The title itself (figures of the trend continuation) describes the essence of such figures. These are figures of correction but not of reversal of a heavy trend. After extinction of such figures, a new wave of the previous trend should be expected.
There are the following figures of the trend prolongation:
· rectangles;
· banners (flags);
· wedges;
· GAP.
Such figures are well-known all over the world – even to each novice at Forex. In fact, the study of these figures is included into the basic obligatory (imperative) course.
On the surface of it, everything is so clear. Detecting such figure of the trend continuation, one must open a deal (bargain) in the previous trend. The profit should be guaranteed. So, why do more than 95% of traders lose their game?
· Maybe, the reason is that such figures are too simple?
· Or have classicists of the technical analysis presented a very simplified version of such models?
In his book “technical analysis. The complete course”, D. Schwager has described the problem of trader’s work in the trade range (quadrangle) in the following way. Generally speaking, markets spend most of time (!) within trade ranges. However, for pity, it is very difficult (!) to trade with profit within such ranges. Most probably, the majority of traders discovers that the best strategy concerning trade ranges is to minimize (!) the participation in such markets.
Therefore, one should try to read the material submitted below from the viewpoint of finding out the reason why do more than 95% of traders all over the world lose their money when using such simple figures.
· What are the contradictions and difficulties that a trader comes across during his work at Forex?
· What are the trader’s typical mistakes in detecting such figures and working with them – i.e., how not to lose the money during the real trade?
· What points do confirm the previous trend continuation?
· Where are the points of the previous trend cancellation (abolition) and the beginning of a new trend?
Rectangles
In “technical analysis of future markets: theory and practice”, J. Murphy characterizes this figure of the trend continuation in the following way.
Sometimes they call the rectangle the “trade (market) corridor” or the region of depression. In the terms of Dow’s theory, it is called the “line”. Independently of the name, this model (pattern) usually designates the period of consolidation in the present tendency development. Most often it is concluded with the price movement prolongation towards the same direction.
Chart 6.9a. It is an example of the “bull” rectangle in the case of the ascending tendency. This configuration is called the “trade or market corridor”. It is formed under the condition of fluctuations in prices within two horizontal lines of the trend. This model is also called the “area of depression”.
Chart 6.9b. It is an example of the “bear” rectangle. As a rule, rectangles are regarded as patterns of the tendency continuation. However, the trader must be always ready to detect signals of their “turning into” one of the models of a change in the tendency.
Schwager has dwelled on the work in the trade range (the “rectangle”). According to this author, the trade range is a horizontal corridor. It envelops fluctuations in prices during a prolonged period of time. In general, markets spend most of time in trade ranges. However, for pity, it is very difficult (!) to gain profit within such ranges. Actually, the majority of traders can discover that the best strategy concerning trade ranges is to minimize (!) the participation in such markets.
That is, according to Schwager, the greater part of their time traders must stay out of the market.
Schwager’s rules of work in the trade range (“rectangle”) – breaking through the trade range
Breaking through the trade range bounds implies the further movement in prices towards the breakup direction (see Charts 4.5 and 4.6 from the book by Schwager). The following factors often confirm verity (reliability) of the breakup and heighten its significance.
1. The trade range length: the longer it is, the more potentially substantial is the scale (scope) of the breakup to come.
2. The range narrowness: as a rule, breakings through narrow ranges generate especially-reliable signals for the trade. And what’s more, the trade of this type can be particularly attractive because reliable protective stops guarantee a relatively low risk of losing money.
3. Confirmation of the breakdown. The following situation is rather typical: prices go out of the trade range only by a small magnitude or just for several days – further the prices return into the range bounds. One of the reasons is the following. Market participants want to insure themselves from a heavy movement in prices after the breakup. Therefore, they install protective stop-orders in the area, located not far beyond the trade range bounds. As a result, sometimes insignificant movement in prices towards outside can provoke realization of a large number of protective orders. As soon as this initial spate of orders is satisfied, the breakup becomes “exhausted”. This happens if there are no fundamental reasons and supporting purchases that can strengthen the tendency – or extensive sells if the lower border is broken through.
Taking into account these specificities in the price behavior, one can see that the breaking through the trade range makes a more reliable signal for the tendency beginning if prices still remain out of the range after several days (e.g., 5 days). One can use confirmations of other kinds – for instance, a minimal percentage change in the price.
trade ranges
After the breakup, a quick movement in the price is possible during a given number of days. Waiting for the breakup confirmation, one can miss a part of profits per several days at the beginning of the tendency. All the same, this helps us to distinguish a lot of “false” signals. The result of this compromise depends on the accepted conditions for the confirmation. Every trader must judge by himself. However, the keystone is that a trader must experiment with various conditions for the confirmation but not to follow all breakups thoughtlessly.
