Science Of Support, Resistance, Fibonacci Analysis, Harmonic Pattern, Elliott Wave and X3 Chart Pattern

By Young Ho Seo

This book provides the scientific trading guideline for the Forex and Stock market. The book explains the price dynamics between the turning point and trend in connection with economics. The three cases of value investing in the Stock market, fundamental analysis in the Forex market and pairs trading strategy are illustrated to explain the connection. We cover the spread and the margin of safety in detail for each strategy. At the same time, the book provides the scientific rationale behind the price patterns like the support, resistance, trend line, triangle pattern, rising wedge, falling wedge, channels, Fibonacci ratio analysis, Harmonic pattern, Elliott wave theory, and X3 Chart pattern. We do this by looking at the trend, cycle, and fractal wave. We explains the ways to overcome the limitation and weakness of the trend and cycle analysis using the fractal wave analysis. This book also provides one unified theory to frame all the chart patterns explained in this book. To help with more accurate market timing, we provide the detailed guideline over the pattern inside pattern analysis (PPA) with many chart examples. At the end of the book, we also provide the guideline on how to use the turning point probability and the trend probability in the Forex and Stock market trading. In addition, we provide the guideline on how to combine the probability with support and resistance to improve over the existing support and resistance techniques. The four books below are the main reference to this book. If you want to dig deeper on some topics, you might use one of these books.

 

• Profitable Chart Patterns in Forex and Stock Market (Fibonacci Analysis, Harmonic Pattern, Elliott Wave, and X3 Chart Pattern)
• Guide to Precision Harmonic Pattern Trading (Mastering Turning Point Strategy for Financial Trading)
• Scientific Guide to Price Action and Pattern Trading (Wisdom of Trend, Cycle, and Fractal Wave)
• Predicting Forex and Stock Market with Fractal Pattern: Science of Price and Time

• Language: English
• Publisher: www.Algotrading-Investment.com
• Release date: Jul 11, 2021
• ISBN: 9798201751890

Young Ho Seo

Young Ho Seo is an Engineer, Financial Trader, and Quantitative Developer, working on Trading Science and Investment Engineering since 2011. He is the creator of many technical indicators, price patterns and trading strategies used in the financial market. He is also teaching the trading practice on how to use the Support, Resistance, Trend line, Fibonacci Analysis, Harmonic Pattern, Elliott Wave Theory, Chart Patterns, and Probability for Forex and Stock Market. His works include developing scientific trading principle and mathematical algorithm in the work of Benjamin Graham, Everette S. Gardner, Benoit Mandelbrot, Ralph Nelson Elliott, Harold M. Gartley, Richard Shabacker, William Delbert Gann and Richard Dennis. You can find his dedicated works on www.algotrading-investment.com. His life mission is to connect financial traders and scientific community for better understanding of this world and crowd behaviour in the financial market. He wrote many books and articles, which are helpful for understanding the technology and application behind data mining, statistics, time series forecasting, fractal science, econometrics, and artificial intelligence in the financial market.

Book preview

1. Understanding Turning Point and Trend

1.1 Mean Reversion and Momentum Trading in the Financial Market

Mean reversion and momentum trading are the two dominating trading strategies used in the Forex and Stock Market. Most of trading strategy we can think of will fall under a category of mean reversion or momentum trading. These two trading strategies show completely different market timing. For example, momentum trading tries to take the entry when the price shows a strong directional movement. Momentum trading is often considered as the trend following strategy. On the other hand, mean reversion trading tries to take the entry when the price is far from the mean. Mean Reversion trading is often the core trading principle behind Buy Low and Sell High strategy like value investing. In momentum trading, the trader tries to pick trend whereas in the mean reversion trading, trader tries to pick the turning point.

