Elliot Wave Pattern and Strategy

 Here we want to give you a simple explanation of the Elliot Wave pattern.

The most important thing is to get yourself familiar with the shape and steps of formation of this pattern.

• Ralph Nelson Elliot back in the 1930s developed this theory.
• Based on his theory, price movements are very predictable because a large group of people behave in a predictable way.
• You probably heard of herd mentality. I will explain this a bit more; every crowd psychology moves between faces of optimism and pessimism. (That is how a revolution in the bigger picture happens in a country!) Moments of joy and sadness come one after another. This is part of human nature that we want to explain in the financial market.

So, when we are using Elliot wave theory we want to figure out if a stock follows a predictable pattern.

How Elliot Wave looks like:

1. During the first wave of the move, not many people notice the new trend. If you believe that this could be the start of another pattern then you can jump in on time.
2. The pull-back is very important as this will confirm the new trend by point 2 being above point 1.
3. Look for the signs for the end of pull-back and catch the train for the next wave which is the most important one. (Wave 3)
4. Wave 3 is the biggest wave and you can make the most out of following this pattern.
5. The fact that the crowd now noticed the pattern is something that makes this wave the biggest.
6. Second pull-back and again trend will resume. This is the time that every man and his dog is talking about this stock and the fact that we should by it which if they wait for half way it will be too late and the majority of people will lose their money if they do not know this pattern.

Some other points:

• Every leg up ( wave up) has its own smaller waves.
• Using Fibonacci numbers will help you to trace the waves more accurately.
• Waves 3 and 5 called impulsive waves. Fibonacci Ratio is useful to measure the target of a wave’s move within an Elliott Wave pattern. For example, in impulse wave:
• • Wave 2 is typically 50%, 61.8%, 76.4%, or 85.4% of wave 1
  • Wave 3 is typically 161.8% of wave 1
  • Wave 4 is typically 14.6%, 23.6%, or 38.2% of wave 3
  • Wave 5 is typically inverse 1.236 – 1.618% of wave 4, equal to wave 1 or 61.8% of wave 1+3

Williams %R or Williams Percent Range

 Williams %R or Williams Percent Range

1. This type of momentum indicator moves between 0 and -100
2. Measures overbought and oversold levels. 
3. The period typically sets to 14. I prefer 28 as it will reduce the noise.
4. The best results are in a range market in which you can use both buy and sell signals

• An overbought or oversold reading doesn't mean the trend will change. Overbought means the price is close to the highs of its recent range, and oversold means the price is near to the lower end of its recent range.

The Williams %R may be used to find entry and exit points in the market. 

Signals:

In a range market:

Buy if the indicator moves out of the oversold area.

Sell if the indicator moves below the -20 (overbought) line.

In a downtrend market:

Do not buy

Sell if the indicator moves below the -20 (overbought) line.

In an uptrend market:

Buy if the indicator moves out of the oversold area. (Above -80)

do not sell.

How does the stock price determines

It's all about supply and demand.

 For those of you who are actually curious about the exact mechanics, the open price is calculated by the stock exchange like the NYSE (the New York Stock Exchange) for example, or NASDAQ. (National Association of Securities Dealers Automated Quotations)

• NYSE is an auction market that uses specialists or designated market makers
• Nasdaq is a dealer market with many market makers in competition with one another. 

Dealer vs. Auction Market

• Dealer market: Market participants do not buy and sell to one another directly. Transactions go through a dealer which, in the case of the Nasdaq, is a market maker. More than 260 market-making firms provide liquidity for Nasdaq-listed stocks. This competition helps ensure buyers and sellers are getting the best prices.
• Auction Market: Before the market's official opening time, market participants can enter buy and sell orders starting normally at 3 hours prior to the official opening. These orders are matched, with the highest bidding price paired with the lowest asking price. At the NYSE, the job of maintaining markets falls to designated market makers (DMMs), formerly known as specialists. The DMM is the human point of contact for the listed company on the NYSE trading floor. DMMs provide stability by taking the other side of the trade when imbalances occur, buying when investors are selling, and vice-versa. They run the opening and closing auctions, using human input and algorithms to help promote price discovery when the volume is typically at its highest. According to the NYSE, DMMs provide a big amount of liquidity. (approximately 20%)



Automated pricing based on supply and demand. bid and ask:

• When you place an order to buy a share at a certain price that is called your “bid” and when you place an order to sell your shares at a certain price that’s called your “ask”.

• Every morning stock exchanges set the opening price by taking pre-opening orders and offers.
• The stock price is the highest amount someone is willing to pay for the stock, or the lowest amount that it can be bought for.
• The calculation of prices is completely automated, software-driven, and anonymous at the specific exchange, and the price is calculated by electronically matching bids and offers for a particular share recorded in an electronic limit order book (ELOB).
• The ELOB contains all the bids – asks for a particular share and the system matches the best bids and asks to execute an order. The price at which a transaction is executed is called the last traded price (LTP) and that’s what you see on TV screens. It’s usually the price that results in most stocks being sold.

Some people say we should add the dump and pump etc to the above, but at the end of the day these are part of supply and demand in larger scale. 

Online trading - FOREX - Stocks - Exit strategies

 Exit strategies:

Should we only focus on buying? Or how to keep your hard-earned gains in a stock and sell at the right time is also important?
We all know that even the stock with the strongest performance eventually start to break down. 
What are your criteria to close a position in profit?
What technical analysis you do to figure out the best exit point?

1.  A gap down on earnings for stocks
2. A low-volume rebound after a sharp break
3. Moving averages
4. Average true range
5. Relative Strenght
6. Fibonacci
7. Resistance and support levels

The list goes on. 

As you can imagine this is not an easy job. We need to educate ourselves and spend a lot of time analyzing the market to be successful traders.

$AA 
$C $ALB $FDX $ZEC 

Financial ratio P/E and Dividend Yield

 How you choose your stocks to trade.

Are you looking at different ratios?

Normally companies with high P/E ratios tend to have

low dividend yields and vice versa.

But I am looking at the data for the following assets and this rule does not apply. ( Data as of today from eToro). So, what is the conclusion?

Obviously, there are many other ratios to look at, but for this post, we just want to decide based on this ratio.

#AAPL  P/E ratio 29.28 Dividend yield 0.66%

#MSFT  P/E ratio 35.37 Dividend yield 0.85%

Should we say that at this stage AAPL is undervalued or MSFT's price is more than it should be? The answer could be this but the other answer is there is no obvious relationship between P/E and Dividend Yield.

At the end of the day, the board of directors can decide what should be the amount of dividend they want to pay.

This makes the decision hard and then we decide to use few ratios instead of only one.

Weighted Close indicator

 The Weighted Close indicator is calculated as below:

Weighted Close Formula

Signals:

1. During an uptrend only go long when: the weighted close crosses to above the Moving Average.
2. In a downtrend only go short when: the weighted close crosses to below the Moving average.

Vertical Horizontal Filter

 

I normally do not use this indicator for signals. Instead I am using this to recognise the trend as a confirmation for my signals.

• Rising values confirms continuation of a trend. (Uptrend or downtrend)
• Falling values indicate a ranging market.
• High values: Potentially end of a trend.
• Low values: Maybe start of a trend.

A volatility indicator can help you in interpreting this indicator as in a more volatile market the range will be wider!