Dear Traders and Investors
I always wanted to create some informative and educational forum about financial trading and investment. I hope this one I can stick with for a long time.
Lately I have developed very simple but powerful trading concept, Five Regularities for the Financial Trading. In fact, this concept is very useful for self training for your trading and investment too. The concept can guide you to the right direction for your trading because it can eliminate a lot of non sense trading in first place.
The concept starts with the statement saying “We trade because there are regularities in the financial market”. This statement means that we can only make money if there are some regularities we can capture into our profit in the market. If there are no regularities, then the market is random. Our trading outcome will be also random too. However, why do we have to trade the random market? If market is random, then we should not trade in first place. But most of time, market is not random. There are some regularities.
Based on this statement, I have created five regularities which can cover the most of technical analysis for your financial trading. I think the attached five pictures can help you to understand the five regularities concept in brief. As you can see from the five pictures, the concept view the technical analysis as the tools to capture these regularities into the profit.
If you have any questions about this five regularities concept in regards to your financial trading or self training, please feel free to discuss in this forum.
There is a book written by myself: Financial Trading with Five Regularities of Nature: Scientific Guide to Price Action and Pattern Trading. So I will be referencing this book a lot in this forum.
I am also happy to conduct formal teaching or training on this topic for the Trading Academy, University or the group of day traders in UK or USA. You can contact me for it on:
Here are some good articles to go with this forum.
So the price pattern table of five regularities look complicated? or Is this another theory nothing to do with your trading? Well both are wrong. I studied many things from Black Sholes to Dynamic Stochastic programming, this is probably simplest among them. I can guarantee that average trader can master the concept and fully utilize them for your trading. Without this vision, I would have not brought this to here in the first place.
Also, this concept does matter for your trading a lot. At this minute, many of you probably spending hours and hours of time on the net. “Why?”. Have any one asked at least once “Why do you use the technical analysis or indicator?”. If you did ask once at least then you are something really because you have the potential to think outside box.
Many of you would assume that you are using technical analysis or technical indicator to catch trend because you heard so many times the lines on the net like “Trader should become friend of trend”, etc.
Well, it is partly right but also partly wrong. but what if the financial market have other structure than just trend? Then you will have the problem because you are applying the tools designed to capture trend only.
Five regularities are the collection of five important market behavior we can observe while we are trading. Indeed, five regularities include the trend as in the first column but it does not assume that trend is the only regularity in the financial market. If it was so easy to make money. Unfortunately, the financial market showing pure trend behavior is even less than 10% among many financial instrument including many share price and currency rate. Most of time, the financial market will exhibit something more complex than just a pure trend.
Then what would exhibit if it is not pure trend ? Well that is already explained in the second, third, fourth and fifth column of the Price Pattern Table. They are cyclic and super cyclic behavior. So if you want to build discipline for your trading, you should at least understand that pure trend is the least thing you can observe in the financial market.
Next time, we will cover what are the second, third, fourth and fifth regularities in really simple term.
What is the first regularity (i.e. first column in the price pattern table) ?
It is a trend behavior. Trend happens when majority of people follow the same thing. In the financial market the trend is also what pushes the price to the equilibrium level. If US had an exceptionally good employment rate, then people will read the news and they will start to buy US dollar. Likewise, if Microsoft had a exceptionally good earnings, then people will read the news and they will buy the share of Microsoft. When more people want to buy US dollar, it will push the value of US dollar up. Likewise, if more people want to buy the share of Microsoft, then the share price of Microsoft will go up too. Trend is the cause (or source) of the equilibrium.
What is the main challenge with Trend?
Trend is like first come first served. If you can ride the trend earlier than other traders, you have longer profitability. If you come later, then you will be late to the party. Later comer can lose money from buying them too high price. Another problem is that there is not many financial instrument showing pure trend. Typically you will be observing more with Trend + Cycles or Trend + Super cycles instead of pure trend.
How to identify
Best way is to check through your chart.
How to trade
You can typically use the typical trend indicator or many other smoothing algorithm like moving average or MACD. In pure trend environment, the typical trend indicator will work well. But do note that there is not many financial instrument showing pure trend environment.
What are the second, third and fourth regularities (Wave process columns in the price pattern table) ?
It is a cyclic behavior. It is something happens in the regular time interval. We have a spring, summer, autumn and winter this year. We will have a spring, summer, autumn and winter next year too because they come around in 1 year cycle. Likewise, some financial instrument in stock market and currency market can have cyclic price movement too. For example, it is well known that S&P500 monthly price series shows weak seasonal cycle. As you can tell this is not a rocket science. We just need to pay attention when there is a cyclic behavior in the financial market. If you ignore it, then you tool or analysis will keep firing wrong buy and sell signals. How to deal with this cyclic behavior? First, identify the cycle period. Then identify when the price is highest and lowest within the cycle. After your analysis is done, buy low and sell high.
