Forex Secret - Enter To Trade Using Slanted Channels At Forex Market - Part I
According to the classicists of Forex, the tactics of opening/closing the deals, where the use is made of slanted channels, can be conditionally divided into the following groups.
1. The work inside the slanted channel (recoil from the slanted channel level).
2. The work on breaking through the slanted channel level. In its turn, it includes the following aspects.
a). One can work along the trend - i.e., under the condition of the ascending trend, it is the breakout through the upper slanted channel (the level of resistance). Naturally, under the condition of the descending trend, the situation is reverse.
b). One can work against the trend - i.e., under the condition of the ascending trend, it is the breakout through the lowest slanted channel (the level of support). Naturally, under the condition of the descending trend, the situation is reverse.
The scheme of presenting the materials is the following.
1. We will examine the points of opening and closing deals in slanted channels as this subject is submitted by the classicists of Forex - J. Murphy, E. Neiman, T. DeMark, Swagger, etc.
2. We will criticize these techniques. It will be explained why a trader can lose his deposit when working strictly according to advices given by J. Murphy, E. Neiman, T. DeMark, Swagger, etc.
3. It is necessary to find out the sound decision to these problems for detecting proper points of opening and closing deals in slanted channels according to Masterforex-V Trading System.
Points of opening and closing deals in slanted channels according to J. Murphy
In his "Technical analysis of future markets: theory and practice", J. Murphy recommends for opening deals in slanted channels to start from the 3rd (!) recoil towards the direction of the trend in force.
J. Murphy considers that the trend line can be successfully used in solving a series of problems - when the third point is detected and the tendency type is determined. As regards this tendency, one of the basic principles is the following. The tendency under development is tending to continuer its movement. Consequently, as soon as the tendency takes a certain tempo and the trend line takes up position at a certain angle, as a rule, this angle is remaining the same during the tendency further development. Under these conditions, the trend line does permit determining corrective phase extremes. And what is more important, the trend line can indicate possible changes in the tendency.
Let us suppose that we deal with an ascending tendency. In this case, corrective (or intermediate) recessions either approach the ascending trend line very close or even touch it. Under the condition of an ascending trend, the future trader is planning to buy at recessions. Therefore, the trend line plays the role of the support edge (limit) below the market. This border can be used as a zone of "buy" (purchase). If the tendency is descending, the trend line can be used as a level of resistance for "sell".
Until there does not occur a radical turn in the trend line dynamics, the trend line can serve for detecting "buy" or "sell" zones. However, in Charts 4.7a and 4.7b (see below), at the point #9 such turn does take place. It is the signal for liquidating all positions opened towards the previous tendency direction. Often the breaking through the trend line is the first evidence of a radical turn in the tendency type.
Chart 4.7a. (For view the picture see notes in end of article)
As soon as the trend ascending line is established (fixed), one can use the subsequent recessions, which reach the trend line, as zones of "buy". In this chart, the points ##5 and 7 can serve for opening new positions - or subsidiary long ones. The trend line breaking at the point #9 indicates a cardinal change in the tendency character - probably, the tendency has become descending. Consequently, at the point #9 all long positions must be liquidated.
Chart 4.7b (For view the picture see notes in end of article)
The points ##5 and 7 can be used as zones of "sell". The trend line breaking (the point #9) testifies the possibility of the tendency turn towards the ascendance.
Criticism of J. Murphy's technique of opening/closing deals in slanted channels
J. Murphy recommends closing all long positions when the slanted channel level is broken through. However, this author has not explained the following aspect:
What is the difference between the false and true breaking through slanted channels?
In order to understand why a trader who works according to J. Murphy's technique will lose his deposit for sure, one must look at Chart 2.14, copied from the book by E. Neiman. That is, there occur false breakouts not only at the encircled point but also to the left and right of it.
Chart 2.14 (For view the picture see notes in end of article)
Losses will be inevitable if one works in this channel according to J. Murphy's technique. J. Murphy's erroneous advices are the following.
1. One must open a deal only starting from the 3rd point of contact - i.e., the recoil towards the trend in force. To the left from the circle, there were three touches. Did J. Murphy imply these contacts when he recommended opening deals to start from the 3rd recoil? Probably, one can regard these three recoils as a single touch. Hence, what's about the 3rd contact? That is, where is the recoil from the level of support in the ascending slanted channel?
2. In this chart, the recoil from the channel lowest border (the point of the deal opening) differs from the breaking through the channel lowest border. Under the condition of the breaking through the lowest border, J. Murphy recommends closing all positions. For instance, I have detected 7(!) breakings through the slanted channel lowest border. Notwithstanding J. Murphy recommendations to close all positions, the currency is keeping on moving along the ascending trend.
