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Found 250 results

  1. Candlestick Formations: Spikes and Reversals As technical analysis becomes more and more popular in forex markets, it has become undeniable that Japanese candlestick charts dominate the landscape in terms of utility. This is because candlestick charts give us much more information in a single glance when compared to common alternatives like the line chart, the bar chart, or the point-and-figure chart. Candlestick charts give us the ability to differentiate between prior trend outcomes in clearer ways as different color bars are associated with different types of price movements. For example, if your bearish candlestick bars are shown in red then it will be easier to identify whether or not there is sufficient momentum in the market to initiate short positions if you see large groupings of red candles. The opposite would be true for your candle analysis if the bullish color scheme was showing something similar. This can be highly valuable information, especially if you are trading on small or medium time frames. Bullish/Bearish Spike Candles: Indicators of Market Extremes In addition to this, candlestick charts can be excellent in terms of the ways they can help technical analysis traders to identify market extremes. These extremes will often show themselves as price spikes that can occur in either direction and ultimately suggest that a reversal scenario is unfolding. Consider the visual examples below: With these examples, we can see that spiking candles can come in a few different reforms, so perhaps it is more useful to think of these price occurrences as belonging to a “family” of candle shapes rather than any single cookie-cutter format. Some of the names that are commonly used when these structures occur would include names like morning/evening stars, dojis, hammers, dragonflies, and pin bars (among others). The main point here is not in the name classification but in the fact that all of these candlestick structures mark a critical point of indecision in the market. On a real-time chart, examples of these types of events (both bullish and bearish) can be seen in the graphic below: This information can be highly valuable when assessing the true strength of the underlying trends that are visible in the forex markets. If an underlying trend is not able to sustain the market extremes that create these spikes, it starts to make much more sense to play things from the other direction. Price spike examples are shown in the red circles above, and these situations represent instances where traders would start to enter positions that oppose the directional momentum that had been seen during the preceding move. Real-Time Trade Example: GBP/USD As a hypothetical example, let’s assume that we are dealing with an uptrend in the GBP/USD. Higher highs and higher lows make up most of what is visible on the price chart, and we are considering taking a long position in the GBP/USD. We see the uptrend culminate in a 50-pip surge to hit resistance just below 1.59. But as this happens, the GBP/USD posts a bearish pin bar, which shows the price spike reversal in question: An occurrence like this would be an early indication that traders should start to consider short positions in the GBP/USD, as long as prices hold below the 1.59 resistance. Any violations here would mean that the spike high is not valid and that there is no real bearish reversal in place -- and this would mean that the trade should be closed. For price targets, an excellent early level to watch is the price level that marks the original surge in prices. This would suggest that the price level is a significant area of support, and there is potential for more bounces later. In our example above, this area comes in at 1.5849 and traders would start to take partial profits once we see a downside move into this price region. This does not mean that the trade should be closed out completely if this occurs but it would generally be a good idea to take part of your gains and to bring your stop loss to breakeven for the remainder of the position. Logical Basis For Trades: The Paradigm Shifts All technical analysis positioning is based on some sort of logic that is used to suggest one directional outcome is more likely than another. In this case, the appearance of price spikes suggests that a significant price move has reached its exhaustion point and there is not enough agreement in the market to create the number of active buy or sell positions that would be required to propel the trend further. This means that the paradigm has shifted and that it is time to start betting in the other direction. Confirmation of these events occurs once we can identify the break of a major support or resistance level. This can be seen in the chart example shown above. Bearish scenarios are confirmed by major support breaks, while bullish scenarios are confirmed by major resistance breaks. In both cases, the central point to remember is that the environment that was previously in place is now changing. So if you already have open positions in the direction of that trend, it is probably a good idea to close-out and take profits. If you are not already in a position that is aligned with the direction of that trend, it is probably a good idea to start planning out a contrarian trade. Tweezer Tops and Bottoms Last, we should take a look at the Tweezer formation, which is another incarnation of the spike highs discussed previously. The Tweezer formation is basically a “double spike” high or low that occurs at the end of a bullish or bearish trend. Trading probabilities for eventual reversal confirmation are slightly higher in these cases because the market has essentially made two attempts to continue with the prior trend -- only to fail later. In the chart graphic below, we can see examples of the bullish and bearish Tweezer structure. The underlying logic when trading a Tweezer Top or a Tweezer Bottom is the same as what would be seen with a standard price spike, so we will not go into further examples here. Instead, it should be kept in mind that the double-spike Tweezer candle structure has a slightly higher success rate in predicting the validity of true reversals in the underlying trend. Conclusion: Price Spikes Should Be Faded, Not Chased With all of this in mind, it should be understood that price spikes should be viewed with caution rather than enthusiasm. These are structures that indicate trends are ending, and this can be confusing in some cases because spikes are characterized by significant surges in momentum. This creates problems for some traders that might be unsure whether or not this is a continuation factor that should be chased rather than faded. But when we look at the ways these structures typically play themselves out, the opposing rationale makes much more sense. Price spikes and Tweezer formations are relatively easy to spot and they can be a powerful addition to any trading strategy. In most cases, experienced traders will not use these instances as a complete basis for a trade. Instead, they can be used to confirm a bias that has already been generated by other technical indicators or price structures. Price spikes can give us critical information about the underlying sentiment levels that are currently seen in the market for a given asset, and this can help you to improve trading probabilities when you are looking to enter into contrarian positioning.
