An “internal” measure of market strength. Typically the major averages are referred to as the “generals,” while the A/D line is referred to as the “troops.” If the troops have departed a bull market, and only the generals are leading ahead, we can look for the generals to make a turn lower (Another example of … Advance / Decline (A/D line)
The direct impact of any chosen signal is 3 to 5 bars. If the wave can’t form and exceed the minimum target (equal to the size of the signal bar) then the signal loses its reliability. And, what is more, it becomes dangerous causing an opposite side break when the trapped scalpers close their positions.
The guideline of alternation refers to the fact that there are two types of corrections, “flat” types and “sharp” types. The types of corrections will usually alternate in waves two and four in an impulse wave. Typically, we will see a sharp correction for wave two (zigzag) with a flat type (triangle) in wave four position.
When a trader becomes paralyzed, and can’t make a trade after seeing a valid signal. Typically this sets in when a trader hasn’t followed a process, such as: defining the Context, Interpreting Momentum and then looking for a specific Signal.
A signal bar that runs counter to the context, i.e. has a tendency to fail. For example, in a strong incomplete bear trend, the market forms a bullish continuation signal in the midst of a corrective leg. We at TraderSkillset.com will side with the context. In other words, we should look to trade the break-down … Anti-Signal
Junction point of the two boundary lines of a contracting chart pattern (usually triangles and ending diagonals).
A positive asymmetric outcome is one where the potential reward is greater than the risk involved. As traders, we are constantly looking for trades where the risk is small relative to the potential gain; in other words, we’re looking for asymmetric outcomes.
A sideways move in a market that, while it may have definite peaks and valleys, makes no progress. Ultimately, a basing pattern should be contained by two horizontal parallel lines.
A rising market within a larger degree downtrend. Typically, we’ll see very sharp bear market rallies in stock markets. In fact, some of the largest percentage up days occurred in the 1929-1932 and 2007-2009 bear markets.
A bearish divergence is seen at a market top. An example would be the Dow Jones Industrial Average going to a new high, but the S&P 500 failing to reach a new high. That’s a bearish divergence. A bearish divergence can also be seen between price and an indicator. For example, EURUSD makes a new high, … Bearish Divergence
A bearish engulfing pattern forms when the real body engulfs the prior bar’s real body. In other words, the bearish engulfing bar opens above the open or close of the prior bar (which ever was higher), and the bearish engulfing bar closes below the open or close of the prior bar (which ever was lower).
An opinion or thought about a market direction. If the opinion is one based on research, facts and sound logic, it can be a trader’s best friend. If it’s based on hope, wishes, or a desire to be proved “smarter than the market” it can be a trader’s worst enemy.
A stop order that has been moved from a level where your position could lose money, to a level where the trade will at least not lose. As a position reaches your first target (Target 1) you should look to move the stop closer to, or all the way to, breakeven.
An increasing price tendency accompanied by positive outlooks about future prices. Chart patterns form higher highs and higher lows as support levels are more important than resistance. The RSI indicator will usually turn up from above 50 and easily moves above 67 into the sustainable bull territory. During larger scale corrections, the RSI zone of … Bull Market
A bullish divergence is seen at a market low. An example would be the Dow Jones Industrial Average going to a new low, but the S&P 500 failing to reach a new low. That’s a bullish divergence. A bullish divergence can also be seen between price and an indicator. For example, EURUSD makes a new low, … Bullish Divergence
A bullish engulfing pattern forms when the real body engulfs the prior bar’s real body. In other words, the bullish engulfing bar opens below the open or close of the prior bar (which ever was lower), and the bullish engulfing bar closes above the open or close of the prior bar (which ever was higher).
The Context of a market is the big-picture Elliott wave outlook for a market. It can also consist of other technical measures: oscillators, structural support/resistance and technical patterns (flags, head and shoulders, triangles, etc.). More can be found on our Context blog.
The opposite of “divergence.” When the price and the RSI (or another momentum indicator) both trend in the same direction, they converge. For instance, when both price and RSI hit new highs together they are said to display “convergence.” In an up trend, convergence on the RSI indicates the probable continuation of the up trend. Also, when the indicator … Convergence
A price movement or structure that runs counter to the prevailing trend. Lasts several bars and most of the cases 3 waves labelled as A-B-C. A correction is a continuation pattern, which means that prices will exit the pattern in the direction they entered it.
