fixed position sizing, the calculation will lead to the statistically expected

profit for N trades. For the fixed fractional position sizing, the dollar value of

risk per trade varies with our trading capital. Therefore, this formula is less

accurate for the fixed fractional position sizing. This calculation will not lead

do to the expected profit for the fixed fractional position sizing but only

hypothetical profit.

Your actual future profit can be more or less than the hypothetical profit after

N trades. However, the calculation is still useful because you can set the

short-term profit goal with simple calculation without needing any complex

simulation. We still recommend using above calculation to get the quick

approximation of our future profit because you can perform much better

when you have the profit goal for your trading. We will illustrate how you

can set your profit goal for the fixed fractional position sizing. Consider that

you have the trading strategy with 35% win rate and Reward/Risk ratio = 3

for the 10,000 US dollar trading capital and 1% Risk. We get:

Hypothetical profit per trade (US dollar) = 40 US dollar = 300 x 0.35 – 100 x

0.65.

Now let us assume that you can manage 50 trades each month, your profit

goal can be calculated like this:

Hypothetical profit after 50 trades = 2000 US dollar = 40 x 50.

The 2000 US dollar profit is corresponding to 20% growth for your account.

Of course, 20% growth per month is good achievement for trader with 10,000

US dollar account size. From this formula, you can find that the main driver

of your account growth is your win rate. If your win rate is 30% for your

trading strategy, then your profit goal can be calculated like this:

Hypothetical profit per trade (US dollar) = 20 US dollar = 300 x 0.3 – 100 x

0.7.

Hypothetical profit after 50 trades = 1000 US dollar = 20 x 50.

If your win rate is below 25% for the trading strategy, then there is no reason

for you to trade because your profit goal from this trading strategy is zero:

Hypothetical profit per trade (US dollar) = 0 US dollar = 300 x 0.25 – 100 x

0.75.

Hypothetical profit after 50 trades = 0 US dollar = 0 x 50.

From above calculation, you can tell that you can scale up your profit by

increasing number of trades. In general, when you can achieve the ideal win

rate and ideal number of trades, you will experience stiff increase in your

profits. Even if your win rate is low, you can always scale up your profit by

increasing number of trades as long as your win rate is above the breakeven

rate. One important thing you should consider is that human gets tired after

many trading. For this reason, too many trades can reduce your win rate. In

return, your profit can be reduced too. Therefore, you should not attempt to

overstay in your trading desk. In addition, you have to control your trading

psychology without losing your focus.

In spite of the fact that profit calculation requires a calculator or spreadsheet,

it is worth to calculate your profit prior to your trading. From the trader’s

point of view, it is always more productive to trade with some tangible profit

goal. In addition, I have met many junior traders who are nervous for their

first trading or trading with new trading strategy. Especially when they got

with one or two bad trading, they normally start to feel the pressure. When

you have calculated your profit goal before your trading, one or two times

losses hardly matter because it is only the part of process in the course of

your trading.

10.6 Compounding Profits

Trader should remember that your profit would be compounded if you were

using the fixed factional position sizing and if you do not withdraw the profit.

Understanding compounding profit is not difficult. Every time you make

profit from your trading, you can keep the profit in your account for your

next trading. At the beginning, your 2% profit is 200 us dollar from your

10,000 US dollar account. As your account size increased with accumulated

profit, your 2% profit can become 300 US dollar from 15,000 US dollar

assuming that you made 5000 US dollar profit. This process will go on every

time you make profit and the profit stays in your account. In fact, with

profitable trading strategy, your account will grow faster than above

Hypothetical profit calculated. Therefore, when you are using this

hypothetical profit calculation, use it for short-term goal only like a month or

two. If you are using the fixed position sizing, it is important to increase your

lot size to get the same compounding effect when you have reached your

profit goal every time.

10.7 Trading Performance and Cost Metrics

Trading performance and cost metrics are useful for our trading because we

can grab all the essential information about our trading with one single

number. Especially, annual return, profit factor, Sharpe ratio and Calmar ratio

and are often used to compare the performance of traders, fund managers and

trading algorithm in the absolute terms. You will not measure the trading

performance every day but at least you should measure them once a month. If

trading performance metric concerns our profit in our trading, the cost

metrics concerns the transactional cost we have to pay for while we are

trading. For example, commission and spread are the typical transactional

cost we have to pay for while we are trading for currency or stock shares. We

have listed several performance metrics and cost metrics in Table 10-5 and

Table 10-6.