A flag above the trade range upper boundary as a signal for the increase in prices. The soybean flour; July, 1993.
**
Elder has examined the “rectangle” pattern of the trend continuation. He dwells on the work
· inside the rectangle – the recoil from the level;
· outside the rectangle – the breaking through the level.
The rectangle is the figure where prices move between two parallel lines. As a rule, they are horizontal. Sometimes such lines can be slanted (see “Lines and flags”).
In order to plot a rectangle, the following points are necessary. The upper line connects two highest maximums. The lower line connects two minimums. These lines must be drawn through the edges of the price consolidation areas but not through the extreme values.
The rectangle upper line indicates the resistance - i.e., the region where “bulls” lose the enthusiasm. The rectangle lower line designates the support - i.e., the region where “bears” get exhausted. The rectangle form shows that “bulls” and “bears” have equal strengths. The principal goal is to determine who will win in the long run – “bulls” or “bears”.
There exist several methods of predicting what can happen beyond the rectangle. One must measure the rectangle height and plot it, starting from the line towards the breakup direction. It is the minimal level of prices under prognostication. The maximum level of prices under prognostication is obtainable by plotting the rectangle length vertically towards the breakup direction.
According to T. Plammer, the rectangle is a component of the trend helical development. This author advices to measure the rectangle height. Further this magnitude must be multiplied by three Fibonacci’s figures (1, 6, 18; 2, 6, 18; 4, 236). For obtaining the prognosticated levels of prices, these values must be plotted towards the direction of the change in prices.
“Rules of the game” during the work with the “rectangle” pattern according to A. Elder
“Traders on the floor” can gain profit due to instabilities in prices within the rectangle. However, “big money” is made by gambling on the stock exchange towards the breakup direction.
1. Gambling within the rectangle, one should buy at the lower bound and sell at the upper one. Oscillators help you to decide when prices are “ready” to reverse within the rectangle bounds. Stochastic, the relative strength index (RSI) and Williams’s coefficient 96R (Wm96R) indicate changes in the price movement within the rectangle. When prices reach their key levels, the direction of movement changes.
If you buy at the rectangle lower bound, stop-losses must be placed slightly lower than the rectangle bottom. If you sell in vicinity to the rectangle upper bound, stop-losses must be placed slightly above the rectangle upper edge. You must be very attentive and take profit at the first signs of the price reversal. The slightest delay inside the rectangle is very dangerous.
2. To understand towards what direction the breakup is more probable, you must give analysis to the market in a timeframe of a scale larger than the one where you work. If you want to detect the breakup in the daily chart, you must try to find this trend in the weekly chart because the breakup is more probable towards the trend direction.
3. If you buy under the condition of the ascending breakup or sell under the condition of the descending breakup, the “stop-loss” must be placed inside the rectangle – in vicinity to the edge. The recoil towards the rectangle bound is possible if the volume of transactions is small. However, prices do not return back into the rectangle if the breakup is true.
The rules of work with the “rectangle” pattern according to J. Murphy are similar to those submitted by A. Elder.
For stock exchange speculations, some traders make use of fluctuations in prices within the “trade corridor”. They buy at recessions when prices approach the lower bound. When activity on the market heightens and prices reach the “corridor” upper bound, such traders sell. Due to the fact that “corridor” bounds are defined clearly, this tactics gives certain advantages to a trader. A trader can gain profit under the condition of the uncertain market. In this case positions are opened in the vicinity to the “corridor” bounds. Therefore, the risk is relatively small, and it is easily to compute it. Till the “trade corridor” bounds are not transgressed (violated), this approach can be rather a success (it permits gaining profit without taking into account tendencies in the market). When the “corridor” bounds are violated, the last unprofitable position must be immediately closed. Besides, a new deal can be made towards the direction of the new tendency that has come into existence.
The rules of work in the “rectangle” according to E. Neiman (see his “Trader’s small encyclopedia”).
All signals examined by E. Neiman I have divided into 3 groups. This facilitates understanding Neiman’s logic. There are
· an intensive signal (+++) - along the trend, accompanied by breaking through the slanted channel;
· a moderate signal (++) - along the trend, breaking through the horizontal channel taking place;
· a weak signal (+)- against the previous trend, breaking through the horizontal channel taking place.
*** A) The “intensive signal” (+++) on the left; B) the “moderate signal” (++) in the center; C) the “weak signal” (+) on the right.
