Correction, Retracement, Reversal What is the difference?

[Grey1]

The title of the thread is

What is the difference between Retracement, correction and Reversal..

The answer is NONE WHAT SO EVER ..

I thought to write about this after receiving a PM from NASTRADER..

Market goes through cycle. every min , hour, day, week month year and so on

The Minute cycles add up to form hourly cycles ,the hourly cycles add up to form the daily cycles, just the way a 3 min bar represents three 1 min bar..


when the cycle top / Bottom ( NODE S) in different time frames coincide and meet you should expect a CORRECTION , Retracement or reversal.. size of the correction depends on what time frame is matching . if you have 1,3, matching only , you should be expecting a tiny correction .. if you have 1 , 5, 10. 30 matching you should be expecting a much deeper correction ( hence is called retracment).. and so on

Now is this really important and if yes why it is important...

Well, to start with you can identify the momentum exhaustion in the time frame you are trading . Lets say you just took a long AAPL and the target for the trade was only 20 C with a stop loss of 10 C then you can safely assume if 1,3, 5 min are approaching OB your trade with hit the stop ..

Also using much higher time frame such as Weekly , Daily cycles matching you can have a much stronger view towards next day INTRA DAY Trend ,, In another word if you had a exhaustion in 2 time frames ( OB ) then you can safely assume the intra day trend will be weak .

You see by using a simple exhaustion in higher time frames you can gain insight into lower time frame TREND.. THIS IS CALLED BIRTH OF TREND .. THIS IS HOW TREND IS BORN .

WHEN Cycle’s IN HIGHER TIME FRAMES MATCH ,,THE RESULT ON LOWER TIME FRAME IS A TREND.. i.e CYCLES GIVE BIRTH TO TRENDS and not the other way .

Question ?

Does it matter what time frame I should be using to measure exhaustion >

Answer:-- That depends on your pos sizing and your expected return for your trade, SO if you are expecting a $5 run then it is no good to look at 1,3 time frame with a LOW ATR stock .

Question ?

Is major reversal the result of yearly ,monthly ,weekly cycles matching

Answer :-- Yes

Question :--

Can I use EE to set a meaningful stop loss..

Answer YESSSSSSSSSSSSSSSSSSSSSSSSS

Question

what if EE signaled a correction and that did not happen .

Well , 75% of the times this will happen in the time frame you are trading as market trend by definition is a series of cycles, but if it did not happen in the time frame you was expecting then you should increase your time frame to much higher on that particular day to have more back up and pressure from higher time frame to bully the market . In another word more army of higher time frames is needed to reverse the trend .

Hope this clarifies things.

grey1

 

[rajibde]

The title of the thread is

What is the difference between Retracement, correction and Reversal..

The answer is NONE WHAT SO EVER ..

I thought to write about this after receiving a PM from NASTRADER..

Market goes through cycle. every min , hour, day, week month year and so on

The Minute cycles add up to form hourly cycles ,the hourly cycles add up to form the daily cycles, just the way a 3 min bar represents three 1 min bar..


when the cycle top / Bottom ( NODE S) in different time frames coincide and meet you should expect a CORRECTION , Retracement or reversal.. size of the correction depends on what time frame is matching . if you have 1,3, matching only , you should be expecting a tiny correction .. if you have 1 , 5, 10. 30 matching you should be expecting a much deeper correction ( hence is called retracment).. and so on

Now is this really important and if yes why it is important...

Well, to start with you can identify the momentum exhaustion in the time frame you are trading . Lets say you just took a long AAPL and the target for the trade was only 20 C with a stop loss of 10 C then you can safely assume if 1,3, 5 min are approaching OB your trade with hit the stop ..

Also using much higher time frame such as Weekly , Daily cycles matching you can have a much stronger view towards next day INTRA DAY Trend ,, In another word if you had a exhaustion in 2 time frames ( OB ) then you can safely assume the intra day trend will be weak .

You see by using a simple exhaustion in higher time frames you can gain insight into lower time frame TREND.. THIS IS CALLED BIRTH OF TREND .. THIS IS HOW TREND IS BORN .