There are several reasons that performance metrics is important for your day

trading. Firstly, we need to measure the performance to compare many

trading and investment opportunities. Without a commonly applicable

metrics, it is not possible to compare different trading and investment

opportunities. Although the performance metrics are not the absolute

predictor of the future performance, you are still much better to use this

metrics to avoid many bad opportunities. To measure some professionally

accepted trading metrics like the Sharpe ratio and Calmar ratio you will need

at least 3 years of trading records. Most of time, when you are experimenting

with new strategy, you will not have such a long trading history unless you

are building the backtesting algorithm for your strategy. To identify the

usefulness of the new trading strategy you can use profit factor because it can

be calculated with much shorter trading history than Sharpe and Calmar ratio.

Along with profit factor, you need to know the winning rate, average profit

and loss from your trading.

Secondly, we can measure the performance of trading system to cross-

compare different instruments when we develop our own trading strategy.

Whether you are applying one trading system across many different

instruments or applying several trading system across many different

instruments, performance metrics are important. Especially if we want to

compare the many different trading systems, then it is important to use the

right trading metrics applicable across different instrument and different

trading strategies. For example, profit factor, CAGR %, Sharpe and Calmar

ratio can be used for this purpose. Especially Sharpe and Calmar ratio

provide the risk adjusted return characteristics of the trading strategy. For

example, Sharpe ratio or Calmar ratio over 1 represents that your expected

return is greater than your risk. Trading system with higher Sharpe ratio and

Calmar ratios is desired for traders and investors.

Metrics Description

Risk free rate % Rate of return of an investment with zero risk. The risk free rate typically represents the annual

interest rate an investor would expect from their typical saving account. The interest rate of the

Annual Return % national saving account is a good example of risk free rate.

Gross Profit The profit an investment generates over a year as a percentage of the amount of capital invested.

Gross Loss the total sum of all winning trades

Average Profit total sum of all losing trades

Average Loss average of all winning trades

Total Net Profit average of all losing trades

Profit Factor the total profit based on the difference between gross profit and gross loss

Winning rate ( or a ratio of gross profit over the absolute sum of the gross loss (=Gross Profit/|Gross Loss|)

Winning Percent) the number of winning trades over the total number of trades

Losing rate (or losing

percent) the number of losing trades over the total number of trades

Maximum consecutive

wins the greatest number of winning trades that occurred in a row

Maximum consecutive

losses the greatest number of losing trades that occurred in a row

Maximum Drawdown

% the largest retracement relative to a previous equity high in the entire trading period

CAGR %

(Compounded Annual Annual percentage rate at which an account must continually grow over the period, in order to attain

Growth Rate) the end value from the starting values of your balance.

Sharpe Ratio

Excessive annual return divided by the standard deviation of the annual returns = (Return % - risk

Calmar Ratio free rate %)/standard deviation %

Excessive annual return divided by the maximum drawdown % = (Return % - risk free rate

%)/maximum drawdown %

Table 10-5: Essential performance metrics for trading and investment.

To check if we are trading with reasonable operational cost, we need to

measure the cost metrics. Operational costs have the direct impact on your

trading profits. Such operational cost can be measured readily in the modern

trading platform. While you are back-testing or forward-testing, you will

notice that high operational cost can wipe out all the profit generated from

your trading system. Likewise, many trading systems are profitable in the

laboratory condition where operational cost is zero. Trader should monitor

the average spread and commission always. Slippage is the absolute value of

the difference between the order open price you have sent to your broker and

the open price that your broker executed. If your slippage is counted towards

your loss, then it is called negative slippage. If your slippage is counted

towards your profit, then it is called positive slippage. In theory, you should

get more or less similar amount of positive slippage and negative slippage in

your trading. If your average negative slippage is much greater than average

positive slippage, you need to investigate the reason why you are getting bad

deals every time.

Metrics Description

Average slippage Average of the price difference between your desired open price and the actual open price

Average positive Average of the price difference between your desired open price and the actual open price, resulted

slippage in your profit

Average negative Average of the price difference between your desired open price and the actual open price, resulted

slippage in your loss

Average Spread Average of the spread (ask – bid) at your order execution time

Average Commission Average commission paid for each order execution

Table 10-6: Essential cost metrics for trading and investment.