As the result, there happens the breaking through the rectangle
· along the old trend (a moderate signal);
· against the previous trend (a weak signal).
Contradictions in working within the rectangle according A. Elder
One must attentively read A. Elder’s and J. Murphy’s rules of work
· inside the rectangle (Schwager does not work in this range);
· under the condition of breaking through the rectangle levels.
It is so simple and clear, isn’t it? Or, maybe you have noticed the contradictions? For instance, how can one lose the deposit when working according to A. Elder’s technique in the rectangle?
The reader should carefully study Elder’s chart again
1. How to combine Elder’s two alternative rules, intended for working with the recoil and the rectangle breakup?
A. As regards the breaking through the level, Elder states that “traders on the floor” can gain profit due to fluctuations in prices within the rectangle. However, big money can be made by gambling towards the breakup direction.
B. As regards the recoil from the level, when one buys at the lower bound, measures of precautions (stop-losses) must be placed slightly lower than the rectangle bottom.
2. The reader must count how many times stop-losses come into action if one works according to Forex classicists’ tactics. In the case of breaking through the “corridor” bounds, a trader not only immediately closes the last unprofitable position but he can also make a new deal in the direction of the nascent tendency.
· The false downward-directed breaking through the rectangle A-B (see Elder’s 1st rule).
· The false upward-directed breaking through the rectangle A-B.
· The double false breaking through the rectangle C-D (the third breakup is true).
There arises the question. What classicists of the technical analysis have not understood dealing with the true and false breaking through the rectangle technical levels? On the other hand, maybe such specialists just don’t want to explain the corresponding aspects to traders.
3. A. Elder’s criteria of the recoil and breakup. If the trade volume increases when it is approaching the upper bound, the upward-directed breakup is more probable. If the trade volume increases when it is approaching the lower bound, the downward-directed breakup is more probable. The true breakup outside the rectangle is confirmed by an increase in the trade volume by one-third (or the half) of the average value in the last 5 days. If the trade volume is small, the breakup, most probably, is false. The reader should keep in mind that at the handbook-man market of Forex indices of volume are not considered. Respectively, the principal criterion, mentioned by Elder, doesn’t exist
4. What are the criteria of the true and false breaking through the level?
5. The oscillator is not the best instrument for the work at the trend range bounds (the rectangle).
Schwager points out that, surely, there exist instruments (techniques) that can be beneficial in trade ranges – e.g., oscillators. However, the use of them in trend markets can be disastrous. The matter is that it is easy to see trade ranges already realized but it is almost impossible to prognosticate them. Besides, the majority of graphical patterns (such as ruptures (gaps), flags, etc.) lose their value when they are formed inside the trade range.
6. There emerges the question. If the currency most of time spend within the trade range, why do classicists of the technical analysis write about this subject so unwillingly? For instance, Elder has dedicated to this theme just several paragraphs (at the same time, a great number of pages is dedicated to “the stock exchange lessons for anonymous alcoholics” and “the association of anonymous losers”). Schwager has written just about breaking through the trade range. At the same time, he does not write a single word about the technique of work with the recoil. Murphy’s approach is very simplified; he does not give any criteria at all. This author says that under the condition of breaking through the “corridor” bounds trader must not only immediately close (!) the last unprofitable position but he also may (?) make a new deal towards the direction of the new tendency formed. One should look at Elder’s chart and find when Murphy will lose his deposit dealing with false breakups depicted in this chart. Williams is just afraid of losing money when working in such “filth” (a flat, rectangle).
Surely, it is unnecessary to submit the corresponding reasoning. Evidently, classicists of the technical analysis just don’t know answers to these questions.
I hope it is clearly explained how one can lose the deposit, working with the 1st classical model of the trend continuation.
Now let us dwell on the methods of gaining profit taking into account mistakes made by classicists of Forex.
Promptings from Masterforex-V Trading System
1. The figure of rectangle is a flat. In its essence, it is an arrest (delay) during the movement in the previous trend. There moving averages are being accumulated (collected, gathered) before the spurt along a trend – the previous or new ones.
2. The reader should again carefully study A. Elder’s chart from this viewpoint. It is necessary to understand what mistake has Elder made dealing with these rectangles. According to this author, big money can be made by gambling on towards the breakup direction. In this connection, what must be added to Elder’s chart? The aim is to simplify his technique of work with the breaking through the rectangle, making it clear and faultless – in other words, comprehensible even to the beginners. On the sheet of paper, the reader should draw the figure of the true breaking through the technical level. This will help us to understand Elder’s mistakes.