A divergence is simply two items that don’t totally agree. An example would be if the Dow Jones Industrial Average goes to a new high, but the S&P 500 does not. The two indexes show a bearish divergence. Another example is if a stock, commodity or currency goes to a new high (or new low) … Divergence
When the price and the RSI (or another momentum indicator) trend in the opposite direction. For example when a stock, commodity or currency creates a higher high but the indicator makes a lower high that is called “oscillator lower-top divergence” (see illustration) or often referred to as “bearish divergence”. When the RSI forms a higher … Divergence – Simple Oscillator Divergence
ETF is an acronym for Exchange Traded Fund. It is usually a static basket of securities that can be traded like a stock. It’s similar in nature to a mutual fund, although typically ETFs will not have a fund manager, and will represent a constant amount of stocks (or any other security).
A type of flat correction where wave B achieves a new high above wave A’s origin. Wave C will follow, in five waves and it will end beyond wave A’s end. Oftentimes, it’s a difficult wave to trade for many because the new high in wave B appears to be a breakout. Then, wave C’s … Expanded Flat
Where several Fibonacci measurements are near each other. For example, the point where wave C will equal wave A, might be near the .382 retracement of the prior five wave rally. That’s two different Fibonacci measurement techniques showing a similar target, or confluence zone.
Leonardo Fibonacci’s sequence is 0,1,1,2,3,5,8,13,21,34,55,89… Each successive number is calculated by adding the previous two numbers. So, 3+5 means that the next number in the sequence is 8. As the numbers get larger, dividing a number by the next larger one approaches the Golden ratio of .618. The ratio of the numbers in the Fibonacci … Fibonacci numbers
Financial markets seem to be ruled by invisible mathematical relationships. We see the same mathematical relationships show up over and over again, and often times these relationships are related to the Golden ratio (.618). It’s a ratio that Leonardo Fibonacci discovered based on Fibonacci numbers. The most common retracements we look at are .618, .50 … Fibonacci retracement
Can be of three varieties: running flat, expanded flat and just plain flat. Here waves A, B and C will tend to all be of equal length. After a completed five wave movement, wave A will correct roughly 38.2%. Wave B will then nearly touch the old high before wave C returns to the level … Flat correction
A fractal is a self-similar structure. In other words, the larger picture is also made up of smaller parts that are similar in shape, similar to a snowflake or a floret of broccoli. Have a look at one, and you’ll see! Elliott’s discovery is a growth cycle which consists of the same patterns recurring at … Fractal (in technical analysis)
An “Austrian School” economist who is best known for his defense of classical liberalism. He won a Nobel Prize for his work on “theory of money and economic fluctuations,” essentially how a market economy’s “prices” communicate important information to participants. It’s exactly this price information that gets distorted by central bank manipulation and interference with … Friedrich Hayek
Why do mathematical and structural relationships show up time after time in financial markets (like Fibonacci, channels, support & resistance) ? It’s because human beings are hard wired to “herd.” In eons gone by, humans did this for protection. In today’s investment markets humans herd for “protection” of their investment capital. Why did investors buy zero revenue companies during the … Herding Instinct
Also known as batting average. It’s the number of winning trades divided by the number of total trades. If one had 6 winning trades out of 10, the hit rate, or batting average, would be 60% (6/10).