  2. Technical Analysis

    Hello would it be possible to get a few emails addresses of people that have significant knowledge of technical analysis, so i could forward a few pages of research for some feedback
  3. How much of the volume comes from trades done based on technical analysis? I would assume it is really hard to get any data on this, but I would be happy to hear about any studies or even educated guesses. I am mostly interested in the stock market, but also glad to hear about forex or commodities if this information is available there. One reason why I am asking is that I started to wonder why most technical trading books, blogs, etc. describe the market as something only affected by information becoming available to people and psychological factors, resulting in patterns or signals that can be detected by indicators. Rarely do I hear people talking about patterns resulting from people doing technical trading, or trading systems based on assumptions of which other trading systems people are using. For example if enough people are trading according to some indicator, it would be possible to develop a system exploiting this. Why is this not so common? Is it because technical trading is so rare that it has no impact on the stock price, or is it because so many different systems are used that it averages out or becomes random noise, or is there some other reason? I appreciate all help. Especially any volume breakdown information.
  4. In the formative years of my trading career (late '90s), I frequently found myself scratching my head over an interesting problem. Despite analyzing the hell out of stock chart patterns, ensuring the technicals looked quite favorable before buying, I still found my trades completely going in the wrong direction way too often. Thanks to the help of a trusted trading mentor, I eventually discovered the problem; hyperfocusing primarily on the daily time frame. Although the daily chart has always been pivotal for locating low-risk buy setups, my extreme focus on that single time frame was causing me to ignore the power of confirmation from longer time frames (such as weekly and monthly charts). Put simply, I was missing the "big picture" and it was destroying my trading profits. Are you... Missing The Big Picture Too? Every technical trader has his own specific approach to scanning chart patterns and locating potential buy setups. Although I have my own, rule-based swing trading strategy, which has been thoroughly explained on my blog and nightly newsletter over the years, my trading system is just one of many types of successful trading methodologies out there. Nevertheless, there is one trading technique you (and every trader) should always use, regardless of your individual trading style: Multiple Time Frame Analysis Multiple Time Frame Analysis (let's call it "MTF" hereafter) is an extremely simple, yet incredibly powerful concept, that can be applied to analysis of stocks, ETFs, forex, futures, bitcoin, and any other financial instrument that can be charted. If you too have been making the same mistake of hyperfocusing only on the daily charts, read on to find out why you're missing the big picture of what's really happening with the stocks and ETFs you trade. Exploring For Oil On Multiple Time Frames One of the ETFs currently on my watchlist for potential buy entry is SPDR S&P Oil & Gas Exploration ETF ($XOP). Using MTF analysis, I will show you how this ETF actually landed on my swing trading watchlist. Starting with a long-term monthly chart showing at least 10 years of data or more (if possible), we see that $XOP stalled at resistance of its all-time high a few months ago. If you were buying $XOP based strictly on a daily chart with three to five years of data at that time, you probably would not have even seen the highs from 2008: Although $XOP pulled back after bumping into resistance of its 2008 high, the ETF firmly remains in an uptrend, above support of its rising 10-month moving average. Furthermore, the current base of consolidation is holding above the prior highs of 2011. The next step in my MTF analysis is to zoom in to the shorter-term weekly chart interval, where each bar represents a full week of price action: On the weekly chart, notice the 10-week moving average is trending lower, but the price is still holding above the 40-week moving average. The 10 and 40-week moving averages are similar to the popular 50 and 200-day moving averages on the daily chart. The current base of consolidation will take some time to develop, but as it chops around the 10-week moving average, the price should eventually flatten out and begin to tick higher. Finally, let's use MTF analysis to drill down to the benchmark daily chart time frame: The $XOP daily chart shows last week's price action holding above the prior swing low. If this low holds, the price action can begin to set "higher lows" with the base and form the right side of the pattern (learn more about base building