Some thoughts on pattern recognition and correction waves:
After seeing several charts on this site, I've noticed some common mistakes; re-tracement levels, pattern recognition, wave counts, and, trend-lines, along with, channel formation cover a lot of them.
Some thoughts:
Re-tracements / Projections don't always conform to 0.62 /1.62 ratios. Think about it. Is a 62% re-tracement really bullish? 38% and 50% re-tracement and projections are important too.
Pattern recognition - SHS & W or WV tops and bottoms can be, and often are, subjective. The S sometimes becomes a V and vice-versa. Regardless, both have 'neck-lines' and a pattern only materializes after it is complete. A complete pattern requires revisiting the 'neck-line' and a 'bouncing-off' (usually with volume) to count as a 'pattern'. Remember, since prices often are fractal in nature, there may be patterns within patterns and using them, and their projections, can be a good way to understand price movement. Finally, failed patterns have equal importance as completed patterns, but, with the opposite indication.
Wave-count - EW counts, to those that practice them, are somewhere between voodoo and gospel. They are difficult once you get into real-time trading. But some useful tips are as follows:
1) Charting an SMA and hiding everything else is a good way to view waves. Candlesticks, and their variations, can sometimes confuse the wave count because each 'red' candle is viewed in a certain way; diametrically opposite of each green candle. The eyes, and hence the mind, because of bias, can, and will, play tricks on you.
2) Wave 3 per-rule cannot be the smallest wave.
3) Extensions alternate between wave counts.
4) When an instrument moves from $7 to $400 in a matter of months, not using a log-scale, exaggerates higher price movements. Given that scale is important to EW analysis, price movement from $7-$14 (100%) at the bottom looks like 7% when the price moves from $100-$107 or 3.5% when price moves from $200-207.
Trend-lines - Most practitioners I know follow the 3-touch principle of establishing trend-lines (and channels for that matter). Remember that consistency is important. Simply connecting 'highs' and 'lows' isn't necessarily the only way. Some ppl use closing prices, others use a combination of the two approaches. Trend-lines and channels change when switching scales so if you switch scales you will need to redraw them. A trend-line / channel that has 3 or more 'touches' is significant and can usually be relied upon to act as support / resistance. What is a break? Good question. You have to decide what that is. Is it an hourly close? A daily close? You have to decide, but then, stick with it. Change the definition in-between trades, but not during them :)
Support and Resistance - These should be considered more like guidelines than hard rules. Often price forms patterns, in and around, these zones. Price doesn't simply bounce off a level (unless you're applying the 3-touch principle). Imagine if that were the case. Everyone would know about a 62% level and people would realize that not everyone can get in and out at the same price. So they obviously will change the expectations around that level. Some may be happy with 60%, others with 55%, and some third group may even be extra bullish / bearish and try and sneak in an extra %, here and there, at 65% And while patterns are fractal and levels created from different scales often intersect, there may be different trades being executed based on different patterns and timelines. If behavior is thought along these lines, then it is obvious pattern formation will take place at the zone of these levels and hence one needs to understand when a zone is breached.
A final thought on volume. Volume analysis is almost as important as price-movement analysis, if not more.
I've reached my word limit :)
Note: The attached chart isn't meant to be bullish / bearish. I've simply tried to illustrate the above.
Some thoughts:
Re-tracements / Projections don't always conform to 0.62 /1.62 ratios. Think about it. Is a 62% re-tracement really bullish? 38% and 50% re-tracement and projections are important too.
Pattern recognition - SHS & W or WV tops and bottoms can be, and often are, subjective. The S sometimes becomes a V and vice-versa. Regardless, both have 'neck-lines' and a pattern only materializes after it is complete. A complete pattern requires revisiting the 'neck-line' and a 'bouncing-off' (usually with volume) to count as a 'pattern'. Remember, since prices often are fractal in nature, there may be patterns within patterns and using them, and their projections, can be a good way to understand price movement. Finally, failed patterns have equal importance as completed patterns, but, with the opposite indication.
Wave-count - EW counts, to those that practice them, are somewhere between voodoo and gospel. They are difficult once you get into real-time trading. But some useful tips are as follows:
1) Charting an SMA and hiding everything else is a good way to view waves. Candlesticks, and their variations, can sometimes confuse the wave count because each 'red' candle is viewed in a certain way; diametrically opposite of each green candle. The eyes, and hence the mind, because of bias, can, and will, play tricks on you.
2) Wave 3 per-rule cannot be the smallest wave.
3) Extensions alternate between wave counts.
4) When an instrument moves from $7 to $400 in a matter of months, not using a log-scale, exaggerates higher price movements. Given that scale is important to EW analysis, price movement from $7-$14 (100%) at the bottom looks like 7% when the price moves from $100-$107 or 3.5% when price moves from $200-207.
Trend-lines - Most practitioners I know follow the 3-touch principle of establishing trend-lines (and channels for that matter). Remember that consistency is important. Simply connecting 'highs' and 'lows' isn't necessarily the only way. Some ppl use closing prices, others use a combination of the two approaches. Trend-lines and channels change when switching scales so if you switch scales you will need to redraw them. A trend-line / channel that has 3 or more 'touches' is significant and can usually be relied upon to act as support / resistance. What is a break? Good question. You have to decide what that is. Is it an hourly close? A daily close? You have to decide, but then, stick with it. Change the definition in-between trades, but not during them :)
Support and Resistance - These should be considered more like guidelines than hard rules. Often price forms patterns, in and around, these zones. Price doesn't simply bounce off a level (unless you're applying the 3-touch principle). Imagine if that were the case. Everyone would know about a 62% level and people would realize that not everyone can get in and out at the same price. So they obviously will change the expectations around that level. Some may be happy with 60%, others with 55%, and some third group may even be extra bullish / bearish and try and sneak in an extra %, here and there, at 65% And while patterns are fractal and levels created from different scales often intersect, there may be different trades being executed based on different patterns and timelines. If behavior is thought along these lines, then it is obvious pattern formation will take place at the zone of these levels and hence one needs to understand when a zone is breached.
A final thought on volume. Volume analysis is almost as important as price-movement analysis, if not more.
I've reached my word limit :)
Note: The attached chart isn't meant to be bullish / bearish. I've simply tried to illustrate the above.