A bearish key reversal occurs when a market makes a new high for the move, but closes below the close of the prior bar. It results in some type of candlestick reversal pattern: shooting star, bearish engulfing or piercing line. A bullish key reversal occurs when a market makes a new low for the move, … Key Reversal
The lower bull support zone is one of four primary RSI indicator zones in our Momentum Zone Principle. It’s range is from 38-50, and in a bull market correction, usually even a larger degree correction can will find support in this RSI zone. If RSI drops below this ultimate support zone, a market most likely … Lower Bull Support Zone
The Momentum Zone Principle is what we call our context application of RSI. There are four zones (from top to bottom): Sustainable Bull – Above 67 (upper blue) – Implies any pullback from this level will be corrective. Bear Resistance – 50-63 (in grey) – When a wave structure moves up and the RSI reaches … Momentum Zone Principle
A proprietary concept which indicates where a trend will begin to deteriorate (decelerate). The point of symmetry is the area of peak momentum in an established trend. It is likely near the point where the number of corrections after it, will equal the number of corrections before it as the trend matures. Usually, the point … Point of Symmetry
Risk versus reward will be abbreviated as R:R. Typically we will refer to reward, or targets, as a ratio of the size of the risk. So, if a stop order, or risk, is 50 pips, a 2:1 R:R ratio would have us looking for a target of 100 pips.
The relative strength index is our most important technical analysis indicator used to measure momentum on a scale of 0 to 100. It was introduced by Welles Wilder in 1978. He originally recommended using a 14-period RSI. Although we keep the original settings, we developed a non-traditional interpretation. We consider a stock or an instrument … Relative Strength Index (RSI)
It’s a fancy name for a simple concept. Former support once it’s broken, becomes resistance, and vice versa – former resistance once it’s broken, become support. This is true of price levels and trendlines.
Waves 2 and 4 typically show alternation between “flat” (sideways) type and “deep” (sharp) corrections. If wave 2 was “deep,” like a zigzag (most typically), then we can expect wave 4 to be a “flat” type of correction: triangle or flat. Waves A and C will alternate most of the time as well. If A … Rule of Alternation
Running corrections typically occur in markets that are “on the move.” In a bullish version after a five wave rally, a running flat correction will have down waves A and C, separated by a B wave. Wave C will end above the bottom of wave A, which is not typical in a regular flat or … Running Correction
A short term trade that lasts 3-5 bars on the selected time frame (i.e. 3-5 hours on the hourly, or 9-15 minutes based on a 3-minute time frame). The position aims at a minimum price target that equals one or two times the risk; and, it’s managed with a tight trailing stop. The risk, or … Scalp Trade
We have developed a checklist of attributes to evaluate signals. This list tells you what to look for as each bar develops, when looking to enter a trade. Of course, one should only be looking to enter a trade after determining Context and confirming Momentum on a particular market. Then, as we look to enter a … Signal Attributes
The sustainable bull territory is one of the zones we talk about in our Momentum Zone Principle. Sustainable bull territory is when RSI momentum indicator with a look-back period of 14 reaches above 67. When that happens, it’s best to view any subsequent price weakness as just a correction in an ongoing bull market and … Sustainable Bull Territory
A medium term trade that lasts 15-20 bars (or more) on the selected time frame (i.e. 15-20 hours on an hourly chart, or 45-60 minutes on a 3-minute bar chart). The target should be at least twice as much as the risk taken, managed with a loose, structural-type trailing stop. The trade is with the … Swing Trade
Is a proprietary concept. The correction prior to the final wave in an established trend. Most of the time it has a sideways shape, often a triangle, and then price breaks out in the direction of the established trend. The breakout, out of a Terminal Set-Up, fails to travel 100% of the height of the … Terminal Set-Up
It’s a poker term, but it’s a great concept for traders to understand. Tilt can come in many forms, but its essential concept is when one is not performing at a peak level. At a poker table, it’s usually cause after a correct play is beaten by a weaker hand; and, the resulting frustration causes … Tilt
Under orthodox Elliott Theory, a triangle is a sideways congestion pattern that consolidates the previous wave. The structure is 3-3-3-3-3, and it’s labeled A-B-C-D-E. There are four varieties of triangles: Contracting, Ascending and Descending (all are contained by converging trendlines) and Expanding which is the rarest variety. In an Expanding triangle, the endpoints of each wave occur at wider levels, which leaves trendlines … Triangle (EWP)
Three shallow attempts to reverse the prevailing trend, that end up forming a sideways pattern. It’s a continuation pattern, so it will usually break out in the direction prices entered the triangle. It typifies a temporary equilibrium between sellers and buyers which tends to show decreasing volume from left to right within the pattern. Trader Skillset’s proprietary methodology leads … Triangle by Trader Skillset