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In regards to the TREX methodology, I would like to present a few
articles, along with a
concrete example of the TREX harmonics at work in the market.
We all can pretty much agree that there is a rythm to the market.
Unfortunately, when one attempts to use theories such as Gann, Fib
ratios
or Elliot Wave theory in an effort to capitalize on these rythms, it
becomes VERY difficult.
This is because we do not know what the PHASE of the market is.
In order to present these two concepts in a more readilly understandable
manner, I would like to present rythm and phase in a 3 dimensional
manner:
One accomplishes this by using the anology of sound; music if you will
This might sound strange to some, but after I had traded for a few
years,
I could swear there were times when a market was singing to me. I could
HEAR it.
In trading this principle, it is often not too hard to define rythm.
Principles
such as Fib, Elliot, and Gann do this well:
(beat1 - beat 2)*ratio = POSSIBLE rythm/phase turning point expresses
a POSSIBLE turning point.
But, notice I said POSSIBLE harmonic turning point. This is where the
methodology breaks down in effectivenes. All these methodologies do
is present you with a SERIES of POSSIBLE harmonic turning points.
Is this , as Rick Ratchford suggests, better than nothing at all?
Absolutely, but now the trader has reached a highly subjective
point. WHICH rythm will be correct. Now, only the market knowledge
,indicators, sup/res levels....etc. can help the trader. If his
estimation
is wrong, and considering that often you might be dealing with say
8 different turning points, he has only a 1 in 8 chance of being right
on, then he loses. Granted, he CAN methodically reduce the number
of rythmic points by consistently trading those he is comfortable
with, but think of all the opportunities that will be missed, all
because
the trader lacked a better way to determine PHASE.
What is the missing link in the equation expressed as:
Rythm - ? + Rythm = PHASE.
The answer is the PEOPLE that trade the market.
Hang with me here, I promise it will become more concrete :)
99% of all traders derive all equations used to study the market,
strictly based on the movement of price. BUT when you do this,
you ALWAYS wind up with a ball-park figure, no matter what you
do. :)
That is because how the traders trading a particular market
think and react is not being calculated into the equations.
Figuring these calculations out isn't particularly hard, once
you make this causul leap, and start considering the markets
in this light.
In the case of TREX, the calculation for PHASE quickly becomes
apparent:
Rythm - Memory + Rythm = PHASE
To put it plainly, PEOPLE FORGET, but the market
doesn't.
Therefore: look at what people are NOT thinking about, and
that will be your answer. (Don't forget the formula I stated :) )
The points that are produced from this calculation hold several
advantages over conventional Fib/Gann/Elliot theory.
1. only 1 to maybe 3 points are of prime consideration. Usually,
it is 2; one HIGH and 1 LOW. That's it.
2. These pooints are a NATURAL RYTHM AND PHASE OF THE MARKET.
what this means, is that these points tend to be DYNAMIC rather than
static. They draw the market to them. Or to put it another way, the
market has
a VERY strong inclination to trade to them. If one point is not reached
or the market
stalls out, it becomes VERY likely that the market will trade to the
other harmonic
point.
In TREX, I also define statistical market patterns in order to aid with
HOW the
market will trade in relation to my TWO points. But to tell you the
truth, ANY
methodolgy would work at this point, because you have answered two key
questions: Is the market high or low? and where are we most likely to go
from here?
This is different from cycle indicators or trending indicators or
whatever, because
you might be in what you think is an uptrend, when in fact, the market
has failed to
reach the KEY harmonic high, and is ready to sprint for the harmonic
low.
The example i am siting is December Coffee. Right now I have Coffee
"singing
at 283- 285. You probablyt noticed that post I sent saying "Time Stamp"
with
this statement. That is because I wanted it on record just in case we
got there
while I was writing this. : )
In looking at where Coffe is at right now, I see that we haven't moved
much. It is
just dangling at 171.
Alright, let me define the harmonic low here, and how I am trading this
thing:
Harmonic low at: 159.35
The statistical pattern I have here is that coffee has an 80% chance of
a massive
dump from 285, or a massive dump if 285 is not penetrated pretty
quickly.
Why? because these points are SINGING to the market : )
By the way, I also have another statistical pattern which states that if
we
reach and penetrate the first harmonic low, there is a 70% chance that
we will keep on dumping to a secondary harmonic low of 143.
So there it is: a total of 3 points to consider, and many ways to trade
the
market imbetween : ) Remember that these points are SINGING to the
market.
the longer it takes to reach one, the more likely it becomes that we
will trade to the
other.
Right now we know we are high.
I am long 170 calls, and I will sell 180 calls against this position if
the market goes for 185
Im a bull here just in case Coffee blows out through the top when it
hits 185.
If we continue to hang here, a large move down becomes more and more
likely.
In this case I will either liquidate the long call, and prepare to go
short.
or more likely adopt an option
straddle to try and cover both possible moves.
Less aggressive traders might try to play the odds on a large down move.
Remember a few weeks back when I made what appeared to be an uncanny
prediction in The japanese Yen?
Also, go back through some of the CIS posts looking for TREX calls on
the
SP 500. I think you will find the results interesting.
For now, I am playing with Coffee.
So let's see how this puppy plays out. : )
Walt Downs
CIS Trading
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