WHEN Cycle’s IN HIGHER TIME FRAMES MATCH ,,THE RESULT ON LOWER TIME FRAME IS A TREND.. i.e CYCLES GIVE BIRTH TO TRENDS and not the other way .

Question ?

Does it matter what time frame I should be using to measure exhaustion >

Answer:-- That depends on your pos sizing and your expected return for your trade, SO if you are expecting a $5 run then it is no good to look at 1,3 time frame with a LOW ATR stock .

Question ?

Is major reversal the result of yearly ,monthly ,weekly cycles matching

Answer :-- Yes

Question :--

Can I use EE to set a meaningful stop loss..

Answer YESSSSSSSSSSSSSSSSSSSSSSSSS

Question

what if EE signaled a correction and that did not happen .

Well , 75% of the times this will happen in the time frame you are trading as market trend by definition is a series of cycles, but if it did not happen in the time frame you was expecting then you should increase your time frame to much higher on that particular day to have more back up and pressure from higher time frame to bully the market . In another word more army of higher time frames is needed to reverse the trend .

Hope this clarifies things.

grey1

Thank you very much Grey1-this post helps me to improve my understanding on 'when to exit' from a position.

Cheers!

Raj

PS-on a slightly different note-I was reading your notes on 'MAMA' and tried to use the code in the TS chart-how much useful is MAMA while trading (while using it on the charts)?

 

[gulam]

Thank you very much Grey1-this post helps me to improve my understanding on 'when to exit' from a position.

Cheers!

Raj

PS-on a slightly different note-I was reading your notes on 'MAMA' and tried to use the code in the TS chart-how much useful is MAMA while trading (while using it on the charts)?

Hi Raj, I didn't realise MAMA was an indicator, I think Iraj uses that expression when he makes a killing from the markets..... MAMA Mia! Or am I missing something?

 

[samtron]

Hi Raj, I didn't realise MAMA was an indicator, I think Iraj uses that expression when he makes a killing from the markets..... MAMA Mia! Or am I missing something?

Hi gulam,
FYI
Ehlers MESA Adaptive Moving Average (MAMA) which is based on the rate change of phase as measured by the Hilbert Transform. The script also plots the Following Adaptive Moving Average (FAMA) which is in time synchronization with the MAMA but with smaller vertical movement. As a result, the MAMA and FAMA do not cross unless there has been a major change in market direction.

 

[rajibde]

Hi gulam,
FYI
Ehlers MESA Adaptive Moving Average (MAMA) which is based on the rate change of phase as measured by the Hilbert Transform. The script also plots the Following Adaptive Moving Average (FAMA) which is in time synchronization with the MAMA but with smaller vertical movement. As a result, the MAMA and FAMA do not cross unless there has been a major change in market direction.

Hi Samtron,

Thanks for the answer on my behalf; The reason why I had asked the question was to know if the MAMA/FAMA crossover is a good intraday indication or is it only reliable for the swing (or longer term) traders .

Regards

Raj

 

[rajibde]

MAMA / FAMA divergence combined with other signals is very good at determining exhaustion and likely reversal points.


Paul

Thanks Paul- In an intraday scenario this then should give an indication for the market reversal if plotted on the Dow chart-i'll give it a try tomorrow.

Cheers

Raj

 

[Nastrader]

The title of the thread is

What is the difference between Retracement, correction and Reversal..

The answer is NONE WHAT SO EVER ..

I thought to write about this after receiving a PM from NASTRADER..

Market goes through cycle. every min , hour, day, week month year and so on

The Minute cycles add up to form hourly cycles ,the hourly cycles add up to form the daily cycles, just the way a 3 min bar represents three 1 min bar..


when the cycle top / Bottom ( NODE S) in different time frames coincide and meet you should expect a CORRECTION , Retracement or reversal.. size of the correction depends on what time frame is matching . if you have 1,3, matching only , you should be expecting a tiny correction .. if you have 1 , 5, 10. 30 matching you should be expecting a much deeper correction ( hence is called retracment).. and so on

Now is this really important and if yes why it is important...

Well, to start with you can identify the momentum exhaustion in the time frame you are trading . Lets say you just took a long AAPL and the target for the trade was only 20 C with a stop loss of 10 C then you can safely assume if 1,3, 5 min are approaching OB your trade with hit the stop ..