Figure 1-1: Conceptual drawing of mean reversion and momentum

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Among the trading community, the preference between the mean reversion trading and momentum trading are completely different. Some trader uses the mean reversion trading better and some trader uses the momentum trading better. To find out which trading style you are good at with, you need to try both trading strategies. In fact, mean reversion and momentum trading can explain the water and fire elements of the human characteristics. Mean reversion trading explains the human characteristics of being Cautious or being Realistic like water. Momentum trading explains the human characteristics of Impulsive behaviour or Heard Behaviour like fire. However, the wise trader will not view these two trading strategy as two different subjects because one comes after the other. For example, mean reversion will come after momentum. Likewise, momentum will come after mean reversion. Therefore, the legendary trader like Jesse Livermore emphasized to observe the turning point, where the market shift its major direction. This does not mean that you have to trade against the large momentum in the financial market. This means that we need to buy the stock or currency as low price as possible near the turning point before another momentum is established. Once the momentum is established, it is not easy to ride on the momentum because the price move too fast. The heard or impulsive behaviour in the market can push the price in the shortest possible time. If you enter them too late, then you are likely to end up buying the stock or currency in high price. You will either make a thin profit or loss. For this reason, you need to find a way to enter the market between the turning point and the momentum. In doing so, you need to become familiar with the turning point as well as the trend. Therefore, you need to learn the methods of identifying the turning point and trend.

1.2 Market Timing of Turning Point and Trend

When you trade in the financial market, the first thing you need to understand is the turning point and trend. If you read many trading articles and books, you will find the diverse opinion over turning point and trend. Many people view turning point and trend as two separate subjects. However, it might be better to understand turning point and trend as one subject.

Figure 1-2: Conceptual drawing of trend and turning Point

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Let us try to understand the trend. To do so, let us take human as an analogical example. We are born, we grow up, we become mature, and then we die. During this process, we can observe that there are four main stages. These four stages are universal across many creatures and objects observable in the earth.

Birth – Growth – Maturity – Death

Trend also goes through these four stages. Let us take an example in the financial market. For example, if we hear that Apple Inc. has some temporary problem in their smartphone supply line, this could stir up the stock price of Samsung Electronics because the demand for Samsung’s smart phone will be increased. Once this news is spread on the financial market, the upward trend will be born for Samsung’s stock price. At the beginning, this news could be known by few people. Later, more and more people could hear this news. Hence, Samsung’s stock price can build up upward momentum. However, this momentum will not last forever. Once people start to recognize that price rallied too high and some people start taking the profit by selling the stocks, the upward momentum can slow down. Especially, if we hear that Apple recovered the temporary problem in their smartphone supply line, the trend could die completely. As shown in this example, Birth, Growth, Maturity, and Death are the life cycle of trend.

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Figure 1-3: Process of birth of new trend in stock market (Chart: www.algotrading-investment.com)

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Now let us revisit the definition of turning point and trend. Turning point is the beginning of new trend after the death of an old trend. Hence, turning point strategy refers to the strategy that tries to pick up this new trend as early as possible. This sometimes involves picking up the turning point at the birth stage of the trend. In financial trading, trend strategy typically refers to the strategy that tries to pick up the trend during the growth stage. Hence, most of trend strategy we know is in fact momentum strategy. When the growth of trend is strong, many technical indicators are designed to react on this strong growth.

Therefore, most of trend strategy provides you entry at the growth stage not at the birth stage. For example, if you trade on the buy signal when 20 moving average line crosses over the 50 moving average line, you do need strong upwards movement to lift the 20 moving average line over the 50 moving average line.

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Figure 1-4: Buy entry confirmed by moving average cross over strategy

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In contrast to this, in the turning point strategy using the Fibonacci ratio analysis, Harmonic patterns, Elliott wave patterns and X3 patterns, we are looking for the newly born trend instead of the trend in growth stage. Hence, the main difference in turning point and trend strategy is when to enter during the life cycle of trend. Typically, we are seeking to enter near the birth of trend in the turning point strategy. In the trend strategy, we are seeking to enter at the growth stage of trend. You can probably see the difference between these two strategies.

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Figure 1-5: Buy entry confirmed by harmonic pattern (Chart: www.algotrading-investment.com, Optimum Chart)

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In our example, we considered only one trend. In practice, situation is tougher because we will have many financial and political news released in 24/7 days. Hence, we have to deal with the collection of trends instead of one trend. Some trends will be cancelled off each other and some trends will be adding up to form bigger trend. As a result, sometimes, this collective trend can have a clear direction. However, sometimes, we may not see clear direction from this collective trend but just ranging movement. At the same time, we could have many short-lived trends confusing our entries. Therefore, our trading strategy is subjective to probability of success rate regardless of that you are using turning point strategy or trend strategy.

1.3 Trading with Turning Point and Trend

In the trend strategy, your entry will be at the strong trend movement during the growth phase. This might be good if our entry is not too late. However, if we are late, then we will encounter the loss from early enterers starting to materialize their profits. In the turning point strategy, we are trying to pick up the new trend as early as possible in their birth stage. Therefore, it gives you the opportunity to become the early enterer. Hence, the profitable range is longer than typical trend strategy. In addition, you can also quit your position much earlier than other trend strategy players can.