11. Rolling Ball Effect and Harmonic Pattern Trading

We use turning point strategy because of their high reward/risk ratio. Higher

rewards/risk ratio means relatively lower winning rate comparing to other

lower rewards/risk trading setup. As an extreme example, in scalping, you

can achieve over 90% of winning rate if you have the target profit of 1 pip

against 20 or 30 pips risk. However, it does not mean that scalping is better

technique than other strategies. With scalping, you have to increase

frequency of trading to achieve the same profit level as other techniques do.

In addition, few losing trades will risk your account quickly. In harmonic

pattern trading, higher rewards/risk ratio will reduce your winning rate

dramatically. It is hard to say exact winning rate. Roughly, your chance to be

successful is somewhere between 10% and 60%. Of course, it can be higher

depending on your discipline and rewards/risk ratio. When we trade with

turning points, we can be wrong many times. However, few winning trades

will offset your loss and will offer you profits. Several losing trades will

never impose a lot of pressure on your account when you are taking

reasonable risk for each trade. Turning point strategy has nice operating

characteristics for trader. Unlimited profit range is the key merit on why the

turning point strategy is loved by many traders (Figure 11-1). In addition, the

required frequency of trading is much less than other trading strategy. This

sort of strategy will fit to the life style of many of us. Having said that, many

traders do not understand the skills and discipline required for turning point

strategy. In essence, the key to apply successful turning point strategy is

reducing number of losing trades.

Figure 11-1: Profit range of turning point strategy compared to others.

To reduce number of losing trades and to increase your winning rate, you

must understand the rolling ball effect. What is rolling ball effect? To explain

the rolling ball effect in harmonic pattern context, let us start with some

example of bullish harmonic patterns. We will be using bullish trading

example thoroughly in this chapter. For selling case, please turn the logic

explained here the other way around.

Figure 11-2: Schematic diagram of rolling ball on the slope.

Most of time the bullish turning point will come after heavy selling period. In

the case of global turning point, it would come after intensive selling (Figure

11-3). In the case of continuation and local turning point, the turning point

will come after some selling (Figure 11-4). When we look back this in chart,

it seems everything is ok. However, if we are standing at the time before the

turning point happens, this is not fun to be honest. Especially we have just

sent some large buying orders when all bearish investors think this might be

suiciding. Even in this fearful moment, we still do this because we know that

there are people waiting to enter buy when price is sufficiently discounted.

However, this is only half of our equation.

To win, you have to understand the other half of equation. The other half of

equation is that it is not easy to stop the rolling ball on the slope as shown in

Figure 11-2. Even the rolling ball reaches end of the slope, we cannot expect

the rolling ball to be stopped right at the end because the rolling ball has the

built up momentum in the rolling direction. Instead, it usually takes several

hard attempts to stop them or they will role until they lose all the momentum

by the friction of surface and air and other obstacles on its way. This rolling

ball effect is the typical cause behind the failed harmonic patterns. Less

sophisticated trader does not see this rolling ball effect. They are almost

careless about the built-up momentum of the selling market. If you miss this

point, you will be joining the 90/90/90 club, 90% of the traders losing 90% of

their money within 90 days.

Figure 11-3: Global turning point example after the heavy selling pressure.

Figure 11-4: Local turning point example.

To deal with this rolling ball effect, sometimes, you can employ the multiple

entry technique for harmonic pattern trading. In multiple entry technique, you

will split your order into two or three smaller. At first, you will open first

entry with the order size of half or one third of one full order. Then you will

monitor how the market is responding. If market is going down further, this

means that the rolling ball effect is still not cleared yet. As price is going

down further, the harmonic pattern can fail. During this process, this might be

losing trade or this might be breakeven if you are skilled. At the same time,

you have to check if the market is showing some intent to become bullish or

not for your future second entry. If the market showed some intent to become

bullish, then you can wait for the second opportunity. It is important to have

sufficient price distance between your first and second entry though. Second

entry must be well below outside the Pattern Completion Interval of the first

entry to account for the rolling ball effect. If we meet the turning point in our

first entry, it is the best scenario. In such scenario, make sure that you are

using maximum profit range to account for the reduced position size. Even if

our first entry did not go well, we still have the second chance. Now, you

might be wondering how many entries are recommended in multiple entry.

Typically, two is recommended and three is the maximum I can suggest. If

you split your order into too many pieces, then you profit size is getting

smaller too. I do not recommend going over more than three typically. Two is

good choice and three is the maximum.