patterns here). The next breakout in $XOP will likely be the one that launches the ETF to new highs on multiple time frames, which would be a very powerful buy signal. Still, if you were to only glance at the daily chart of $XOP, without taking into account the weekly and monthly chart patterns, you might understandably make the mistake of assuming this ETF is not in a steady uptrend. On the contrary, the "big picture" provided to you by MTF analysis definitely shows a dominant, long-term uptrend in place. Pullbacks and consolidations along the way, such as shown on this daily time frame, are completely normal. Why Longer Is Better Now that you understand the easy, yet crucial concept of MTF analysis, you may be wondering which individual time frame holds the most weighting, especially in the case of conflicting chart patterns. Remember, in the beginning of this article, when I told you about that problem I had when I first started trading? As I found out the hard way, a longer time frame always holds more weight over a shorter time frame. In the best, most promising stock trading setups, all three chart time frames (daily, weekly, monthly) will confirm the patterns of one another. But if that is not the case, just remember that a weekly trend is more powerful than a daily trend, while a monthly chart holds more sway than a weekly trend. Of course, you must also keep in mind that longer time frames also take a longer period of time to work themselves out. For example, daytrading based on a weekly chart pattern does not work. However, that same weekly chart is of paramount importance if you are looking to buy a stock as a core/position trade. There's no doubt in my mind that utilization of Multiple Time Frame Analysis will substantially increase your trading profits...but only if you make the decision right now to start applying this underrated technique to all your stock chart analysis.
  5. Have you ever asked yourself, “What should be the minimum volume requirement for the stocks and ETFs I trade?” If so, you’re definitely not alone. It’s an important question, yet the answer is not black and white (despite what you may have heard from other traders). Read on and I will tell you why… What Is Average Daily Trading Volume? Why Does It Matter? Average Daily Trading Volume (“ADTV”) is a measure of the number of shares traded per day, averaged over a specific period of time (we use 50 days). While this is not a technical indicator that seeks to predict the future direction of an equity, it is nevertheless important because it helps traders to assess the liquidity of a stock or ETF. When a stock is highly liquid, you can easily enter and exit positions without directly influencing the stock’s price. Conversely, you can know which securities to avoid because they are too illiquid to trade. Knowing the ADTV of an equity is also important because it establishes a benchmark from which to spot key volume spikes that are the footprint of institutional accumulation. If, for example, a stock has an ADTV of 500,000 shares, but suddenly trades 2,000,000 shares one day, that means volume spiked to 4 times (400%) its average daily level. If such a volume surge was also accompanied by a substantial price gain for the day, it is a definitive sign that banks, mutual funds, hedge funds, and other institutions were supporting the stock. 4 Key Questions To Determine If A Stock Is Liquid Enough To Trade Although ADTV by itself could be used as a concrete “line in the sand” to determine if a stock is liquid enough to trade, there are too many other factors that play a part in that role. Following are four key questions that, when combined with ADTV, can help you to more accurately determine whether a stock can be traded or should be left alone. 1.) How Many Shares Will I Trade? (Size Matters) If you are only planning to buy 100 shares of a stock, the ADTV of an equity basically becomes a non-issue because it will be easy to liquidate such a small position, even in a very thinly traded stock. However, if you intend to buy 5,000 shares of that same stock, you need to more seriously consider whether or not it will be difficult to eventually exit the position with minimal slippage and volatility. Regardless of what you may have heard, size matters (at least in this scenario). 2.) How High Is The Average Dollar Volume? Average Dollar Volume (not to be confused with Average Daily Trading Volume) is a number that is determined by multiplying the share price of a stock times its average daily trading volume (ADTV). For example, a $25 stock with an ADTV of 800,000 shares has exactly the same dollar volume of a $50 stock with an ADTV of just 400,000 shares. In both cases, the Average Dollar Volume is 20 million ($25 X 800,000 or $50 X 400,000). For institutional investors and traders who rely on making big trades, Average Dollar Volume is a more important number than ADTV. In the example above, an institutional trader would consider both of those stocks to be equal with regard to liquidity. As a general rule of thumb, an Average Dollar Volume of 20 million or greater provides pretty good liquidity for most traders. If you trade a very large account (and accordingly large position size), consider an average dollar volume above 80 million to be extremely liquid. By knowing the Average Dollar Volume of a stock, you can lower your minimum ADTV requirement if the stock is trading at a higher price. 