3. Why does J. Murphy recommend closing the positions after breaking through the slanted channel lowest border in the case of the ascending trend? Probably, it would be more reasonable to close deals in the vicinity to the ascending channel upper border. However, the problem is the following. J. Murphy designates the trend ascending channel just with one line. That is, according to his theory of the trend channel, the ascending trend upper border does not exist (the picture of the channel corridor is copied from the book by E. Neiman).
4. J. Murphy advices are in evident contradiction with Elliot's theory. According to the latter, the 3rd point of the trend recoil is the trend 5th wave - i.e., the point where begins the market backward movement.
Taking all these specificities into account, it would be amazing to notice the importance attached by J. Murphy to the 3rd check point in the slanted channel.
After detection of the 3rd point and determination of the tendency character, the trader can successfully use the trend line in solving a series of problems. One of the tendency basic principles is the following. A tendency under development is tending towards continuing its movement. However, at the same very page in his book, J. Murphy presents a chart that cardinally refutes his own statements.
In Charts 4.7a and 4.7b, at the point #9 such a turn does occur. It is a signal for liquidating all positions opened towards the previous tendency direction.
For pity, J. Murphy does not explain either these contradictions or the ones enumerated below.
1. As regards a point in the chart, he writes that all positions opened towards the previous tendency must be liquidated. However, further he writes about the same point that long positions must be closed.
2. Why should one at first close long positions and then short ones?
3. Was a long position opened at the point #5 (the 3rd point in the slanted channel)?
4. What does the following phrase mean: the point #9 testifies the possibility of the turn in tendency? That is, one implies the turn or the possibility of the turn. This aspect is very important for the trader. Is it worthwhile to keep short deals open? Must one close all deals and remain out of the market? Otherwise, maybe one should open new deals towards the new trend possible development.
5. What is the difference between the point #9, where all positions must be liquidated, and the false breaking through the level? One must compare the charts 2.14 and 4.9 from the books by E. Neiman and J. Murphy, respectively. Sometimes there occurs the breaking through the trend line several times within one day (see the chart 4.9). This confronts analysts with the dilemma. Must one preserve the initial trend line if it is still correct? Or is it better to draw a new line? A compromise may be possible. A new dotted line is drawn, the trend initial line being preserved. Later on one will see which of the lines is more correct.
6. The most unexpected aspect is the following. J. Murphy confesses that he does not know the difference between the true and false breakings through the slanted channel.
J. Murphy is not sure what one must do with insufficient breakings through the trend line. He mentions that prices can break through the trend line during a day. However, at the moment of closing the initial pattern becomes developed again. Consequently, an analyst cannot be sure whether the breaking has really happened (see Chart 4.9). Must the trend new line be drawn with taking into account new data - under the condition that the trend line small disturbance is evidently of the temporal or occasional nature? In Chart 4.9, this situation is depicted. During the day prices "fell below" the trend ascending line. However, at the moment of trading closing they were above this line again. Is it necessary to draw the trend line anew? For pity, there is no unequivocal answer that could fit for all cases. Sometimes the breaking can be neglected - especially if the market further movement confirms that the trend initial line was true. As it is already mentioned above, sometimes a kind of compromise is required. An analyst can make use of two trend lines simultaneously: the trend initial line (the solid one) and the trend new line (the dotted one). There can develop the following situation. The trend line breaking can be relatively insubstantial and occur just within a day. If at the moment of closing the prices have reached a value above the trend line again, the analyst can neglect this breaking. The use still can be made of the trend initial line. As well as in many other areas of the market analysis, best of all is to rely on the experience and intuition. In many doubtful situations, they are the best advisers.
Comments. J. Murphy has become confused when dealing with slanted channel breakings. Respectively, he cannot explain the problem to readers. Really, what does it mean "one can neglect this breaking - especially if the market further movement confirms that the trend initial line is true? At the same time, one must liquidate all long positions at the point #9 in Chart 4.7a.
E. Neiman considers the breaking through the slanted channel levels along the trend to be the most powerful signal for the deal opening (In the case of the trend ascending channel, it is the breaking through the upper slanted level. Respectively, in the case of the trend descending channel, it is the breaking through the lower slanted level).
Let us trace the consequences of this approach in the real trade.
E. Neiman explains the essence of his technique in the following way. The technique of giving analysis to lines of resistance and support helps traders to follow changes in the tendency - i.e., its reversal or intensification. These levels are especially important for installing protective stop-orders.
The people' memory is an important factor in making use of these. For instance, a trader can remember that recently the price turned from a level of support and went upward. Hence, for him it is perfectly legitimate to make a deal on 'buy' at this very level the next time. On the contrary, the trader can remember that the price turned from a level of resistance and went downward. Consequently, it is mostly probable that the next time the trader will make a deal on "sell" at this very level.
