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The basic theory is from Elliott Wave. It's a refinement of Dow theory, which states that the market moves in waves.
The market moves in one of two ways: Impulse or retrace. Elliott Theory states that it is probable that impulse waves will move in three pushes & retracements will move in two pushes.
So, in a trend, when you see two small legs down & then the market resumes in the direction of the trend, you have better than even odds that the trend is resuming.
At a minimum, if you are trading with the trend, you don't want to jump in after the first pullback because it will most likely have two waves.
In the picture below, an H1 is when price moves from A to B. An H2 is when price moves back up after C. In all probability, you are going to make a new impulse up to the next 1. That's what makes it high probaiblity.
Another factor, is that most people are shorting at C. They see the break of the low at A and then see the lower-low at C and see a head-and-shoulders pattern, so they sell. The impulse back up to 1 is largely made up of the stops from all those shorts. Also called a "short squeeze", the move up to 1 is usually fast and furious as the shorts panic and puke their position. So if you are one of the early ones to buy at C, you get the instant satisfaction of seeing your postion move in your favor very quickly.
Al uses bars rather than lines, so it defines his entry point. When the high of the lowest bar at A is broken to the top, that is an H1. When the high of the lowest bar at C is broken upwards, that is an H2.
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If you want so see a good example of this pattern, zoom out on a 60 minute chart of the Nasdaq or Dow. Everyone was predicting the market would drop. Look how it gaps up to make new highs. Anyone buying the low C's, got to sell to all the shorts as they panicked. It works on any time frame, but the lower you go, the more noisy there will be.
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So, if I am right. 1-2 is L1 and 3-4 is L2. Then, I can say 1-2, 3-4, A-B are legs as mentioned in Al's book? Please correct me if I am wrong. Again, thanks for your detailed explanation. It does help a lot.
Yes. Except, L's are counted in a down-trend and H's are counted in an uptrend. Every line on the chart is a leg. I call them waves, others call them different things.
And the market is fractal in nature, meaning there are legs within legs. Meaning leg 3-4 will have smaller legs within it, possibly a 1-2-3-4-5. and the retracements will usually have smaller a-b-c's inside of the bigger A-B-C's. This is the biggest factor in determining trend. You have to decide which legs are relevant on what time-frame. On my example chart, if you were trading it, the trend would be up. But if you were looking at the next shorter time-frame, the trend may appear down. The important thing is to remember which legs are relevant on the time-frame you are trading. The size of the moves should be in proportion to the moves before it. If an up-leg took 100 bars to develop, a two-legged pullback of 8 bars is not relevant. In all probability, they are smaller legs withing larger legs. Occasionally, you'll hear Al point this out in the live room.
There's no need to try to identify or label the legs. When it's clear and obvious that you've had legs up and now have had two legs down (that are in proportion to the up move), you have a high probability that price will resume the move up once the down move fails.
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First post so hope picture works well for viewing. Could not seem to insert so added at attachment.
Still very much learning Al's methods, but this morning the EUR/ USD had several classic patterns, none of which I had the confidence yet to trade. Still good to see them in action, and hopefully seeing will breed confidence.
Clearly a trend day, so buying any 2 legged pullback to EMA worked. (I tend to use the 34 EMA for forex, but have 20 EMA because Al seems so taken with it.) Nice Wedge around 12:20 to 13:25 area, with breakout to new highs, followed by a beautiful Final Flag. Al speaks of Final Flags and Failed Final Flags frequently and this was one of the clearest I have ever seen. FFF setup followed by a two legged move down.
Question to group is at the bottom of leg 2 I would consider the inside bull bar the H2 signal bar, which would have led to a trade being stopped out 2 bars later, followed by what would have been a successful long. These trades, I have to admit, take their toll on my soul more than any others because of the what if's. Would others have called the bear doji after the inside bull the "real" H2 because the bull inside bar did not have a higher high than its predecessor, or is this just one to chalk up to "the market"? The trade would have worked, albeit at a higher price, if the doji was H2. but the inside bar also, I think, fits Al's liberal use of an H2 bar.
Thanks all for all the patient discussion of Al's methods.
Yep....I've just read the current book (multiple times) and would really like to see the new revisions/additions.
I am new to the Al Brooks approach, but already it has shown me (and kept me out of) out of a bad trade I used to take.
One thing that slowed me down initially, was identifying the 'bars' Al talked about.....
(after a while they are easy to spot, but at first I made it too difficult).
This led me to write an indicator for Ninja 7....(actually modified some existing code and added new code)....
that will help identify "H" "L" bars...as well as "Inside Bars" and "Outside Bars".
I've added it to the futures.io (formerly BMT) Ninja 7 downloads page.
NOTE: This indicator is most likely ONLY useful for practice and learning....I wouldn't recommend using it for live trades. (Besides, I imagine folks would want to have these basic pieces of Al's system learned before using them live).
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