3.) How Long Will I Hold? Are you a daytrader, swing trader, or position trader? The length of time you typically hold stocks has a direct relationship to suitable minimum volume requirements. A daytrader who scalps for tiny 10 or 20 cent gains must limit himself to trading only in thick stocks where millions of shares per day change hands (equities with tight spreads and extremely high liquidity). On the other hand, a position trader who rides the profit in uptrending stocks for many months can trade in much thinner stocks because they can scale out of positions over the course of several days or weeks. Although I originally started as a daytrader (in the late ’90s), I now focus exclusively on swing and position trading stocks in my managed accounts and newsletter. 4.) Am I Trading Individual Stocks Or ETFs? In individual stocks, ADTV and/or Average Dollar Volume plays a big role in determining a stock’s liquidity. But with ETFs (exchange traded funds), average volume levels are largely irrelevant because ETFs are open-end funds. This means new units (shares) can be created or redeemed as necessary; supply and demand therefore has little effect. Even if an ETF has no buyers or sellers for several hours, the bid and ask prices continue to move in correlation with the market value of the ETF, which is derived from the prices of individual underlying stocks. As such, you should be much less concerned with the average volume of an ETF than with an individual stock. In my nightly stock and ETF pick newsletter, I generally use a minimum ADTV requirement of 100k-500k shares for individual stocks (depending on share size of the position), but may go as low as 50k shares for ETFs (in order to achieve greater asset class diversity). While liquidity is not of concern when trading ETFs, you should still be aware that ETFs with a very low ADTV may have wider spreads between the bid and ask prices. To remedy this, you may simply use limit orders in such situations. Since I trade for many points, not pennies, occasionally paying up a few cents does not bother me. For further details on the subject of ETFs and liquidity, check out Why ETF Trading Volume Does Note Determine ETF Liquidity. How To Easily Determine The Liquidity Of A Stock/ETF Although there are free financial websites that provide you with the ADTV and/or Average Dollar Volume of stocks, the fastest and best way to gauge the liquidity of a stock is by plotting the data on a stock chart of a quality trading platform. Below is the daily chart of SolarCity ($SCTY), which I bought in The Wagner Daily newsletter on December 19 (still long as of January 10, with an unrealized price gain of 26%): The chart above is pretty self-explanatory. The top section shows the price action (and a few moving averages), the middle shows daily volume bars and 50-day ADTV, and the bottom bars plot the Average Dollar Volume (in millions). With an ADTV of nearly 5 million shares and an Average Dollar Volume of 315 volume, $SCTY is a highly liquid stock that is “institutional-friendly.” It’s Important, But Don’t Get Hung Up If you want to avoid surprise price reactions when it comes time to close out your trades, pay attention to the ADTV and/or Average Dollar Volume of stocks. Doing so ensures there is sufficient liquidity to prevent your trades from directly affecting the stock prices. Nevertheless, you must realize that determining whether or not a stock has sufficient liquidity is not as clear-cut as merely picking an arbitrary number such as 500,000 minimum shares per day. Further, you should understand that Average Dollar Volume gives a more complete and accurate picture of a stock’s liquidity than ADTV alone. Your individual trading timeframe also plays a role in determining which stocks can be traded. Frankly, I feel many individual retail traders get too hung up about the average daily volume of a stock. Unless you’re a whale with a massive trading account, your individual transactions within a stock will usually have a minimal (if any) effect on the price. Of much greater importance is just focusing on buying leading stocks with strong institutional support (these stocks are typically quite active anyway). If a company has a history of outstanding earnings growth, or a revolutionary product that’s selling like suntan lotion at the beach, it’s even okay to buy thinly traded stocks. But just be sure to reduce your share size to compensate for greater price volatility (I always list our portfolio position size for each new stock/ETF pick.).
