A lot of market movements are random
A lot of market movements are random. With simple concepts, we can trade the market sentiment for profitable results.
Dear Neuronal traders,
It is safe to assume that most strategies that trade against the trend are losing in the long-term. Most changes in market prices are random, and trading is all about extracting the information that is meaningful; not convincing yourself that insignificant developments are signs of something in the future.
The basic theory of the market function according to Elliott Wave Theory is that the market moves in impulses and corrections. An impulse is a strong driving force in a trend, and the correction is the balancing force which pauses the trend.
Bill Williams simplified the concept further by inventing the concept of market Fractals. Market fractals consist of 5 candles, in which the middle candle is the highest or lowest point and the two candles on each side are higher/lower. For a bullish fractal, this means 5 candles in which the middle candle is the highest point and the two candles on each side are lower. Between each fractal is an Elliott Wave.
Only bullish fractals are valid in an uptrend, and only bearish fractals are valid in a downtrend. Bill Williams recommended using the Alligator Indicator, a series of moving average with offset to the future, to determine the trend and hence valid fractals. However, there is a simpler method that does the job better.
This is the 200-period Simple Moving Average
Also called the 200-day moving average (due to its common use on daily charts), the 200-period SMA takes into account the last 200 candles to calculate an average of the price movement. 200 SMA is an excellent method to determine the overall trend while filtering market noise. If the price is above the 200 SMA, it is an uptrend; conversely, if price is below the 200 SMA, it is a downtrend.
We can use this to determine valid fractals. Valid bullish fractals are above the 200 SMA; valid bearish fractals are below the 200 SMA!
Fractals are very easy to identify by the eye and you do not need to add Bill Williams’ Fractal indicator on the chart. In the simplest of terms, a bullish fractal is a resistance level and a bearish fractal is a support level.
Using the fractals and the 200 SMA to trade successfully on the market movements
On your hands are now to excellent market concepts that may well be everything you need as a successful trader. We shall not fight the market; rather, we shall follow its sentiment. With the help of fractals we are able to enter the market at the end of the correction wave, at the start of the impulse.
The correct way to enter the market is to wait for a breakout of the fractal. In most cases, a breakout of the fractal marks the end of a correction wave. It is therefore expected to be a new impulse shortly thereafter. Remember, use the 200 SMA to determine the trend and only follow the trend. In practice, this means you look for a fractal above the 200 SMA and enter a Buy trade once the market has broken the fractal. Conversely, for a Sell trade, you look for a fractal below the 200 SMA and wait for the market to break it.
Using MACD for additional confirmation
To further confirm a trade, it is fine to use the MACD oscillator. If the histogram is above 0, that confirms a Buy trade; if it is below the zero level, this confirms a PUT trade. MACD is one of few leading and accurate indicators and can be a valuable tool to confirm the trend alongside the 200 SMA.
Conclusion
This strategy can be applied for both margin/spot trading and binary options. In margin trading it is important to set a reasonable take-profit and stop-loss. To find the take-profit in a fractal breakout trade, you find the nearest support or resistance level. To find the appropriate stop-loss, divide the take-profit (in pips) by 5 or whichever number you deem suitable.
This strategy also works for binary options.
The strategy is best to use on 4-hour charts, but may also be used on 1-hour and daily charts. Lower time frames may have more noise. Remember: the higher time frames of a market are the dictators, and the lower time frames are the subordinates with limited play-time!
A lot of market movements are random, but this will filter out the important information. Good luck to you!
And Remember on Neuronaltrader: ” If you’re Ready to grow up and invest in your future, you’ll know what you are able to do”
Important: The information and/or knowledge expressed in this article shouldn’t be taken as investment recommendations or financial advice. All investments and/or actions involve a risk and each person is responsible for researching, educating and analyzing before making an investment decision.