Also using much higher time frame such as Weekly , Daily cycles matching you can have a much stronger view towards next day INTRA DAY Trend ,, In another word if you had a exhaustion in 2 time frames ( OB ) then you can safely assume the intra day trend will be weak .

You see by using a simple exhaustion in higher time frames you can gain insight into lower time frame TREND.. THIS IS CALLED BIRTH OF TREND .. THIS IS HOW TREND IS BORN .

WHEN Cycle’s IN HIGHER TIME FRAMES MATCH ,,THE RESULT ON LOWER TIME FRAME IS A TREND.. i.e CYCLES GIVE BIRTH TO TRENDS and not the other way .

Question ?

Does it matter what time frame I should be using to measure exhaustion >

Answer:-- That depends on your pos sizing and your expected return for your trade, SO if you are expecting a $5 run then it is no good to look at 1,3 time frame with a LOW ATR stock .

Question ?

Is major reversal the result of yearly ,monthly ,weekly cycles matching

Answer :-- Yes

Question :--

Can I use EE to set a meaningful stop loss..

Answer YESSSSSSSSSSSSSSSSSSSSSSSSS

Question

what if EE signaled a correction and that did not happen .

Well , 75% of the times this will happen in the time frame you are trading as market trend by definition is a series of cycles, but if it did not happen in the time frame you was expecting then you should increase your time frame to much higher on that particular day to have more back up and pressure from higher time frame to bully the market . In another word more army of higher time frames is needed to reverse the trend .

Hope this clarifies things.

grey1

Hi Grey1,

Your explanation on cycles, in higher TF’s, and exhaustion is excellent and does help to clarify my understanding. Your comments about the more a cycle match in higher TF’s are especially helpful in understanding oscillations in relation to a run/trend.

Thanks !

NasTrader

 

[Grey1]

[NAZ

I have a quiz for you . This quiz will be the foundation of your trading career,

Look at the enclosed chart and look for the reason for the reversal of all stocks @ Time shown by the vertical line.

Their chart pattern differs in all stocks prior to the reversal ( so much for chart pattern analysis and how naive to trade a chart pattern alone .. ) but they all seems to reverse.. if you look for MTF analysis of the DOW then you can find the answer.... Program Traders will hit a broad spectrum of stocks once they have a MTF confirmation on the market direction .

 

[samtron]

[NAZ

I have a quiz for you . This quiz will be the foundation of your trading career,

Look at the enclosed chart and look for the reason for the reversal of all stocks @ Time shown by the vertical line.

Their chart pattern differs in all stocks prior to the reversal ( so much for chart pattern analysis and how naive to trade a chart pattern alone .. ) but they all seems to reverse.. if you look for MTF analysis of the DOW then you can find the answer.... Program Traders will hit a broad spectrum of stocks once they have a MTF confirmation on the market direction .

Grey1
As always thanks for generously sharing your insights

Looking at the dow I think "chartists" might also arge that the reason for the reversal was because an important weekly restistance level was reached.

 

[Glenn]

I use it on specific stocks and to be honest the divergence differs. On RIMM there can be a much greater divergence before a likely exhaustion / reversal is seen compared to say AAPL where it is much lower. You will need to experiment with it before adhering to any hard and fast rules and it should only be used in conjunction with other confirmation signals.


Paul

Hi Paul
Since I told you about MAMA DIV in September I have modified it further.
As this happened just after my mother died I may have forgotten to mention it.
It can be adjusted to harmonise it across the price spectrum and to account for volatility which makes it a more useful and consistent tool.
Cheers
Glenn

 

[rajibde]

Hi Paul
Since I told you about MAMA DIV in September I have modified it further.
As this happened just after my mother died I may have forgotten to mention it.
It can be adjusted to harmonise it across the price spectrum and to account for volatility which makes it a more useful and consistent tool.
Cheers
Glenn

Hi Glen,

Is the MAMA code on the lines of what G1 had posted earlier? If so then please can you elucidate a bit more on the modifications ?

Cheers!

Raj

 

[Glenn]

Hi Glen,

Is the MAMA code on the lines of what G1 had posted earlier? If so then please can you elucidate a bit more on the modifications ?