What is the main challenge with the cyclic behavior
The problem is that the financial market can show multiple cycles. In general, it is not easy to spot those cycles without tools. You will need to use some tools to identify the presence of those cycles in your chart.
How to identify the cyclic behavior
Fourier Analysis is good tool to start with since modern financial market have multiple of cycles. Principal Component Analysis or Wavelet transformation can be useful tool too.
How to Trade
It is best to identify the significant cycles precisely using the tools. Then we generate the educated guess about the next movement of the financial market. However, such advanced analysis is not available to average traders in general. In that case, you can use the classic oscillator like MACD or RSI or Stoch, etc. These classic oscillator can deal with the cyclic movement up to some degree although not perfect. However you have a task to choose the indicator period for this oscillator. The indicator period should be tuned to the major cycles. Once again, to know the major cycle, you will need to have an analysis using the tools like Fourier analysis or etc. Otherwise, you have to find out trial and errors like manual trading or backtesting.
What are the fifth regularity (Fifth column in the price pattern table)
Simply speaking, fifth regularity is the repeating geometry in varying size (i.e. fractals). Small geometry (i.e. say building block) will combine to build larger geometry but the larger geometry will look alike the small geometry. After that larger geometry will combine to build even larger geometry. The resulted larger geometry will look alike the smaller geometry. This process can repeat infinitely to build really complex geometry. Once again, this is natural phenomena. We can find the example of these repeating geometry in nature like Snowflake, coastal line, mountain edges, surface of pineapple, patterns in leaves, etc. Earlier I have mentioned super cycle. I was actually referring the super cycle to the fifth regularity because their infinite scales corresponds to the infinite combination of different cycles in wave process.
What is the main problem with repeating geometry?
The main problem of fifth regularity is that they are complex in term of their geometry. Average traders can easily get lost when they faces such complex patterns in the chart. However there is a way of dealing with these complex patterns. Indeed we are here to teach you.
How to identify the repeating geometry
The best way to identify the repeating geometry in the financial market is to use the Equilibrium Fractal Wave Index (EFW index). You might use the fractal dimension developed by Mandelbrot in 1975 or Hurst exponent too. However, you will find EFW index is much easier to use and simpler.
How to trade
To trade with fifth regularity, you need to identify the shape of the repeating geometry. If you know what is repeating, then you can make an educated guess on the next movement of the financial market. We will come back to this how to trade in depth since this is the main focus of this forum.
By reading the previous posts, you might have found that we emphasize to build the rational (or trading logic) before you build your trading strategy. Every effect have some cause. For winning trading strategy, there is also some cause too. If you want your trading strategy to work well, then you need to apply right tools to the right market.Technical analysis is merely a tool to capture the known regularities in the market. Therefore, you can not ignore above the five regularities in the financial market when you want to select the trading tools. You should trade based on the fact and evidence. Many, probably over 90% of traders are almost blindly applying some technical analysis without questioning what they are dealing with in the market. Then we hope you can avoid to become one of those 90% of trader. Next post, we will continue to focus mostly on the fifth regularity in this forum because the presence of the fifth regularity is pretty strong across most of the financial market.
Vast majority of trading strategies, technical indicators and charting techniques on the net to help you to capture one of these regularities. Maybe sometimes, it is not explicitly said so. But still, they are in term of their working principle.
Some trader might ask what about fundamentals like Economic news and data release? Ok, fundamental is important for your trading and investment. When you trade with the fundamentals, it is based on the correlation. In fact, the correlation can stand as sixth regularity in the price pattern table.
But in the five regularities trading framework, we focuses mostly on how we get the timing right for our entry and exit. Therefore, I have not decided to open up the large topics of correlation. Plus there are many other places on the net you can learn how to trade fundamental using their correlation.So we will not reinvent the wheel again in this forum. Just for your information, intensity and direction are the most important when you trade with correlation. But things are pretty straightforwards and common sense most of time.
Having said that, the correlation is one of the main mechanism behind these five regularities too. For example, crowd behavior following trend (first), cyclic behavior (second, third and fourth), repeating patterns in infinite scales (fifth) are mainly caused by the correlation. Therefore, we may not explicitly study the correlation here but we are still studying the effect of correlation.
Anyway, the main focus in this forum is to get you to the Price Action and Pattern Trading framework using the fifth regularity. We will show here how under the fifth regularity we can encapsulate the powerful trading system invented by the five giants in the technical analysis including Elliott and Gartley as well as many brilliant new trading strategies last 100 years.
You are in the right place for your trading and investment education in this forum. We will be telling you the trading principle in one unified trading framework.