  6. LESSON : 2 Motive Waves Motive waves subdivide into five waves with certain characteristics and always move in the same direction as the trend of one larger degree. They are straightforward and relatively easy to recognize and interpret. Within motive waves, wave 2 never retraces more than 100% of wave 1, and wave 4 never retraces more than 100% of wave 3. Wave 3, moreover, always travels beyond the end of wave 1. The goal of a motive wave is to make progress, and these rules of formation assure that it will. Elliott further discovered that in price terms, wave 3 is often the longest and never the shortest among the three actionary waves (1, 3 and 5) of a motive wave. As long as wave 3 undergoes a greater percentage movement than either wave 1 or 5, this rule is satisfied. It almost always holds on an arithmetic basis as well. There are two types of motive waves: impulses and diagonal triangles. Impulse The most common motive wave is an impulse. In an impulse, wave 4 does not enter the territory of (i.e., "overlap") wave 1. This rule holds for all non-leveraged "cash" markets. Futures markets, with their extreme leverage, can induce short term price extremes that would not occur in cash markets. Even so, overlapping is usually confined to daily and intraday price fluctuations and even then is extremely rare. In addition, the actionary subwaves (1, 3 and 5) of an impulse are themselves motive, and subwave 3 is specifically an impulse. Figures 1-2 and 1-3 in Lesson 2 and 1-4 in Lesson 3 all depict impulses in the 1, 3, 5, A and C wave positions. As detailed in the preceding three paragraphs, there are only a few simple rules for interpreting impulses properly. A rule is so called because it governs all waves to which it applies. Typical, yet not inevitable, characteristics of waves are called guidelines. Guidelines of impulse formation, including extension, truncation, alternation, equality, channeling, personality and ratio relationships are discussed below and through Lesson 24 of this course. A rule should never be disregarded. In many years of practice with countless patterns, the authors have found but one instance above Subminuette degree when all other rules and guidelines combined to suggest that a rule was broken. Analysts who routinely break any of the rules detailed in this section are practicing some form of analysis other than that guided by the Wave Principle. These rules have great practical utility in correct counting, which we will explore further in discussing extensions. Most impulses contain what Elliott called an extension. Extensions are elongated impulses with exaggerated subdivisions. The vast majority of impulse waves do contain an extension in one and only one of their three actionary subwaves. At times, the subdivisions of an extended wave are nearly the same amplitude and duration as the other four waves of the larger impulse, giving a total count of nine waves of similar size rather than the normal count of "five" for the sequence. In a nine-wave sequence, it is occasionally difficult to say which wave extended. However, it is usually irrelevant anyway, since under the Elliott system, a count of nine and a count of five have the same technical significance. The diagrams in Figure 1-5, illustrating extensions, will clarify this point. Figure 5 The fact that extensions typically occur in only one actionary subwave provides a useful guide to the expected lengths of upcoming waves. For instance, if the first and third waves are of about equal length, the fifth wave will likely be a protracted surge. (In waves below Primary degree, a developing fifth wave extension will be confirmed by new high volume, as described in Lesson 13 under "Volume.") Conversely, if wave three extends, the fifth should be simply constructed and resemble wave one. In the stock market, the most commonly extended wave is wave 3. This fact is of particular importance to real time wave interpretation when considered in conjunction with two of the rules of impulse waves: that wave 3 is never the shortest actionary wave, and that wave 4 may not overlap wave 1. To clarify, let us assume two situations involving an improper middle wave, as illustrated in Figures 1-6 and 1-7. Figure 1-6 Figure 1-7 Figure 1-8 In Figure 1-6, wave 4 overlaps the top of wave 1. In Figure 1-7, wave 3 is shorter than wave 1 and shorter than wave 5. According to the rules, neither is an acceptable labeling. Once the apparent wave 3 is proved unacceptable, it must be relabeled in some way that is acceptable. In fact, it is almost always to be labeled as shown in Figure 1-8, implying an extended wave (3) in the making. Do not hesitate to get into the habit of labeling the early stages of a third wave extension. The exercise will prove highly rewarding, as you will understand from the discussion under Wave Personality in Lesson 14. Figure 1-8 is perhaps the single most useful guide to real time impulse wave counting in this course. Extensions may also occur within extensions. In the stock market, the third wave of