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Introduction to elliott_wave_fibonacci_spread_trading

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Introduction to elliott_wave_fibonacci_spread_trading

  1. 1. Elliott-Wave Fibonacci Spread Trading Presented by Ryan SandenThe inevitable disclaimer:Nothing presented constitutes a recommendation to buy or sell anysecurity. While the methods described are believed to be effective inthe long run, no guarantee of efficacy is being made. Trading involvesrisk. I will in no way be responsible for any decisions or trades made as adirect or indirect result of this material. Full understanding of all tradinginstruments and exchanges is the sole responsibility of the trader.Ryan owns positions in the following related securities discussed herein: SDS
  2. 2. Principles of Market Trends• Markets move in trends.• Movements with the trend are called “impulses”.• Movements against the trend are called “corrections”.• Trends eventually change. lse corre pu im ction lse corre pu im ction lse corre pu im ction Trend is UP 2
  3. 3. Principles of Market Trends• Trends depend on their time frame.• Green = uptrend• Red = downtrend 6 Trends 3
  4. 4. Principles of Market Trends• Trends depend on their time frame.• Green = uptrend• Red = downtrend 48 Trends 4
  5. 5. Principles of Market Trends• Trends depend on their time frame.• Green = uptrend• Red = downtrend 1 Trend 5
  6. 6. Principles of Market Trends• Trends depend on their time frame.• Green = uptrend• Red = downtrend Which is correct? They all are. Which you trade is up to you. Planning to trade one trend while acting on movements in another trend 6 is called a trend relativity error. It is one of the most common trading mistakes.
  7. 7. Principles of Elliott Wave Theory Markets tend to advance in 5 waves, and retrace (correct) in 3 waves. 5 B 3 1 A 4 C 2 Larger-degree uptrend (higher time frame trend is up) 7
  8. 8. Principles of Elliott Wave Theory Markets tend to advance in 5 waves, and retrace (correct) in 3 waves. 5 B 3 1 A 4 C 2 Larger-degree uptrend (higher time frame trend is up) 8
  9. 9. Principles of Elliott Wave Theory Markets tend to advance in 5 waves, and retrace (correct) in 3 waves. 2 4 C 1 A 3 B 5 Larger-degree downtrend (higher time frame trend is down) 9
  10. 10. Principles of Elliott Wave Theory Markets tend to advance in 5 waves, and retrace (correct) in 3 waves. 2 4 C 1 A 3 B 5 Larger-degree downtrend (higher time frame trend is down) 10
  11. 11. These structures “repeat”.. That is, they connect together: 2 4 C 2 1 A 4 C 3 2 B 1 A 5 4 C 3 A B 1 5 3 B 5If I take away the colors and labels.. It really looks like the stock market.Yet, the underlying order is there if you know what to look for. 11
  12. 12. They don’t just infinitely repeat. That would be too easy. Really, theycombine to make “higher degree” waves. So, what looks likerepetition is really just larger degree waves unfolding. 5 3 1 1 v 4 iii b iv i a 2 c ii 2 12
  13. 13. 5 3 B1 A 4 C 5 v B iii ii c 3 iv a ii v i i iv iv 2 iii b iii b v i 1 iii a ii A v v i iv iii b c C 4 ii a i iv c 2 ii 13
  14. 14. An Idealized Market 14
  15. 15. Major Degree Waves – “The Big Trend” 15
  16. 16. Intermediate Degree Waves – “The Major Moves” 16
  17. 17. Minor Degree Waves – “The Daily Wiggles” 17
  18. 18. Nested Waves. Elliott-Wave “map” of the market. 18
  19. 19. Nested Waves. Elliott-Wave “map” of the market. Intermediate B of Major 2Intermediate 1 of Major 1 Minor 4 of Intermediate 3 of Major 1 Minor A of intermediate 2 of Major 1 19
  20. 20. S&P 500 Example: Daily Bars. September 2007 through January 2008 (Market Top) ii 2 c iv a ii i b iv 4 iii i c v a iii 1 b v 20 3
  21. 21. Q: That’s Wonderful. How can I use this knowledge?A: The better we can predict where we are in the structure, the better we can predict the next move in the market.For example, let’s pretend that the above chart is “now”.We can see enough to clearly identify the above wave count.We just finished a “2” of the of the “green” waves, and now we expecta “3” of the green waves. Therefore, we are bearish. This is true eventhough the casual observer looks at the chart and sees a bottom! 21
  22. 22. Q: How do we know when we’re wrong? A: This is a very important question. When we don’t have a firm opinion of the market anymore, we should exit the trade. This becomes a stop loss. The waves offer natural stop loss points! (stop) ?So, we can draw the waves as best as we think. Then, if the market hits ourstop loss, then we will wait until we have a new clear picture to trade.Sometimes we’re wrong about the wave count. That’s OK. We’re right oftenenough to make this methodology worthwhile. 22
  23. 23. FibonacciTo make life easier, each wave has a “target” region for where it should end.We use Fibonacci relationships to plot these on the chart in advance.For example, Wave 2 target is 50%-78.6% of Wave 1: 2 78.6% retracement 61.8% retracement 50.0% retracement 1 23
  24. 24. Green Wave 1 down is finished. Currently in Green Wave 2 up. 24This wave should end somewhere between $145.99 and $150.71. ($147.94 is best.)
