This article would be sure to make it to my future book.
How does the market move?
In relation to the pair of EUR/USD (for the sake of an example) the following things apply.
There is a FUEL TANK, also known as Statistical 3-DAY ATR. By statistical, I mean the following: if you keep track of the 3-day average with this pair, you would find that it is almost always around 80 pips. How is this possible, when sometimes there are 130+ pips days are in the sample period?
First, if you have a large range day, the next day would most likely be a tight consolidation range – these two almost cancel each other out when averaged.
There is of course more to this. There are different speeds to the market, and when you have a daily range way above 100 pips, it is most likely because of the speed of progression and the arbitrary, self-imposed day separating marks are not fully compatible. In other words, you just witnessed “2 days’ worth of a move counted as one.” Dividing four days sample with 3 would get you the wrong result.
This is why instead of measuring you should have the statistical figures at hand.
The market has two sizes for a swing.
40-44 pips is a “Small break” = Extension Length = Move May be Terminal, watch for a reversal!
60-66 pips is a “Large break” = Progression Length = 100% retracement is not likely =
The extension move is half gas, a quasi, failed break. It uses up 50% of the statistical fuel, therefore you should encounter resistance / find your reversal taking place at this, statistical extension resistance level.
The progression move is a move that sticks. It starts from the ignition point and uses up 80% of the statistical fuel, therefore at 80% of the tank is where you should encounter the statistical, progression resistance, that should prompt a consolidation, that would be taking place in a shape of a fluctuation range or a flag.
In the case of the EUR/USD, a 30-32 pips range is considered a “fluctuation”. Without going into details, I suggest you to start paying attention to the behaviour around the shadow of the market, the 26-sample pivot, the Kijun-sen. You would find that when it is flat, the market is not likely to separate from its shadow by more than 16 pips on either side – this is the size of the fluctuation range.
People use those statistical support and resistance lines that you must have encountered. The idea is there: different size building blocks – with different meaning associated. I’m not sure about their precision when they are hooked on daily closes?! The ranges are brought about from the invocation points, like I showed you. The least important piece of information is the daily close – a random point in time. It is always the high, the low and the halfway distance that matters, and so you should set all of your oscillators on these values, not the closes.
The following image shows the Invocator, the starting point for the extension move, which means of course the terminal one. Once the invocator point was in place, you could had measured the distance and place your sell limits 40 pips above, right? You can even see that there were 3 pushes up (5 waves and 40 pips progress could give you even more confidence), although the second fractal did not appear on the 30 minute chart: a speed issue.
Now you can finally appreciate my rectangle measurements that are being plotted on my charts.