Figure 11-5: Multiple entry demonstration with AB=CD pattern.

Sometimes, there are people doing exactly opposite to multiple entries

recommended here. That is they are taking multiple exits. For your

information, multiple exit technique can not deal with the rolling ball effect if

the entry of two orders are identical. Multiple exits with same entry isn’t

efficient technique because the end result is more or less the same with single

entry with the averaged take profit between two take profits. For example,

some trader sets two take profits at 0.381 and 0.618 Fibonacci projected level

from D point. The results of this will become close or identical to one take

profit at 0.500 Fibonacci projected level in long run. I do not recommend

this sort of multiple exit setup. However, if you must do this sort of multiple

exit setup, then I recommend using Potential Continuation Zone, instead of

simple Fibonacci projection. Potential Continuation Zone, introduced in this

book, is much better predictor of turning point after the D point is confirmed.

Hence, you can use two Potential Continuation Zone sensibly to place your

two take profit targets. In addition, if you are going to employ two orders, try

to differ the entries to account for the rolling ball effect. If you are differing

the entries of the two orders, then it will become the multiple entry technique

we have been explaining here.

Figure 11-6: Multiple exit demonstration with AB=CD pattern.

Figure 11-7: Single exit setup equivalent to multiple exit setup in Figure 11-

4.

12. Young’s Mutual Pattern Turning Point Strategy

We have described the rolling ball effect in previous chapter. We have shown

that multiple entry technique can act as some sort of buffer against the rolling

ball effect. When you trade with any turning point (i.e. reversal strategy), you

need to be cautious about this rolling ball effect. Because of their presence,

your trading plan may not go as you planned. Unfortunately, many instructor

or educator in trading and investment industry misses this important piece of

information. Harmonic pattern can spot potential turning point but it will not

rule out the rolling ball effect by itself. When junior trader misses this point,

the outcome will be highly negative.

Then how can we overcome this rolling ball effect and find the turning point

with higher winning rate? In this chapter, we will show you how to improve

your winning rate marginally without employing multiple entry technique.

There are many different strategies on online. Probably there are countless of

them. More you dig on those, more you will get confused because each

strategy is not tuned in the same context. You will have the hard time of

putting them together. In this chapter, I will teach you the strategy I designed

to deal with this rolling ball effect personally. I have also taught this

particular strategy to my students from various countries last five years. I

named this strategy as Mutual Pattern Turning Point Strategy. The main

ingredients of Mutual Pattern Turning Point Strategy include these three price

patterns and one intermarket analysis:

Harmonic patterns

Price patterns: Triangle and Wedge patterns

Elliott Wave 12345 or Elliott Wave 1234 pattern

Intermarket analysis – Pairs Trading or any other

In the rolling ball, the most natural way to lose the built up momentum is to

lose them gradually. As I mentioned, the ball will not stop at one attempt but

they will lose the momentum gradually with the friction on the surface and

air and with other obstacles on its way. Price patterns, Elliott Wave 12345

and 1234 patterns are one of those techniques visually confirming gradually

losing momentum in the market. I will show you this with an example. First,

let us have a look at rising Wedge pattern (Figure 12-1). Typically, wedge

pattern will start with thick bottom. Then the edge will be narrowing down

towards its tip, hence it is called wedge pattern.

Figure 12-1: Example rising wedge pattern on EURUSD H1 timeframe.

Now, gradually narrowing edge to its tip is the evidence of gradually

reducing momentum. Hence, at turning point, we will be seeing harmonic

pattern and rising wedge pattern mutually. In Figure 12-2, we show the

Rising wedge and harmonic pattern mutually showing up at the turning point

in USDJPY. As you can tell, USDJPY made a sharp fall at Point D of

harmonic pattern. We have already explained the risk management with

pattern completion interval. You will be stick to the knowledge we taught

here for your risk management. To make things clear, I will show you

another example in Figure 12-3. In Figure 12-3, AB-CD pattern is mutually

predicting the turning point with the rising wedge pattern too. Likewise, you

can you can use triangle patterns for the same purpose. I have shown some

example in Figure 12-4. In Figure 12-4, the turning point was mutually

agreed between AB=CD pattern and Triangle pattern.

Figure 12-2: Example of combining the Rising Wedge Pattern with Harmonic

Pattern on USDJPY H1 Timeframe.