Chart 2.4.2. Trend lines drawn along minimum prices (lines of support). (For view the picture see notes in end of article)
Thus, Neiman states the following.
a). (+++) denotes the intensive signal. It is a good position for breaking through the channel level along the trend (opening a deal, directed downward).
b). (++) is the signal of moderate intensity. It is the confirmation at the level of "A"-line. It is a temperate position for opening a deal, directed downward
c). (+) designates a weak signal for breaking through a slanted channel against the channel in force. Judging by the chart, it is to be specified that one talks about the breaking through two levels of resistance against the trend descending initially. The position is to be opened "after two confirmations". There occurs the 1st confirmation at the level of "A"-line. One can find the 2nd confirmation at the level of "B"-line. However, this position is weak. It is better to receive other confirmations
E. Neiman does not dwell on points of closing deals.
Criticism of E. Neiman's technique of opening/closing deals in slanted channels.
One must again look attentively at the D1 Chart 2.14 from the book by E. Neiman.
1. Only in the left corner of the chart one can see intensive signals (+++), which is a good position for breaking through the channel upper level along the trend. Thus, making use of Neiman's technique, a trader misses the whole (!) trend. The trader must stay out of the market to start from half of a year and up to the year (see Chart D1).
2. In all the three cases, intensive signals (+++) for breaking through the trend have resulted in the false breaking through. After this, there has taken place a spurt from the left part of the chart towards the opposite direction.
3. That is, to beginners E. Neiman recommends opening deals where they always open such deals - i.e., at the end of the movement, directly before the correction and reversal.
4. The reader should try to answer the following question. Why does not E. Neiman write about points of closing deals?
5. As well as J. Murphy, E. Neiman does not submit clear criteria of difference between a true breaking through slanted channels by currency pairs and the false one. To be more precise, E. Neiman regards all false breakings through slanted channels as true ones.
In this connection, E. Neiman himself gives the following explanations.
There are the following contradictions in trend lines and models
· Contradictions in the direction of the trend in force and the direction prognosticated in the course of the analysis (such contradictions are especially important under the condition of the trend reversal).
· Trend lines and models, developed in different time intervals, can also yield contradictive conclusions. For instance, a weekly trend can indicate itself as "bull" trend, while the daily trend can indicate itself as "bear" trend.
· When facing any of the above-described contradictions, it is better not to make deals at all and to wait till clarification of the situation.
Concluding this paragraph, it is worthwhile to mention one of the most important rules of analyzing trend lines and models.
One must not look for trend figures where they are absent. Don't give vent to your fantasy.
Issuing from Neiman's statements, one can make the following brief conclusions.
· If in future the trend slanted channel will be confirmed, this will confirm "the correctness and importance" of this instrument of giving analysis to Forex.
· If in future the trend slanted channel will not be confirmed, one must not look for trend figures where they are absent.
Thus, one must estimate "the usefulness" of Neiman's advices concerning trend channels.
· To miss an intensive trend in D1 chart - at least 1000 points as it is depicted in Chart 2.14.
· Simultaneously to manage three times "to catch" stop-losses at intensive signals.
· Finally, one has to listen to "the classicist's" advice "not to look for trend figures where they are absent and not to indulge one's fantasy".
Making use of the slanted channel and oscillator according to Ch. Lebo and D. Lukas
In "Computer analysis of future markets", Ch. Lebo and D. Lukas state that the secret of the recurring entrance into the market consists in the following. First, one must wait till the end of the temporal correction. As soon as one can understand the principal trend direction, one must buy quickly. Surely, it is too long to wait till there will arise a new peak in the market. However, one must become convinced that the correction is really finished. A sufficient intensity testifies this fact. Here one deals with a point of great nicety. This matter requires careful considerations. Besides, one needs a sensitive and reliable indicator.
One can find a very sensitive indicator of the recurring entrance into the market. For this purpose, it is recommended to use the method of supershort oscillator. For instance, one can take the 3-day relative strength index (RSI) as the recurring entrance starting signal (see Chart 1.7). (For view the picture see notes in end of article)
Thus, Ch. Lebo and D. Lukas submit a method that combines advantages of the two instruments of giving analysis to the market:
1. The slanted channel indicates the trend direction.
2. The oscillator depicts the trend recoil. It is necessary in order to open a deal along the trend issuing from the recoil but not at local peaks (as E. Neiman recommended).
Notwithstanding all the advantages of this method, there is a problem that cannot be solved with the help of the oscillator. Under the condition of the trend recoil, the oscillator does not "distinguish" this reversal from the correction. Consequently, the traders who use oscillators in their work need an additional instrument of the market analysis. This instrument must indicate the trend reversal at the beginning but not at the end of it. Combined with such instrument, the oscillator can be used for the successful measurement of recoils when deals are opened in the opposite direction.
See continuation of this article under name "Forex Secret. Enter to trade using slanted channels at Forex market. (Part II)"