an extended third wave is typically an extension as well, producing a profile such as shown in Figure 1-9. Figure 1-10 illustrates a fifth wave extension of a fifth wave extension. Extended fifths are fairly uncommon except in bull markets in commodities covered in Lesson 28. . Figure 1-9 Figure 1-10 Truncation Elliott used the word "failure" to describe a situation in which the fifth wave does not move beyond the end of the third. We prefer the less connotative term, "truncation," or "truncated fifth." A truncation can usually be verified by noting that the presumed fifth wave contains the necessary five subwaves, as illustrated in Figures 1-11 and 1-12. Truncation often occurs following an extensively strong third wave. Figure 1-11 Figure 1-12 The U.S. stock market provides two examples of major degree truncated fifths since 1932. The first occurred in October 1962 at the time of the Cuban crisis (see Figure 1-13). It followed the crash that occurred as wave 3. The second occurred at year-end in 1976 (see Figure 1-14). It followed the soaring and broad wave (3) that took place from October 1975 to March 1976. Figure 1-13 Figure 1-14 LESSON 3 Diagonal A diagonal is a motive pattern yet not an impulse, as it has two corrective characteristics. As with an impulse, no reactionary subwave fully retraces the preceding actionary subwave, and the third subwave is never the shortest. However, a diagonal is the only five-wave structure in the direction of the main trend within which wave four almost always moves into the price territory of (i.e., overlaps) wave one and within which all the waves are "threes," producing an overall count of 3-3-3-3-3. On rare occasions, a diagonal may end in a truncation, although in our experience such truncations occur only by the slimmest of margins. This pattern substitutes for an impulse at two specific locations in the wave structure. Ending Diagonal An ending diagonal is a special type of wave that occurs primarily in the fifth wave position at times when the preceding move has gone "too far too fast," as Elliott put it. A very small percentage of ending diagonals appear in the C wave position of A-B-C formations. In double or triple threes (to be covered in Lesson 9), they appear only as the final "C" wave. In all cases, they are found at the termination points of larger patterns, indicating exhaustion of the larger movement. Ending diagonals take a wedge shape within two converging lines, with each subwave, including waves 1, 3 and 5, subdividing into a "three," which is otherwise a corrective wave phenomenon. The ending diagonal is illustrated in Figures 1-15 and 1-16 and shown in its typical position in larger impulse waves. Figure 1-15 Figure 1-16 We have found one case in which the pattern's boundary lines diverged, creating an expanding wedge rather than a contracting one. However, it is unsatisfying analytically in that its third wave was the shortest actionary wave, the entire formation was larger than normal, and another interpretation was possible, if not attractive. For these reasons, we do not include it as a valid variation. Diagonals Ending diagonals have occurred recently in Minor degree as in early 1978, in Minute degree as in February-March 1976, and in Subminuette degree as in June 1976. Figures 1-17 and 1-18 show two of these periods, illustrating one upward and one downward "real-life" formation. Figure 1-19 shows our real-life possible expanding diagonal. Notice that in each case, an important change of direction followed. Figure 1-17 Figure 1-18 Figure 1-19 Although not so illustrated in Figures 1-15 and 1-16, fifth waves of diagonals often end in a "throw-over," i.e., a brief break of the trendline connecting the end points of waves one and three. Figures 1-17 and 1-19 show real life examples. While volume tends to diminish as a diagonal of small degree progresses, the pattern always ends with a spike of relatively high volume when a throw-over occurs. On rare occasions, the fifth subwave will fall short of its resistance trendline. A rising diagonal is bearish and is usually followed by a sharp decline retracing at least back to the level where it began. A falling diagonal by the same token is bullish, usually giving rise to an upward thrust. Fifth wave extensions, truncated fifths and ending diagonal all imply the same thing: dramatic reversal ahead. At some turning points, two of these phenomena have occurred together at different degrees, compounding the violence of the next move in the opposite direction. Leading Diagonals It has recently come to light that a diagonal occasionally appears in the wave 1 position of impulses and in the wave A position of zigzags. In the few examples we have, the subdivisions appear to be the same: 3-3-3-3-3, although in two cases, they can be labeled 5-3-5-3-5, so the jury is out on a strict definition. Analysts must be aware of this pattern to avoid mistaking it for a far more common development, a series of first and second waves, as illustrated in Figure 1-8. A leading diagonal in the wave