Figure 12-3: Rising wedge pattern on D1 timeframe was placed together with

AB=CD pattern found on H1 timeframe.

Figure 12-4: Triangle pattern and AB=CD pattern on W1 timeframe for

AUDNZD.

In term of dealing with the rolling ball effect, another great tool is Elliott

Wave 12345 pattern. Elliott Wave 12345 pattern is another natural predictor

of gradually reducing momentum in the rolling ball effect. In the Elliott

Wave Framework, Elliott observed that wave 3 is the longest wave and it

cannot be the shortest. Hence, wave 5 will be always shorter than wave 3 in

Elliott Wave 12345 pattern. Reduced wave length in Wave 5 is another

evidence towards gradually reducing momentum of the rolling ball effect

(Figure 12-5). For Elliott wave 12345 to be the mutual predictor of turning

point, wave 5 should be coincided with Point D of harmonic pattern. You

need to check that wave 5 is definitely shorter than wave 3 for successful

application. For the task, you can use pattern completion interval. In Figure

12-6, we have shown one example where Elliott wave 12345 is predicting the

turning point with harmonic pattern.

Figure 12-5: Schematic diagram of Elliott wave 12345 pattern.

Figure 12-6: Example of combining the Elliott Wave 12345 pattern with

Harmonic Pattern on EURUSD D1 Timeframe.

Elliott wave 1234 pattern is another mutual pattern to predict the turning

point with harmonic pattern. However, Elliott wave 1234 pattern works

slightly different from Elliott wave 12345 pattern. In this case, we are not

actually try to find the evidence of gradually reducing momentum but we

predict the turning point because we know that the rolling ball effect in wave

4 direction is weak comparing to the large rolling ball effect in wave 3

direction. In Figure 12-8, we illustrated the Elliott wave 1234 pattern and

harmonic pattern mutually predicting the turning point. Identifying Elliott

wave 1234 is important because arrival of next wave will form Elliott wave

12345 pattern. This strategy can continue after Elliott wave 12345 pattern is

formed.

Figure 12-7: Two rolling ball effect demonstration for at wave 4.

Figure 12-8: Example of combining Elliott Wave pattern 1234 with

Harmonic Pattern on EURUSD D1 Timeframe.

So far, we have shown the most effective mutual patterns to predict the

turning point together with Harmonic pattern. Next thing we are going to

teach is how to find the motivation behind the turning point. Typically

technical trader concern least about this. Shall we ignore the motivation

behind the turning point at all just like other trader? With the mutual patterns,

I have taught in this book, you could already improve your winning rate

marginally. However, from my experience, our trading is even safer if we can

find the motivation behind the turning point.

To find the motivation behind turning point, the closest thing in my opinion

is the intermarket analysis. Intermarket analysis will simultaneously take

accounts for cross-market relationship of multiple instruments and asset

classes. This often brings the valuable insight, which is not covered by the

price pattern analysis on single subject alone. Having said that, intermarket

analysis will not find the direct motivation of the turning point because

multiple factors will influence market always. At least, we can find the global

market view of the particular turning point. When we make some sense on

our turning point in related to other instruments, the reliability in our analysis

increases.

You could pay attention to the economic data release and financial news for

this purpose too. Many professional trader in fact do this. If you can do this,

there is hardly any problem. However, this analysis is difficult to incorporate

in systematic approach for average trader. For example, quantitatively

measuring the impact of financial news and economic data release is well

beyond our skills as a trader. As far as I concern, measuring the impact of

financial news and economic data release is even difficult task to an

experienced Statistician. In addition, checking their usefulness of those news

and economic data release for our trading as in backtesting and forward

testing is not easy task either. Therefore, we will recommend more systematic

approach to find the motivation. There can be several candidate techniques

but we will introduce Pairs trading exclusively for the purpose. The Pairs

trading is also known as the statistical arbitrage among the mathematical

trading community. In Pairs trading, we concern when two highly correlated

instruments (i.e. two highly correlated currency pairs in Forex and two highly

correlated shares in Stock market) have unusually big spread in price.

Typically, the large spread in price is caused by some fundamental reason.