Here are some untold story about the financial trading. The fifth regularity. When the multi dimensional financial market have to be drawn in two dimensional Price and Time space. It would be interesting to see how the financial market will look like in the two dimensional space. Well, complex.
Let us talk about the fifth regularity, the scientific trading principle behind the Price Action and Pattern Trading. What should we know about the repeating pattern in the fifth regularity? Just like anything else, you will need to start with its building block. The building block of the fifth regularity is Equilibrium Fractal Wave (EFW).
What is it equilibrium fractal wave? In the financial market, the market is moved every time to meet the new equilibrium price. In fact, this equilibrium fractal wave propagate into time and price space while the market moves to the equilibrium price. It is simple and easy term to remember.
It would look like this simple triangle.
Well it looks simple but never underestimate because they can show you highly complex patterns when they are combined. This simple triangle is the building block to represent the multi-dimension of the financial market into the price and time space.
In addition note that most of time the triangle is tilted in its right end because this shape is necessary to clime the price up or down during the equilibrium process.
Single equilibrium fractal wave can combine to form more complex geometry but the complex geometry look like the single equilibrium fractal wave every time. So equilibrium fractal wave is fractals in fact.
Now you are the student of cycles. You have seen the equilibrium fractal wave as the building block of fifth regularity. What about the building block of second, third and fourth regularities (wave process) ? I guess you are curious. Well, it is simple. I am not here to explain the Fourier analysis or wavelet transformation in this forum. But I will give you some idea so that you can see the coherency of the five regularities in the price pattern table. Here is a building block of the second, third and fourth regularities. You can call this building block as the equilibrium wave. Once again the right end is tilted so this equilibrium wave can clime up or down during the equilibrium process.
Just like equilibrium fractal wave, equilibrium wave can be combined to form more complex price patterns of its kind.
As I mentioned, I have only given you this equilibrium wave to help you understand better with the price pattern table. The price pattern table of five regularities I drawn personally by my own hands because drawing all these patterns in software is extremely difficult. Now if you can understand how these price pattern table is drawn, then well done. You have done great job. Now you can master the trading principle in matter of time really. You will be able to use the latest trading science into your advantage. However, still we will focus more on fifth regularity rather than fourth.
If you are still greedy and you want to master both equilibrium wave and equilibrium fractal wave for your trading, then just personally contact me for private lesson or what so ever. I built the forecasting software in the book: Principle of Business Forecasting: https://www.amazon.com/Principles-Business-Forecasting-Keith-Ord/dp/0324311273 many years ago. I have more than sufficient knowledge in cycle forecasting with experience of private tutoring on post graduate students on mathematical trading and quantitative trading students in the top university.
But anyway we will be focusing on fifth regularity onward.
Now let us come back the fifth regularity. We have shown you the building block, equilibrium fractal wave. Now next thing you need to know is what are the properties of equilibrium fractal wave. If we know their properties, then we can trade with them. The five characteristics of equilibrium fractal wave include:
- Extension (transformation)
- Jaggedness (overlapping)
- Infinite scales ( or infinite cycle periods)
- Loose self-similarity (heterogeneity)
For this I will just copy and paste the lines from the book: Financial Trading with five regularties of Nature here to save some time. Before do that, you have to understand each equilibrium fractal wave have unique identifier called shape ratio. This shape ratio is the quantity measuring the shape of each equilibrium fractal waves in the financial market.
The shape ratio of equilibrium fractal wave = current move in price units (Y2)/ previous move in price units (Y1).
We will give you some idea about what is shape ratio in the picture below:
The first characteristic of equilibrium fractal wave is the repeatability. While the price is moving to its equilibrium price level, we observe the zigzag path of the price movement. After extensive price rise, the price must fall to realize the overvaluation of the price. Likewise, after extensive price fall, the price must rise to realize the undervaluation of the price. This price mechanism builds the complex zigzag path of the price movement in the financial market. During the zigzag path, the price shows the four possible triangle shapes as shown in Figure 10-5. These four equilibrium fractal waves are the mirrored image of each other. Therefore, they are the fractal. The complex price path in the financial market is in fact the combination of these four equilibrium fractal waves in alternation.
2. Extension (transformation)
The second characteristic of equilibrium fractal wave is that equilibrium fractal wave can be extended to form another bigger equilibrium fractal wave as shown in Figure 10-6. During the important data release or market news release, the financial market can experience a high volatility or shock. When the market experiences the high volatility or shock, the last lag of equilibrium fractal wave can extends to adapt the shock or volatility introduced in the market. Even after the extension, the equilibrium fractal wave still maintains its fractal geometry, the triangle. Hence, the fractal nature of financial market is unbreakable. This price extension often determines the reversal or breakout movement around the important support and resistance levels.