The longer profitable range means that we need fewer trades to achieve good profits. At the same time, there are some weaknesses of the turning point strategy too. For example, turning point strategy might signal buy or sell entry too early while the ongoing trend was not finished. Since both trend and turning point strategy have their own strength and weakness, it is possible that you can compromise between turning point strategy and trend strategy too. For example, you do not immediately trade at the turning point signal but you can wait until you observe that some price movement is following the new trend direction. Therefore, this becomes semi-turning point strategy. Many of good traders use semi-turning point strategy since they are the hybrid of turning point strategy and trend strategy. The fact is that skills to predict the turning point is important for the successful trading. Even though you are trading with trend strategy, it is still advantageous to have good skills in predicting turning point. Hence, the methodology of predicting turning point was sought after by many legendary traders in the financial market nearly 100 years. It is one clear piece of winning logic for successful trading helping You act faster than other trader.

Figure 1-6: Profitable range for turning point strategy, semi –turning point strategy and trend strategy

1.4 Price Patterns to identify the Potential Turning Point and Trend

To understand the technical turning point, it is important to check its connection with economics. For example, in Stock market trading, the underlying value of a company can explain the occurrence of the major turning point in the market. Likewise, in the foreign exchange market, the strength and weakness of a currency is often influenced by the fundamental value of a country. The fundamental and economic data release can cause to change the direction of the current price movement. As a result, they often become the major driving force behind the bullish and bearish turning point. Hence, to understand why an important turning point occurs in the financial market, we recommend you to look at following three cases.

Turning point in the Stock market with Value investing

Turning point in the Forex market with Fundamental analysis

Pairs Trading with turning point

When you understand the driving force of the turning point in connection with economics, it helps you to follow the flow of the smart money from the investment banks and hedge funds. Besides, the price pattern can also help you to predict the turning point technically. When you apply the price pattern together with the knowledge of the fundamental driving force of the turning point, you can increase your performance marginally. Therefore, it is important to understand the price patterns used by the trading community last 100 years. We list the important price patterns for your technical analysis below.

Horizontal support and resistance

Diagonal support and resistance (i.e. trend lines)

Triangles and wedge patterns

Fibonacci analysis

Harmonic pattern

Elliott wave theory

X3 Chart Pattern

To apply these price patterns better in practice, we must understand the origin of these price patterns with the scientific view. Fractal and fractal wave can explain the scientific rational behind these price patterns. Hence, we will look at how these price patterns are connected with Fractal and Fractal Wave.  The scientific knowledge around these price patterns will help you to understand the flow of the financial market as said by Mark Twain History Doesn't Repeat, But It Often Rhymes. In addition, you will find out that Fractal and Fractal Wave is the powerful tool to overcome the limitation of the modern trend and cycle analysis. The price patterns are in fact the practical application of Fractal and Fractal Wave in the financial market. Furthermore, we will provide the universal pattern framework to help you understand these price patterns with one unified knowledge. Therefore, we will make use of the X3 Pattern Framework while educating these price patterns.

2. Turning Point in Connection with Economics

One way to understand the turning point in the financial market is to study its causes. One such explanation is to look at the price dynamics in Forex and Stock market. After extensive price rise, the price must fall because many people want to sell them to materialize the profit. Likewise, after extensive price fall, the price must rise because many people think they are cheap and they will start to buy them again. This price dynamics will generate the bullish turning point and bearish turning point in the financial market.

Beside the price dynamics, we can find other causes of the turning point from the economic point of view. For example, in the Stock market, the intrinsic value of the company is one important cause of the turning point. This connects the turning point with the value investing principle created by Benjamin Graham. Similarly,

Reviews for Science Of Support, Resistance, Fibonacci Analysis, Harmonic Pattern, Elliott Wave and X3 Chart Pattern

[Daniel Vergel Gonzalez-Rubio · Rating: 5 out of 5 stars]

Me cambio mi perspectiva sobre el trading, ya no se toman decisiones a la suerte sino en base a la probabilidad cercano a la certeza

[Jamal · Rating: 5 out of 5 stars]

This book is the next level of understanding charts and trading. you have to have a good basic knowledge of charts and trading. it will give you the bigger picture of charts and different strategies to make your trade highly profitable.