  25. 25. C A BGetting an “ABC” from here would be ideal… 25
  26. 26. That would be a reversal. 26
  27. 27. Now, we have to “project” a likely extent for Wave 3:Wave 3 is generally 1.000 to 1.618 of Wave 1, projected from the end of Wave 2.This is technically named an “alternate price projection”. 2 1 100% 161.8% 27
  28. 28. Although it’s a little more tricky, we can project time the same way:Wave 3 is generally 1.000 or so (in time) of Wave 1, projected from the end of Wave 2.This is technically named an “alternate time projection”. 2 1 28
  29. 29. Combining these, we can get a general idea for price and time: 2 1 100% 161.8% 29
  30. 30. Looks like we’re shooting for 123 to 133 sometime in the middle of January. 30
  31. 31. Price and Time Targets for Various Waves Note: There are others! I am just presenting basic ideas here. Wave Price Time Can’t be projected. This wave is created Can’t be projected. This wave is createdWave 1 by fundamentals and is how fundamentals drive the market. by fundamentals and is how fundamentals drive the market. 50% to 78.6% of Wave 1 Around 61.8% of Wave 1Wave 2 100% to 161.8% of Wave 1, Around 100% of Wave 1,Wave 3 projected from end of Wave 2 projected from end of Wave 2 38.2% to 61.8% of Wave 3 Around 61.8% of Wave 3Wave 4 100% of Wave 1, projected Around 100% of Wave 1,Wave 5 from end of Wave 4 projected from end of Wave 4 Can’t be projected. This wave is created Can’t be projected. This wave is createdWave A by fundamentals and is how fundamentals drive the market. by fundamentals and is how fundamentals drive the market. 50% to 78.6% of Wave A Around 61.8% of Wave AWave B 61.8% to 161.8% of Wave A, Around 100% of Wave A,31Wave C projected from end of Wave B projected from end of Wave B
  32. 32. How it played out: 32
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  42. 42. Review of Process (thus far)• 1. Label Waves – Determine Bullish or Bearish – Determine Stop Loss• 2. Perform Price and Time Projections – Get an idea for approximately where and when we should expect trend reversal. 42
  43. 43. Entries Reversal DayProjected •Close below today’s open (red candle day)Resistance •Close below yesterday’s close (down day) •Stronger signal if it made a new high as well. 43
  44. 44. EntriesProjectedResistance Stop Risk Sell Short on Close 44
  45. 45. EntriesProjectedResistance Stop Loss Stopped Out 45
  46. 46. EntriesProjectedResistance 46
  47. 47. Entries Reversal DayProjectedResistance 47
  48. 48. Entries StopProjected RiskResistance Sell Short on Close 48
  49. 49. Entries Stop Risk on Principal Paper Profit 49
  50. 50. Entries Stop Loss :-( Credit crisis was actually a novice accounting mistake. Oops. 50
  51. 51. Trailing StopsN-Day high or N-Day low. N is a number. For example: 3-Day High: •3-Day high Highest high of last 3 days prior to and •1-Day High including the extreme point, non-inclusive •2-Day Low of “inside days”. Inside Day: A day whose range is “inside” the previous day’s range. Extreme Point 51
  52. 52. Trailing StopsN-Day high or N-Day low. N is a number. For example: 3-Day High: •3-Day high Highest high of last 3 days prior to and •1-Day High including the extreme point, non-inclusive •2-Day Low of “inside days”. 1 Extreme Point 52
  53. 53. Trailing StopsN-Day high or N-Day low. N is a number. For example: 3-Day High: •3-Day high Highest high of last 3 days prior to and •1-Day High including the extreme point, non-inclusive •2-Day Low of “inside days”. 1 Extreme Point 53 Inside Day. Its range is “inside” the previous day’s range.
  54. 54. Trailing StopsN-Day high or N-Day low. N is a number. For example: 3-Day High: •3-Day high Highest high of last 3 days prior to and •1-Day High including the extreme point, non-inclusive •2-Day Low of “inside days”. 2 1 Extreme Point 54 Inside Day. Its range is “inside” the previous day’s range.
  55. 55. Trailing StopsN-Day high or N-Day low. N is a number. For example: 3-Day High: •3-Day high Highest high of last 3 days prior to and •1-Day High including the extreme point, non-inclusive •2-Day Low of “inside days”. 3 2 1 Extreme Point 55 Inside Day. Its range is “inside” the previous day’s range.