3. Jaggedness (overlapping)
Third characteristic of equilibrium fractal wave is that they can overlap on each other. For example, when the equilibrium fractal wave is propagating, we can observe the jagged patterns repeatedly as shown in Figure 10-7. To untrained eyes, this complex pattern might look like random patterns. They are not random pattern. Later part of the 1st training, we will show you how even untrained individual can readily identify equilibrium fractal waves in your chart with the peak trough analysis.
4. Infinite scales ( or infinite cycle periods)
The fourth characteristic of equilibrium fractal wave is the infinite scales. The infinite scales mean that you will see the similar patterns repeatedly in the price series while their sizes are keep changing. The repeating pattern can come in any size from small to large. For example, if we stack the varying size of equilibrium fractal waves with the particular shape ratio, then literarily we can stack the infinite number of triangle as shown in Figure 10-8. This implies the infinite number of cycle periods in Figure 3-3 and Figure 3-4. This is exactly why “Equilibrium Fractal-Wave” process is much harder to be handled by traditional technical indicators or mathematical models because they were not designed to deal with the infinite cycle periods mostly. In the next several chapter, we will introduce several important techniques and concepts to deal with these equilibrium fractal waves for practical trading.
5. Loose self-similarity (heterogeneity)
The fifth characteristic of equilibrium fractal wave is the loose self-similarity (heterogeneity). In nature, it is easy to find the strict self-similarity. However, we can only expect the loose self-similarity in the financial market due to the highly heterogeneous players, participating in the market. Even though all the equilibrium fractal waves will have the same form of triangle, their shape ratio will be different to each other. For example, if we display the shape ratios of all the series of equilibrium fractal waves in the chart, then we will expect the shape ratios to vary to its adjacent one (Figure 10-9). This does not mean that we will never have the similar shape ratios in history. In fact, we can get lots of them repeating in the history. For example, we get to see the shape ratio of 0.618 all the time in the financial market. However, we are just saying that the same shape ratios will not come in the successive manner. This heterogeneous characteristic also implies that the financial market have the shapes more frequently occurring than the other shapes. For example, last hundreds years, traders had a solid trust in using the Fibonacci ratios like 0.618, 0.382 and 1.618 for their trading. Some traders used these ratios for Elliott wave analysis or some traders used these ratios for the Fibonacci retracement measurement. Likewise, each financial instrument has different shapes dominating than the rest. Hence, each financial instrument shows more idiosyncratic behaviour of their own.
So what is the big deal about these five characteristics of the equilibrium fractal wave:
- Extension (transformation)
- Jaggedness (overlapping)
- Infinite scales ( or infinite cycle periods)
- Loose self-similarity (heterogeneity)
Well, if you can understand these five characteristics, you can understand advanced trading strategies and you can also create your own trading strategies. These are the powerful knowledge for your trading and investment. Now you will understand this picture clearly.
Now enough of explanation. Do we have anything to see the evidence of all these equilibrium fractal waves in our chart. So you can use them for your trading. Well, yes, I have already told you even average trader can master the Price Action and Pattern Trading. This is not a rocket science. To get the evidence of equilibrium fractal wave in your chart, we have a two important tools. You must have in fact.
- Firstly, the Peak Trough Analysis.
- Secondly, the Equilibrium Fractal Wave Index.
Firstly the Peak Trough Analysis. The peak trough analysis is a simple tool to identify the continuous equilibrium fractal wave structure in your chart (i.e. ZigZag movements).
You can freely download it from our website:
or from mql5.com website
Secondly, the Equilibrium Fractal Wave Index. It is a simple index to tell which equilibrium fractal wave is strong in your chart. I personally invented this techniques because simply I could not find anything else doing the similar job. The way you use is similar to Hurst exponent by Harold Edwin Hurst (1880-1978) or Fractal dimension coined by Mandelbrot in 1975. However, Equilibrium Fractal Wave Index is more intuitive and practical for your trading. The good description about EFW index was first introduced in the Book: the Financial Trading with Five Regularities of Nature (Scientific Guide to Price Action and Pattern Trading). I can share the equation for EFW index here.
The mathematical equation for the Equilibrium Fractal Wave index is like below:
Equilibrium fractal wave index = number of the particular shape of equilibrium fractal wave / number of peaks and troughs in the price series.
When we say particular shape of EF wave, it is simply referring to the Shape ratio of any equilibrium fractal wave in your chart.
Here is some interesting article on how to use Shape ratio and EFW index. Please read this article in regards to the previous posts in this forum.
Article “Best Fibonacci Ratio and Shape Ratio for Winning Technical Analysis with 100 Years of Belief” Link:
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