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Searching for regularities in the financial markets

Introduction to Price Action and Pattern Trading Course


Presented By Young Ho Seo
www.Algotrading-Investment.com
Searching for regularities in the financial
markets

Working trading strategy never comes


blindly. There are reason for it.
Trading is all about using the
regularities existing in the financial
price series.
After we learn the regularities in the
price series, we predict if market will
go down or up using this regularities.
This is the universal principle behind
any trading or investment strategy.
Searching for regularities in the financial
markets

Now we have just understood that


searching regularities are the main
principle for our successful trading.
Have you ever thought why you apply
MACD or RSI or Bollinger bands, Heat
map, Renko chart, etc for your trading
at least once?
Or are you using them because you
just found bunches of articles teaching
you how to use them?
Searching for regularities in the financial
markets

Simply you may not have much choice


because overwhelming number
articles are talking about those
techniques on the internet.
Searching for regularities in the financial
markets

Before applying any trading strategy


blindly, you should think about what
kind of regularities we are dealing
with at least once?
This can save you tons of money
before applying inappropriate trading
strategy for the wrong market.
Searching for regularities in the financial
markets

Financial price series have traditionally


known regularities by traders and
scientists.
These regularities are trend, seasonality
and cycle. Quite familiar, isnt it? We are
not talking about rocket science here.
Of course, randomness exist in the most
of financial price series besides trend,
seasonality and cycle. Therefore you
should always assume some randomness
in the price series even if I am not talking
about them.
Trend (or Equilibrium process)

Just in case, you are not familiar with


these regularities. Let us recap.
Trend is caused by the equilibrium
force to release the unbalance
between supply and demand. It is
probably most important element in
the financial market.
Trend (or Equilibrium process)

Trend can take both linear and non


linear forms. Or There can be no trend
but just horizontal move only. The
trend can look like this. We only
presents rising trend here. For
declining trend, just flip the picture
vertically.
Seasonality

Seasonality is a seasonal fluctuations


in the financial markets.
Simple but little unrealistic example
would be the stock price of ice cream
company.
For example, the stock price of ice
cream company can reach high during
summer and low during winter due to
the high demand during hot season.
Seasonality

Seasonality can exists on their own


but they can be combined with trend
together like below. Sometimes,
seasonality can grow with time
(Multiplicative seasonality).
Cycles

Cycles are similar to seasonality. Cycle


is a periodical fluctuation during fixed
time interval too. Sometimes several
cycles can be combined in one price
series.
Cycles

Multiple cycles can look like this. Of


course, they can exist on their own
but they can be combine with trend.
When they are combined with trend,
they are called Equilibrium Wave
process.
Fractal Wave ( or Fractal Geometry)

Besides the trend, seasonality and


cycle, we have the another form of
regularities called Fractal Wave.
Fractal wave is simply the
representation of fractal geometry in
price series.
Fractal wave in the financial price
series is characterized by repeating
self similar patterns in different scales.
Fractal Wave ( or Fractal Geometry)

Of course, they can exist on their own.


But they can be combined with trend.
When they are combine with trend,
they are called Equilibrium Fractal
Wave process.
Searching for regularities in the financial
markets

When we put trend, seasonality, cycle


and Fractal Wave together. These
regular components will form the
Price Pattern Table like this.
This Price Pattern Table are simply the
collections of some known regularities
in the financial price series. As you can
see, they are not rocket science.
Searching for regularities in the financial
markets

Here are some of the important


extension from this searching for
regularities topics.
In real world price series, the financial
price series will always exhibit combined
behavior. Rare to see single behavior.
For example,
a. trend + seasonality (Equilibrium
Wave process)
b. trend + multiple cycles (Equilibrium
Wave process)
c. trend + fractal wave (Equilibrium
Fractal Wave process)
Searching for regularities in the financial
markets

Because of these combined effects,


trend based technical indicators like
moving average and any sort will often
fails to deal with real world financial
series.
Some monthly price series might show
trend + seasonality (Equilibrium Wave
process). In general, seasonality are
weak for most of currency pairs and
stock prices.
Searching for regularities in the financial
markets

Trend + multiple cycles or Trend +


fractal wave are probably more
common in financial price series.
Both cases are much harder to deal
with comparing to Trend alone or
Trend + seasonality.
Searching for regularities in the financial
markets

Simply because latter cases have more


number of cycles within the price
series, they are harder to deal with.
Check the picture below. (Equilibrium
process = trend)
Dealing with Trend + Multiple Cycles
(Equilibrium Wave)

Here are some techniques to deal with


Trend + Multiple cycles:
Trend based technical indicator
Relative Strength Indicator
Commodity Channel index
MACD as an oscillator
General oscillator based technical
indicator
Principle Component Analysis
Wavelet transformation
Fourier Transformation
X-12 ARIMA from the US Bureau of the
Census
Dealing with Trend + Fractal Wave
(Equilibrium Fractal wave)
Here are some techniques to deal with Trend +
Fractal Wave:
Peak-Trough Analysis
Fractal indicator by Bill Williams
Modified Fractal indicator
Zig Zag indicator
Fibonacci Analysis
Ganns Angle (Ganns Fan)
Harmonic Pattern
Triangle and Wedge pattern
Elliott Wave Theory
Renko chart
Point and Figure chart
Dealing with Trend + Fractal Wave
(Equilibrium Fractal-Wave)

We can tell that many trading


strategies we have known in fact are
falling under the Equilibrium Fractal
Wave category.
Those techniques capable of dealing
with equilibrium Fractal-Wave can be
considered as Price action and pattern
trading strategies.
As you can tell, they are quite
distinctive from averaging or
smoothing based technical indicators.
Dealing with Trend + Fractal Wave
(Equilibrium Fractal-Wave)

Especially following four techniques


are very important trading strategies
within the Price Action and Pattern
Trading Strategy:
1. Ganns Angle (Ganns Fan)
2. Harmonic Pattern
3. Triangle and Wedge pattern
4. Elliott Wave Theory
Dealing with Trend + Fractal Wave
(Equilibrium Fractal-Wave)

At least, from now on, think what kind


of regularities you are dealing with.
Think about if you are using the right
tool for your trading.
In the next part, we will focus on the
characteristics of Equilibrium Fractal-
Wave process and these four trading
strategies.
Dealing with Trend + Fractal Wave
(Equilibrium Fractal-Wave)

Note that you can also read the book to


improve your Price Action and Pattern
Trading skills:

Price Action and Pattern Trading Course:


Theory to Practice with over 85 years of
Evidence (By Young Ho Seo)

You can also visit our website


www.Algotrading-Investment.com for
tools for Price Action and Pattern Trading
Strategy.
Dealing with Trend + Fractal Wave
(Equilibrium Fractal-Wave)

Thanks for watching this slides until


the end.