Trade with the Trend

When I was a student and studied finance I got a half day job on a trading floor. It was in 1997! Pretty fast they promoted me to a position of a Portfolio Manager. I was 20 years old, but had authority to make trades for millions of dollars.

Back then we traded like blinded monkeys. No process, no analytical software and no great understanding of what and why we do what we do. That was a purely emotional trading based on gut feeling. That is why three years later I quit and found a job on the corporate side. In four years I grew to CFO position and in four more years was promoted to CEO position.

In 2014 I retired and decided to give a chance to financial markets again. That time I decided to do that right. I read probably all the books about trading I could find. I studied candlesticks and indicators. I learned to code and coded probably 500 different indicators and automated strategies. I tried all the ideas I could find. But nothing worked well enough for me.

And then in 2015 I came across Elliott Wave theory that was  introduced by R.N. Elliott in 1930s and popularized by Robert Prechter. The cornerstone of that theory is that markets are driven by sentiment of market participants. Our brain has not evolved enough since the prehistorical times when the major reaction to outside events was "fight or flight". We still make the vast majority decisions subconsciously rather than by the process of logic thinking. Because traders and investors alike are driven by fear and greed the crowd sentiment and consequently the price keeps following specific repeating patterns.

The more I practiced that analytical tool the more I liked. However, pretty soon I stumbled upon limitations of that theory. I noticed again and again that price at some stages of impulsive rallies and declines deviated from fractals originally proposed by R.N. Elliott. That was a problem for trading because the main assumption of the theory is that rally will get completed once the fractal gets played out including all its parts. R.N.Elliott was aware of that shortcomings and he acknowledged that sometimes an impulsive wave may get "truncated" or "extended". What that meant is that he acknowledged that price may significantly deviate from the model fractal.

I kept digging around trying for any better tools. I kept asking any professional trader to refer me to trading books of his choice. And finally I was referred to a book by Ian Copsey. That analyst who had been covering currency markets proposed a slight modification of a structure of an impulsive wave. If under the classic theory each impulsive wave 1, 3 and 5 are themselves composed of small five waves, Ian Copsey suggested that all the five waves in the Five Wave fractal are subdivided into three waves a-b-c.

The first time I read a book about the proposed modification it did not resonate with me. I kept practicing the original five wave fractals. But I started to notice that rallies tops out with the very last move to a new high in a-b-c structure rather than an ideal five wave micro structure. The same happened with impulsive structures looking down. The very last move down making a nominal new low and completing the structure was clearly shaped as a-b-c rather than five waves.

At that point I decided to switch to the modified fractals and I have been using them up to now. I have not seen any other methodology that provides you with a complete set of rules to be easily converted into an efficient trading strategy.

In the process of practicing that methodology I made a lot of new discoveries about repeating rations between different parts of fractals. I plan to record and publish another course where I will describe all the findings and improvements I was able to make.