Here is an example with some synthetic scenario between GBPUSD and

EURUSD. GBPUSD and EURUSD have high correlation and they are

supposed to move in the same direction often. However, if UK decides to

make some unexpectedly high interest rate rise, GBPUSD and EURUSD can

move in opposite direction for several weeks. As a result, the price spread

between GBPUSD and EURUSD can increase substantially. After few

weeks, once the effect of interest rate rise is all cleared, the high correlation

in GBPUSD and EURUSD will ensure that these two will move in pairs

again. As a result, the price spread will be converging again to normal range.

In fact, the large spread in two highly correlated instrument is the trading

opportunity for us. In Pairs trading, during this large spread, trader will buy

one instrument and sell the other instrument. Hence, they will achieve

hedging effect in doing so. Trader will typically hold these two positions until

they achieve their take profits or stop loss target.

Figure 12-9: Spread analysis example between AUDUSD and EURHKD.

In Pairs trading, there are few important points you must understand. Firstly,

Pairs trading involves to sell on the highly bullish instrument and to buy on

the highly bearish instrument. This means that Pairs trading also tries to

predict the turning point like harmonic pattern but using the intermarket

approach. This is different from the price pattern approach of harmonic

pattern and other mutual patterns described here. Secondly, Pairs trading is

timeframe independent. Pairs trading only concern the price spread between

two instruments. Therefore, it is not so hard to combine them with other

known technical indicators or analysis.

These two points makes Pairs trading attractive to use in our turning point

strategy in systematic way. There is also weakness in Pairs trading too. To

find the motivation behind our turning point, you may need to monitor

multiple of instruments instead of only two highly correlated pairs. I

recommend at least twenty instruments or more depending on if your CPU

can handle. When we monitor the spread of multiple instruments, it is often

easy to spot the weakest instruments with more probable to turning point. In

our turning point strategy with harmonic pattern, you will choose instrument

with reasonably large spread. I like to use the spread measurement in the unit

of standard deviation. Large spread typically means spread near 4 or greater

than 4. If you are newbie with Pairs trading, I will recommend to use this

spread range. If you are an experienced trader, then you can probably use

spread over 3. When the instruments have spread near or greater than 4

standard deviation, these instrument will already have the self-motivation to

make the turning point even before the harmonic pattern formation. In this

case, harmonic pattern and other mutual patterns will be great confirmation

for the turning point.

I think finding the motivation behind the turning point is probably the last

piece of puzzle in our turning point strategy. Intermarket analysis can be a

powerful tool beside our price pattern analysis. In fact, the intermarket

analysis is not limited to Pairs trading. However, there are two important

conditions to consider. Firstly, they should help you find the turning point.

Secondly, you should be able to incorporate them into your strategy in

systematic manner. If the intermarket analysis technique does not meet these

two conditions, then it is probably not easy to combine with our turning point

strategy.

Figure 12-10: Spread Analysis example between AUDUSD and EURHKD.

So far, we have given you the description on Mutual Pattern Turning Point

Strategy. Here are the essential steps of Mutual Pattern Turning Point

Strategy you will take away.

Step 1: Identify Potential Turning Point Opportunity

Step 2: Deal with the rolling ball effect

Step 3: Find motivation behind the turning point

Harmonic pattern is the best tool to accomplish Step 1 of this Mutual Pattern

Turning Point Strategy. Then, we have introduced mutual patterns to deal

with the rolling ball effect in Step 2. Mutual patterns include wedge pattern,

triangle pattern, Elliott wave 12345 and Elliott wave 1234 patterns. With

these mutual patterns described here, you can increase your winning rate

marginally. You may not need to apply multiple entry technique. However, if

you are unsure of your skills, then you can still use these mutual patterns with

multiple entry technique together. As you skill are sufficiently improved, you

can always decide to get rid of multiple entry technique. In Step 3, we will

need to find the motivation behind the turning point. We recommend

incorporating an intermarket analysis for this purpose. In our case, we have

used Pairs Trading because it is easy to incorporate mechanically into our

process. In general, my Mutual pattern Turning Point Strategy is not complex

theory or anything. However, it is intuitive but systematic manual to trade the

turning point for Stock and Forex market. Although I teach the original steps

in much more details, in this book, I have kept everything short here for

average trader.

When you are using Elliott wave pattern, you might find difficult to

recognize wave patterns in objective manner with original Wave Theory.