3. When the trader should work with the recoil from the rectangle levels?
· The reader should draw the figures, in the presence of which the deal on recoil (from the support or resistance) can be opened. In the cases of such recoils, the figures are mirror-opposite.
· Should one open deals towards the both directions – as Elder recommends it? Or, maybe, a bargain must be concluded towards one direction?
· Towards what direction it is safer to work with the recoil – to buy from the support or to sell from the resistance (on the left or right parts of the rectangle, respectively)?
4. Except oscillators, what other instruments of giving analysis to Forex can faultlessly indicate
· the false breakup;
· the true (real) breakup;
· the recoil.
5. The notion of index of volume doesn’t exist at the handbook-man market of Forex. In this connection, what can serve as the corresponding gauge? That is, what helps to understand whether one must work on recoil or breaking through the level of support (resistance)?
6. Let us dwell on the allocation of “stop-losses” (to be precise, “locks”). According to Elder, if one buys under the condition of an ascending trend or sells during the descending one, a stop-loss must be placed inside the rectangle. Recoil towards the rectangle bound can happen if the trade volume is small. However, prices cannot return into the rectangle if the breakdown is true. At the same time, in Chart A-B one can see that EUR/USD pair three times (!) returns into the rectangle before the true breaking through the level of support “B”. Respectively, if you were blindly following Elder’s recommendation, your stop-loss would snap into action three times (!). So, where the stop-loss must be placed with taking into account Elder’s mistakes? With what one word can be characterized the A-B level? Why the price can more than once cross this level, the trend direction remaining unchanged? Breaking through what points can cause the change in the trend?
7. The false breaking through the level is the natural process of the currency movement in Forex. Elder’s chart clearly illustrates there are much more false breakings through technical levels than true ones (Elder recommends to make “big money” working with true breakups). In this connection, there emerge the questions.
· How to calculate the point where the false breaking through the level ends (for instance, in the rectangle A-B in Elder’s chart)?
· At what point the breaking through the rectangle A-B does turn into the false breakup?
· Except oscillators, what other instruments can indicate that the given breakup is false?
· On the sheet of paper, the reader should draw the figure of the false breaking through the level. This will help understanding the essence of the false breakup. Respectively, one can answer the questions, not answered by Elder and Schwager.
8. Once more the reader should scrutinize Elder’s chart - the thrice-repeated breaking through the support B, accompanied by returns into the rectangle. The task is to find out the reasons why this “bear” breakup has turned into the true breakup from the third attempt.
9. Under what conditions the trend continuation figure (the “rectangle”) can turn into the trend reversal figure? The reader should name these figures. What they would look like in Elder’s chart (EUR/USD pair movement).
I hope that these 9 promptings will explain why Elder’s, Murphy’s et. al. followers lose their deposits when they use “simple” figures of the trend continuation. Every trader, who wants to open a real account at Forex, must know answers to these questions.
You can discuss the chapter with the Academy members by following the link
Chapter 1. Trend definition in the Masterforex-V Trading System >>
Chapter 2. Levels of resistance and support in Masterforex-V Trading System >>
Chapter 3. Actual and false breakout of the resistance and support level. Rebound from technical level.>>
Chapter 4. Technical levels of Forex by Dow Jones agency. >>
Chapter 5. Pivot point of currency pairs >>
Chapter 6. Slanted Channels, as a tool of the Forex market analysis >>
Chapter 7. Opening of positions when using Slanted Channels >>
Chapter 8. Slanted channels in the Masterforex-V trading system >>
Chapter 9. Classic figures of technical analysis - Trend Reversal >>
Chapter 10. Classic figures of technical analysis - Trend Reversal (ending) >>
Read more:
Chapter 12. Patterns of continuation of trend - Gaps >>
Chapter 13. Patterns of continuation of trend - flag, pennant and wedge >>
Chapter 14. Models of the Forex technical analysis - triangles >>
Chapter 15. Symmetrical triangle - regularities and traps >>
Chapter 16. Ascendant and descending triangles - secrets of the strong signals for opening the positions >>
Chapter 17. Expanding triangle - unresolved problems of classics of the Forex technical analysis >>
Chapter 18. Trading On News: mistakes and unresolved secrets of classical analysis >>
Chapter 19. Trader's code of good practice by news under the Masterforex-V trading system >>
Chapter 20. Ally pairs: which gauge at forex is the most unbiased (impartial) and precise. >>
Book 3. Points of opening and closing of positions at the Forex market (basic course) >>
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