inclination is never to let our trades get into deep water.
FIGURE 3.11 Entry points.
SYSTEM DEVELOPMENT BASED ON CLOSING PRICESSuccessful trading systems can be developed by using the close patternsas an entry technique. The four prior closing prices are used to demonstrate the power of this formation (Figure 3.12). There is nothing sacredabout four bars. The basic idea IB that the range of the recent band of
44
THE ULTIMATE TRADING GUIDE
FIGURE 3.12
Four-close system.
closes is less than the average true range of 10 days. This is a form ofnarrow congestion. This particular pattern occurs about 15 to 25times per year per market. A simple system to utilize the frequency ofthis formation use the following rules for the buy side (sell side is exactly opposite I:1. Range. The range of four doses is less than the 30-day averagebar range.2. Trend. The closing price of the prior day is greater than the closing price 50 days ago.3. Breakout. The market must move 62% of the prior days rangefrom the opening. This point must also be above the highest closeof the prior four days.4. Liquidation. Position is liquidated by a stop below any four priorcloses but must trade 62% below the opening.In Figure 3.12,X = Range of last Four days closing prices I less than 30-day average daily range);Y = Open of day plus 62% of prior day's range;Z = Close of prior day is greater than close 50 days ago;YY = Open of day minus 62% of prior day's range;Stop = maximum of open - 62% of prior day's range on any dayafter entry and four prior day's closes.Table 3.1 on page 45 and Table 3.2 on page 46 demonstrate the effectiveness of these simple rules. Every market except two showed aprofitable return in futures and all but one in stocks. This is not a viable trading system as the numbers do nut make allowance for commission and slippage. It could be the basis for a successful trading system.A trading system is made up of three components: entry, stop loss, and
BAR CHARTS AND THEIR FORECASTING ABILITY
TABLE 3.1 Four Closes in Tight Range—StocksOPENING RANGE BREAKOUT—100 SHARES PER SIGNALTEST PERIOD 1/1/96-10/30/998O ALLOWED FOR COMMISSION AND SLIPPAGE
Definitions. Total SPL = Total profit or loss; Max DrawDn = The highest down movement in equity from any new equity high; % TIM = Percent of time in the market; W:L= Total profit ($} divided by total lost ($).
$50.000 should be more than adequate to trade the 12stocks in view of the Infrequent trading and short time inthe market.exit (either through a profit objective or by a trailing stop). These threeitems must combine to be an effective method of trading. This is justone approach. Further studies on exit techniques and stop loss mightyield a satisfactory approach to this entry and exit technique.Swing ChartsSwing charts are extremely useful in giving clarity to price action byleaving out the bars (Figure 3.13). This simplifies the chart. This typeof graph will be used in analysis of moves including angles, time, distance, and envelope studies. It is made by extending a line from a previous low of a move to the next high. It reverses when the low of aprevious bar is broken. A variation to this is to reverse the line when aset amount of movement occurs in the opposite direction.
TABLE 3.2
Four Closes in Tight Range—Futures
OPENING RANGE BREAKOUT—ONE CONTRACT PER SIGNALEXIT- MAX OF OPENING RANGE BREAKOUT OF 62% OF PRIOR DAYS RANGEAND LOWEST LOW Of 4 PRIOR CLOSESTEST PERIOD 1/1/84 - 6/30/998O ALLOWED FOR COMMISSION AND SLIPPAGE
BAR CHARTS AND THEIR FORECASTING ABILITY
FIGURE 3.13
Swing chart.
Daily RangeFigure 3.14 shows three days of market action with different highs, lowsopenings, and closing prices. Figure3.14A indicates the market shouldBell lower the next day as it closed inlower part of range and below theopening. Figure 3.14B IB a neutralday as it closed in mid-range. Figure3.14C indicates the market should FIGURE 3.14 Daily range forecast.sell higher the next day as it closedabove mid-range and the opening.It is widely believed that if a market closed above the opening andmid-range, it is bullish for the underlying stock or future. Statistically,TABLE 3.3
Daily Range—Stocks
BUY DOWN CLOSES—100 SHARES PER SIGNALBUT OPENING FOLLOWING DOWN CLOSE. LIQUIDATE ON CLOSETEST PERIOD 1/1/96-10/30/998O ALLOWED FOR COMMISSION AND SLIPPAGE
THE ULTIMATE TRADING GUIDETABLE 3.4 Daily Range Study—Futures
BAR CHARTS AND THEIR FORECASTING ABILITY
49
this is false on a one-day basis as demonstrated in the tables. It does notmean that the market may not trade higher in the early part of the day.The trading rules for Table 3.3 on page 47 and Table 3.4 on page 48 are:1. Buy the opening if the market on the prior day closes below theopening and mid-range of the day.2. Sell the opening (on futures only), if the market on the prior daycloses above the opening and mid-range.3. Liquidate on the close (day trade).No stops are used. The tables demonstrate that there is a very definite advantage in buying futures on down days (and vice versa). It is essentially a break even in stocks.These tables suggest that you should consider buying the marketson down days rather than up days. The exception to this is when themarket is breaking out of a trading pattern. The statistics should not betoo surprising as markets are in a trading range about 85% of the time.Inside DayAn inside day (ID) is one in which the entireday's price action is within the range of theprevious day (Figure 3.15). The closing priceis not as significant for forecasting purposesas any other day unless there are two tothree previous closes in the same generalarea. The close might then point the direction of the next minor