Original work of Elliott wave is amazingly good piece of work. However,

wave counting can be highly confusing practice for average trader. This is

popular phenomena and belief among traders. Fortunately, I have done some

intensive research to make the Elliott wave counting in more objective

manner and even easier for average trader. I named such technique as “the

template and pattern approach towards objective Elliott Wave counting”. I

will not cover this approach in this book because I have already wrote about

this approach in my other book: Scientific Guide to Price Action and Pattern

Trading. When you can use Elliott wave pattern in objective manner, it is the

powerful piece of trading tool, which cannot be replaced by any other thing

in my opinion. In my other book: Scientific Guide to Price Action and Pattern

Trading, I have also described many details about price patterns: triangle and

wedges and head and shoulder patterns for your trading. You will find the

book very useful especially after you have completed this book.

13. Tutorial with Peak Trough Analysis

Peak Trough Analysis is the most important tool in financial trading. It helps

you to detect various price patterns in more organized and efficient way.

Detecting the Rising wedge, Falling wedge, Triangle, and Elliott Wave

patterns with Peak Trough Analysis was described in the Book: Scientific

Guide to Price Action and Pattern Trading. In addition, detecting Fibonacci

Price Pattern, Elliott Wave pattern, Harmonic Pattern, and X3 pattern with

Peak Trough Analysis was described in the book: Profitable Patterns in Forex

and Stock Market. In this special chapter, we will provide three simple

tutorials in regards to using Peak Trough Analysis. We will use MetaTrader

as the demonstrating platform. It is simply because MetaTrader is popular

and free to obtain from many different sources. This tutorial will be

applicable to MetaTrader 4 and MetaTrader 5 because MetaTrader 4 and

MetaTrader 5 share the similar user interface. At the same time, this tutorial

can be applied to Optimum Chart as it also provides similar user interface to

MetaTrader. For your information, MetaTrader version of Peak Trough

Analysis can be downloaded from our website freely: www.algotrading-

investment.com. In the Optimum Chart, Peak Trough Analysis indicator is

shipped as default indicator.

In the first tutorial, we will demonstrate how to load Peak Trough Analysis

indicator to your chart. Then in the second tutorial, we will be showing you

how to apply Fibonacci retracement chart object. Then we will cover how to

apply Fibonacci expansion chart object. You should understand that

Fibonacci retracement and Fibonacci expansion are the basis of many of the

price patterns used to predict turning point. Hence, this practical tutorial

should be not missed if you are not confident with the concept of Fibonacci

retracement and Fibonacci expansion.

The classic way of loading indicator in your MetaTrader is by opening Data

Folder from the File menu (Figure 13-1 to Figure 13-3). Copy and paste

PeakTroughAnalysis-xxx.ex4 file to Indicators folder for your MetaTrader 4

platform. If you are using MetaTrader 5 platform, then copy and paste the

PeakTroughAnalysis-xxx.ex5 file to Indicators folder. The file name of

indicator might be different depending on the version of indicator.

Figure 13-1: File menu in MetaTrader

Figure 13-2: Listed Folder in window explorer after Open Data Folder menu

is clicked

Figure 13-3: Subfolder list inside MQL4 for MetaTrader 4 or MQL5 folder

for MetaTrader 5

13.1 Loading Peak Trough Analysis indicator to Your Chart

In this tutorial, we assume that you have downloaded Peak Trough Analysis

tool already in your MetaTrader platform. Once you have downloaded the

indicator, you should be able to see it in the navigator (Figure 13-4).

Figure 13-4: Peak Trough Analysis and other indicators in the Navigator

To use any indicator, you need to have at least one chart opened. In this

tutorial, we will open GBPUSD hourly chart. However, you can open any

chart as you wish.

Figure 13-5: Pop-up menu opened in the Market Watch

Now go back to the Navigator. Select Peak Trough Analysis with mouse

right-click. Then click on Attach to Chart menu (Figure 13-6). This step will

attach this indicator to GBPUSD hourly chart, which was opened in our

previous step.

Figure 13-6: Pop-up menu opened in the Navigator for indicator

Clicking on Attach to Chart menu will pop up the property window for the

indicator. In this property window, you can select various setup according to

your preference. Especially, Peak Trough Analysis can be run as three

different mode.

ZigZag indicator mode

Modified Fractal Indicator mode

Original Fractal Indicator mode

To run it as ZigZag indicator mode, set the first input to false. If you want to

run it as modified fractal indicator mode, then set the first input to true. If you

want to run it as original fractal indicator mode, then set the first input to true

and set N left = 2 and N right = 2. We will not explain the details of these

three modes because this book uses ZigZag indicator mostly. For your

information, we have explained all these modes in details in the book:

Scientific Guide to Price Action and Pattern Trading.