Cheers!

Raj

Hello Raj
I believe that Grey1 is referring to the use of the exhaustion engine in multiple timeframes.
The exhaustion engine is based on a 5- period simple moving average of the 6 period CCI, which produces the MACCI and then further enhanced by auto-regression, although MACCI works well enough.
The MAMA indicator is an attempt to extract the underlying cycle from the price data in order to help confirm when a price has changed from one cycle to another or from one phase of a cycle to another. That is if you accept the principle of cycles, which means fixed amplitude and frequency - something I don't subscribe to.
Glenn

 

[rajibde]

Hello Raj
I believe that Grey1 is referring to the use of the exhaustion engine in multiple timeframes.
The exhaustion engine is based on a 5- period simple moving average of the 6 period CCI, which produces the MACCI and then further enhanced by auto-regression, although MACCI works well enough.
The MAMA indicator is an attempt to extract the underlying cycle from the price data in order to help confirm when a price has changed from one cycle to another or from one phase of a cycle to another. That is if you accept the principle of cycles, which means fixed amplitude and frequency - something I don't subscribe to.
Glenn

Hi Glenn,

Thanks for your reply. I am using G1's concept on the exhaustion engine on a very regular basis (if I may add-with a very successful outcome ). G1 has also some time ago posted MAMA concept and its code for the TS. After reading your post today, I thought you've modified this code to take care of the volatility.

I have started watching the movement of the MAMA/FAMA crossovers since yesterday to try to identify market turning -just about watching.....my trading decisions are not dependant on theMAMA at the moment- however for the times when the market is in the trending mode, I am trying to find ways with which I can identify (on the RS) that the market has stopped trending -the MAMA/FAMA, I think might be useful in this regard(it is yet to prove itself though)

Cheers!

Raj

 

[Nastrader]

[NAZ

I have a quiz for you . This quiz will be the foundation of your trading career,

Look at the enclosed chart and look for the reason for the reversal of all stocks @ Time shown by the vertical line.

Their chart pattern differs in all stocks prior to the reversal ( so much for chart pattern analysis and how naive to trade a chart pattern alone .. ) but they all seems to reverse.. if you look for MTF analysis of the DOW then you can find the answer.... Program Traders will hit a broad spectrum of stocks once they have a MTF confirmation on the market direction .

Hi Grey1,

Thanks for the quiz, and causing me to investigate the MTF O/B conditions on the Dow for 12/19/06. This really did help a lot.

I did the analysis and have included the 1, 3, 5, 10, 15, 20, & 30-Min Charts in the MS Word attachment below. Each chart is annotated, and the results for the MACCI Peak TF’s are listed as follows:

1-Min TF = 14:58 & 15:14
3-Min TF = 14:12 & 15:12
5-Min TF = 14:10 & 15:25
10-Min TF = 14:30
15-Min TF = 15:15
20-Min TF > + 100 and still going higher.
30-Min TF > + 100 and still going higher.

In Summary the following TF MACCI Peaks are all O/B signifying a Short:

1-Min @ 15:14 Peak, and turned down & hit + 100 MACCI.
3-Min @ 15:12 Peak,and turned down at 15:17
5-Min > + 100, although at 15:15 still going higher
10-Min @ 14:30 Peak, and turned down at 15:15
15-Min @ 15:15 Peak, and turned down at 15:15 or next bar to see it.
20-Min MACCI still going higher, but the Dow itself turned down by 15:10
30-Min MACCI still going higher, but the Dow itself tuned down by 15:30 (and should be visually seen at 15:15 going down).

Entry at 1-Min as the MACCI line goes down through the + 100 (O/B) or when the MACCI line turns down on the 1-Min which occurred at 15:17 (hit + 100 on the way down).

In Summary all of the DOW MTF’s signified a Short, since all of the TF’s are O/B. Also, as the 1-Min TF turned down and went through the +100 MACCI, which was at 15:17, seems the best time to ENTER the weakest Stock for a SHORT.

Grey1 this was a great experience to review the MTF analysis for the DOW’s O/B conditions.

I think it would be great if you continued to give us all more quiz's like this one in the future. Thanks again.

Did I pass? LOL

NasTrader