move. Usually, amovement that breaks the high or low of the inside day points the direction of the next minor swing.Sometimes there will be two inside days. A movement outside therange of the second day is usually more pronounced and points the direction of the next minor move, particularly if it closes outside that range.An inside day is indecisive from a supply/demand standpoint. Thetheory is that when the market overcomes this indecision by penetratingeither the high or the low it is an evidence of demand/supply and shouldlead to a profitable trade. Inside days occur about 12% of the time. Statistically, you cannot make money by day trading on this pattern aloneas Tables 3.4 and 3.5 clearly show. These studies were designed todemonstrate that a slight technical edge is gained by using this as anentry technique. This is a beautiful pattern to use in your trading withother fitters because it enables you to enter the market with a closestop. The way to trade the inside day is to have a buy order three ticks
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THE ULTIMATE TRADING GUIDE
TABLE 3.5
Inside Bars—Stocks
BUY BREAKOUT FROM INSIDE BARS—100 SHARES PER SIGNAL
TEST PERIOD 1/1/96-10/30/99$0 ALLOWED FOR COMMISSION AND SLIPPAGE
above the high of the bar with a sell order three ticks below the low ofthe bar. Again, the primary time to trade this formation is:1. Trade with the trend,2. When market is in congestion, buy in the buy zone and sell in thesell zone.3. Trading in the direction of the close of the bar immediately preceding the inside bar. This is frequently a clue as to whether thepenetration is valid.Tables 3.5 and 3.6 show that it is statistically significant and doesgive one a slight edge if the preceding bar showed evidence of demandby closing above the opening (item 3 above). This edge is not sufficientto overcome slippage and commission by day trading. Further studiescould be made by holding the position for a profit objective and using aclose stop. This is how profitable trading systems are developed.
BAR CHARTS AND THEIR FORECASTING ABILITYTABLE 3.6
Inside Range Bar Performance—Futures
51
52
THE ULTIMATE TRADING GUIDE
Outside Days or BarsAn outside bar is one where both the high and low of the day exceedsthe high/low of the prior day. It occurs about 10 to 15 times per year perfuture. This usually represents a one-day change to aggressive demandfrom supply or vice versa. The theory is that one should go with the latest expression of demand or supply. This simple formation was tested byvarious methods on the computer in an effort to see if trading this formation gives one a technical edge. Testing was done by buying on theclose of the outside day and liquidating 1 to 3 days later. It simply is notan effective entry filter.Reversal DayReversal day (RD) patterns occur between15 to 30 times/year with a trend filter (Figure 3.16). A reversal bar is a one-day changein sentiment from bull to bear or vice versa.Statistically, there is no way you can makemoney day trading this pattern alone. However, it can be very useful in trading provided these patterns are combined withother technical indicators and. it is not a day FIGURE 3.16 Reversal day.trade.A reversal day is one where the price trades below (above) the previous day's range and then closes above (below) the previous day'slow/high and opening (Figure 3.17). This type of price action can markthe temporary or permanent end of the minor trend then in effect,
FIGURE 3.17
Reversal days.
Types and Location of Reversal DaysIn Figure 3.18, the RD-3 lows is great for a trending market and this isthe pattern in the correction to a thrust. The second reversal day at adouble bottom is much more powerful than a single reversal day.
BAR CHARTS AND THEIR FORECASTING ABILITY
53
FIGURE 3.19Reversal dayat two daily highs.
FIGURE 3.18
Reversal day in buy zone.
A reversal day up when the market is in the buy zone is more likelyto be successful than one in the sell zone.Figure 3.19 illustrates a minor upthrust with a reversal day. Themarket went above two daily highs and fell back and closes below themThe sign of buying pressure is gone. The range on a reversal day determines its validity. Its position in the pattern is significant. The reversal
TABLE 3.7
Reversal Day Bars—Stocks
BUY ON CLOSE OF DAY OF PATTERN COMPLETION—100 SHARES PER SIGNAL
TEST PERIOD 1/1/96-10/30/99
$0 ALLOWED FOR COMMISSION AND SLIPPAGE
THE ULTIMATE TRADING GUIDE
TABLE 3.6
Reversal Day (Futures)
BUY/SELL ON CLOSE OF DAY OF PATTERN COMPLETIONLIQUIDATE ON OPENING RANGE BREAKOUT OF 0.5 RANGE OF PRIOR DAYTEST PERIOD l/1/83-6/30/99— ONE CONTRACT PER SIGNAL— DAY TRADEJO ALLOWED FOR COMMISSION AND SLIPPAGE
BAR CHARTS AND THEIR FORECASTING ABILITY
55
day at a double bottom has more significance than one at a single bottom if the range is the same or greater than prior day.Factors affecting validity of reversal day include• Range of the bar.• Number of closes reversed.• Number of pivot points below/above it.Computer studies were made using the reversal day pattern as anentry setup. Additional filters were added:1. Buy/sell on close of day of basic reversal day pattern setup.2. Exit. After entry, exit is made on any day that the market had a60% opening range breakout of the previous day's range.3. Trend filter. A buy entry is made only if the close of the prior daywas greater than the close 50 days ago (and vice versa).Table 3.7 on page 53 and Table 3.8 on page 54 show the results ofthis study on futures and stocks. No commission or slippage was allowed. These tables clearly demonstrate that you gain an edge in themarkets by use of the reversal day pattern. However, the