Figure 13-7: Inputs window in Peak Trough Analysis indicator

Click OK button to finalize the indicator setting. Now you should be able to

see Peaks and Troughs detected in the chart window (Figure 13-8).

Figure 13-8: Detected Peaks and Troughs with Peak Trough Analysis

indicator

13.2 Working with Fibonacci Retracement in Your Chart

Fibonacci retracement is one of the basic Fibonacci price pattern in trading.

Before you go for Harmonic pattern, Elliott Wave pattern and X3 pattern, it is

necessary to understand this pattern. In this tutorial, we assume that you have

loaded the Peak Trough Analysis tool in your chart.

The standard approach of accessing Fibonacci retracement is from Insert >>

Objects >> Fibonacci in your MetaTrader (Figure 13-9). There is other short

cut available but they will provide you the same Fibonacci retracement tool.

Figure 13-9: Submenu listed for the Insert file menu

You will apply Fibonacci retracement chart object using left click and hold

move. It is not double click but you will click at Point 1 and then you will

hold it until Point 2. In Optimum Chart, in fact, this is achieved by two clicks

on Point 1 and Point 2. Detected peak and trough in your chart gives good

staring points. For Fibonacci retracement, you need to either select one peak

and one trough or one trough and one peak. The third point is your prediction

for reversal.

Figure 13-10: Demonstration of left click and hold move in your chart

Theoretically, one Fibonacci retracement is equivalent to one Fractal Triangle

made up from 3 points (Figure 13-11). You need to have a habit of

coordinating fractal triangles into points for more advanced training later. In

RECF notation, Fibonacci Retracement of 61.8% can be expressed as:

R: 0.618 or R: 61.8%

Never use Fibonacci Retracement alone in your trading. Always use it

together with Secondary Confirmation as it was discussed in this book.

Figure 13-11: Fibonacci retracement chart object placed on Point 1 and Point

2

Typically, the charting platform will provide the default ratios for Fibonacci

retracement. However, you can customize the ratios according to your

preference. To do so, double click on Fibonacci retracement in the chart.

Click on properties of Fibonacci retracement.

Figure 13-12: Pop-up menu for Fibonacci retracement chart object

In the property window (Figure 13-13), you can change, add, and remove

ratios. You can even change their look including line colour, line thickness,

and line style. This is useful if you do not want to see any particular ratio

from your analysis. For your trading, stay with primary ratio and near

primary ratio always.

Figure 13-13: Property window for Fibonacci retracement chart object

13.3 Working with Fibonacci Expansion in Your Chart

In Fibonacci expansion, we have to pick three points instead of two points to

locate the chart object. In Fibonacci expansion, you will pick up either a

peak, trough and peak or a trough, peak and trough. Use the detected peaks

and troughs in your chart as the starting points. I found that MetaTrader 4 and

MetaTrader 5 show the different response around the snap points of

Fibonacci expansion chart object. I found that MetaTrader 4 provides slight

easier way of applying Fibonacci expansion to your chart. Hence, I will

explain these steps using MetaTrader 4.

The standard approach of accessing Fibonacci Expansion is from Insert >>

Objects >> Fibonacci in your MetaTrader (Figure 13-14). There is other

short cut available but they will provide the same Fibonacci expansion chart

object. Firstly, you will apply Fibonacci expansion chart object with left click

and hold move from Point 1 to Point 2.

Figure 13-14: Demonstration of left click and hold move in MetaTrader 4

Once you see the Fibonacci expansion object is placed in Point 1 and Point 2,

then release mouse. Now drag the third snap point of Fibonacci expansion to

Point 3 in your chart. Now it is done. Make sure that three snap points of

Fibonacci expansion is exactly placed on the Point 1, 2 and 3. In this

example, price made a reversal at 100% Fibonacci expansion level.

Figure 13-15: Drag the third snap point of the chart object to Point 3

Theoretically, one Fibonacci expansion is equivalent to two Fractal Triangles

made up from 4 points. You need to have a habit of coordinating fractal

triangles into points for more advanced training later. In RECF notation,

Fibonacci Expansion of 100.0% can be expressed as:

E: 1.000 or E: 100.0%

Never use Fibonacci expansion alone in your trading. Always use it together

with Secondary Confirmation as it was discussed in this book.