one position is typically followed by a deep retracement. Figure 1-21 Figure 1-21 shows a real-life leading diagonal. We have recently observed that a leading diagonal can also take an expanding shape. This form appears to occur primarily at the start of declines in the stock market. These patterns were not originally discovered by R.N. Elliott but have appeared enough times and over a long enough period that the authors are convinced of their validity. Corrective Waves Markets move against the trend of one greater degree only with a seeming struggle. Resistance from the larger trend appears to prevent a correction from developing a full motive structure. This struggle between the two oppositely trending degrees generally makes corrective waves less clearly identifiable than motive waves, which always flow with comparative ease in the direction of the one larger trend. As another result of this conflict between trends, corrective waves are quite a bit more varied than motive waves. Further, they occasionally increase or decrease in complexity as they unfold so that what are technically subwaves of the same degree can by their complexity or time length appear to be of different degree. For all these reasons, it can be difficult at times to fit corrective waves into recognizable patterns until they are completed and behind us. As the terminations of corrective waves are less predictable than those for motive waves, the Elliott analyst must exercise more caution in his analysis when the market is in a meandering corrective mood than when prices are in a persistently motive trend. The single most important rule that can be gleaned from a study of the various corrective patterns is that corrections are never fives. Only motive waves are fives. For this reason, an initial five-wave movement against the larger trend is never the end of a correction, only part of it. The figures that follow through Lesson 9 of this course should serve to illustrate this point. Corrective processes come in two styles. Sharp corrections angle steeply against the larger trend. Sideways corrections, while always producing a net retracement of the preceding wave, typically contain a movement that carries back to or beyond its starting level, thus producing an overall sideways appearance. The discussion of the guideline of alternation in Lesson 10 will explain the reason for noting these two styles. Specific corrective patterns fall into three main categories: Zigzag (5-3-5; includes three types: single, double and triple); Flat (3-3-5; includes three types: regular, expanded and running); Triangle (3-3-3-3-3; three types: contracting, barrier and expanding; and one variation: running); A combination of the above forms comes in two types: double three and triple three. Zigzags A single zigzag in a bull market is a simple three-wave declining pattern labeled A-B-C. The subwave sequence is 5-3-5, and the top of wave B is noticeably lower than the start of wave A, as illustrated in Figures 1-22 and 1-23. Figure 1-22 Figure 1-23 In a bear market, a zigzag correction takes place in the opposite direction, as shown in Figures 1-24 and 1-25. For this reason, a zigzag in a bear market is often referred to as an inverted zigzag. Figure 1-24 Figure 1-25 Occasionally zigzags will occur twice, or at most, three times in succession, particularly when the first zigzag falls short of a normal target. In these cases, each zigzag is separated by an intervening "three," producing what is called a double zigzag (see Figure 1-26) or triple zigzag. These formations are analogous to the extension of an impulse wave but are less common. The correction in the Standard and Poor's 500 stock index from January 1977 to March 1978 (see Figure 1-27) can be labeled as a double zigzag, as can the correction in the Dow from July to October 1975 (see Figure 1-28). Within impulses, second waves frequently sport zigzags, while fourth waves rarely do. Figure 1-26 Figure 1-27 Figure 1-28 R.N. Elliott's original labeling of double and triple zigzags and double and triple threes (see later section) was a quick shorthand. He denoted the intervening movements as wave X, so that double corrections were labeled A-B-C-X-A-B-C. Unfortunately, this notation improperly indicated the degree of the actionary subwaves of each simple pattern. They were labeled as being only one degree less than the entire correction when in fact, they are two degrees smaller. We have eliminated this problem by introducing a useful notational device: labeling the successive actionary components of double and triple corrections as waves W, Y, and Z, so that the entire pattern is counted "W-X-Y (-X-Z)." The letter "W" now denotes the first corrective pattern in a double or triple correction, Y the second, and Z the third of a triple. Each subwave thereof (A, B or C, as well as D or E of a triangle — see later section) is now properly seen as two degrees smaller than the entire correction. Each wave X is a reactionary wave and thus always a corrective wave, typically another zigzag.
  7. The Atlantic ocean divides America from Europe, hence the name of the option. The aim of this option type is to be able to close out an option before expiry if it becomes profitable, so as to prevent time decay on the asset and also to be able to monetize an option faster, using the American leg of the option.
  8. If the option expires "at-the-money", then the option will attract no payout. In the binary options market, an at-the-money trade will receive no payout and the trade capital is returned to the trader's account.
  9. Option trades confer a right to the option buyer or seller to sell or buy back the option. When this is done, then we say the option has been "exercised".
  10. Assign Definition

    In the options and futures markets, there are contracts that have to be settled with physical delivery of the items being traded (especially commodities). When these contracts mature, the brokerage or clearing houses then have to get the sellers of these contracts to deliver the physical assets to the buyers of the contracts for proper settlement.
  11. The payout structure of an asset-or-nothing put option is based on a fixed amount which is only paid when the trade ends in the money at the time of expiry.
  12. The payout structure of an asset-or-nothing call option is different from a regular vanilla option in that the payout is not calculated based on the difference between the asset price and the strike price, but rather on a fixed amount on expiration of the contract.
  13. The Asian tail can be likened to the option market's equivalent of the stop loss in forex.
  14. This is also known as an average value option, and it is useful when the trader wants to protect his trade from the effects of undue price volatility, and also to reduce cost (as they are cheaper than American or European options).
  15. As an example, a trader in Canada may want to purchase commodity options on corn from a farmer in Chicago, but is worried that in the coming days before the trade is to be settled, the currency of the transaction (US dollars) may gain value over the CAD. He then assumes a long position on the US Dollar to offset any effect the USD gain will have on his option trade (i.e. hedge against a USD gain causing him to pay more for the options transaction). This is an anticipatory hedge.
  16. The coupon payout of the annapurna option is not guaranteed, but depends on whether the worst performing asset in the options basket falls below the benchmark rate of return or not, as well as the extent of any such falls in price. If it takes longer for the worst performer to hit the price floor, the coupon payout is higher. If it takes lesser time to do this, the coupon payment is lower.
  17. The American option is also known as the variable return option. It is a useful type of option if the trader intends to take profits as they come in the options market.
  18. The coupon payout of the altiplano option is guaranteed, but the vanilla-option payout component of the option will only be paid if the basket of options outperforms the benchmark rate of return for the lifetime of the option. They are usually traded by hedge funds and institutional investors.
  19. Alligator spreads are usually created by the trader engaging a large number of call and put options in a trade platform where the broker charges large commissions. Avoiding the effects of an alligator spread can be achieved by using a broker whose commissions are not large enough to swallow profitable spreads.
  20. The agreement value method has a provision for compensating a counterparty if they were not responsible for the premature end of the swap by making allowance for the use of a replacement swap. This replacement swap may provide different terms and conditions from the original swap to cater for changes in market conditions.
  21. If a trader has 2 options contracts that are valued at a strike price of $5, then the aggregate exercise price is $5 X 200 units = $1,000. Usually the calculation does not include any premiums received or incurred on the trade.
  22. Whenever certain adjustments are made to an underlying asset such as a stock split or a share recontruction, the strike price of the options contract must be adjusted to reflect the new reality. Furthermore, coupon rates on Gannie May mortgages differ from the benchmark rate. Therefore the strike price must be adjusted so that the investor can receive the same returns on them. The term may also refer to the strike price of a security following adjustment for stock splits.
  23. It is an exotic option which is more complex than simple vanilla options, taking several factors into consideration for the trader to be able to make the decision after the option has been purchased rather than at the time the option was purchased.
  24. Just like in other swap deals, one party pays the floating rate while the other party pays a fixed rate, with payments being made on the accrual swap only on fulfillment of the set conditions for the trade.
  25. The zero coupon swap has several variations. Some are structured in such a way that the fixed lump sum is paid at the commencement of the contract, while others may be structured so that there is an option to convert the lump sum payment on the fixed arm into instalmental payments over the life of the contract. The objectives of the parties in the swap deal determine how the deal is structured.
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