  56. 56. Trailing StopsN-Day high or N-Day low. N is a number. For example: 3-Day High: •3-Day high Highest high of last 3 days prior to and •1-Day High including the extreme point, non-inclusive •2-Day Low of “inside days”. 3 3-Day High Extreme Point 56
  57. 57. Exits Stop Risk 57
  58. 58. Exits Stop RiskNearest Minor Pivot 58
  59. 59. Exits Stop RiskNearest Minor Pivot 59
  60. 60. Exits Stop RiskNearest Minor Pivot exceeded 60
  61. 61. Exits Old Stop Profit Paper New Stop Profit (3-day High)Exceeded Pivot – Move to Trailing Stop 61
  62. 62. Exits Trailing Stop Profit (3-day High) Paper Profit 62
  63. 63. Exits Profit :-/ 63
  64. 64. Exits – Towards Price Target Projected Support Levels 64
  65. 65. Exits – Towards Price Target Trailing Stop (3-day High) Projected Support Levels 65
  66. 66. Exits – Towards Price Target Trailing Stop (3-day High) Projected Support Levels 66
  67. 67. Exits – Towards Price Target 3-Day High 2-Day High Getting Close: Switch to 2-day high. Projected Support Levels 67
  68. 68. Exits – Towards Price Target Region Hit: Switch to 1-day High Projected Support Levels 68
  69. 69. Exits – Towards Price Target Region Hit: Switch to 1-day HighProjected Support Levels 69
  70. 70. Exits – Towards Price Target If this is a major collapse, we want to hang around for it. Therefore, we continue with the tight trailing stop instead of just taking profit immediately. Region Hit: Switch to 1-day HighProjected Support Levels 70
  71. 71. Exits – Towards Price Target Reversal Day- Close trade. Go long?Projected Support Levels 71
  72. 72. Trend-Continuation Entries Projected Resistance Levels Potential profit. However, risk is too large to enterReversal Day– But we missed it. now (stop loss too far away).Should have sold short,but I didn’t see it. Still good profitpotential left though. What now? Projected Support Levels 72
  73. 73. Trend-Continuation Entries Inside Day Trend-Continuation Entry Stop loss goes here Sell Short if price exceeds thisInside day. This day’s range is “inside” the previous day’s range. 73
  74. 74. Trend-Continuation Entries Outside Day Trend-Continuation Entry Stop loss goes here Sell Short if price exceeds thisOutside day. This day’s range is “outside” the previous day’s range. 74
  75. 75. Trend-Continuation Entries Projected Resistance LevelsReversal Day that we missed Projected Support Levels 75
  76. 76. Trend-Continuation Entries Projected Resistance LevelsReversal Day that we missed Projected Support Levels 76
  77. 77. Trend-Continuation Entries Projected Resistance Levels Outside DayReversal Day that we missed Projected Support Levels 77
  78. 78. Trend-Continuation Entries Projected Resistance Levels Stop loss will go here Enter if we go below this Projected Support Levels 78
  79. 79. Trend-Continuation Entries Projected Resistance Levels Stop loss will go here Enter if we go below this Projected Support Levels 79
  80. 80. Trend-Continuation Entries Projected Resistance Levels Stop loss will go here Enter if we go below this Projected Support Levels 80
  81. 81. Trend-Continuation Entries Projected Resistance Levels Stop Entered here Projected Support Levels 81
  82. 82. Trend-Continuation Entries Projected Resistance Levels Stop Projected Support Levels 82
  83. 83. Trend-Continuation Entries Projected Resistance Levels Stop Projected Support Levels 83
  84. 84. Trend-Continuation Entries Projected Resistance Levels Stopped Out Figures. Projected Support Levels 84
  85. 85. Trend-Continuation Entries Projected Resistance Levels Projected Support Levels 85
  86. 86. Trend-Continuation Entries Projected Resistance Levels Projected Support Levels 86
  87. 87. Trend-Continuation Entries Projected Resistance Levels Inside Day Projected Support Levels 87
  88. 88. Trend-Continuation Entries Projected Resistance Levels Stop loss will go here Enter if we go below this Projected Support Levels 88
  89. 89. Trend-Continuation Entries Projected Resistance Levels Stop loss will go here Enter if we go below this Projected Support Levels 89
  90. 90. Trend-Continuation Entries Projected Resistance Levels Stop loss will go here Enter if we go below this Another Inside Day! Projected Support Levels 90
  91. 91. Trend-Continuation Entries Projected Resistance Levels Stop loss will go here Enter if we go below this Projected Support Levels 91
  92. 92. Trend-Continuation Entries Projected Resistance Levels Stop loss will go here Enter if we go below this Entered at the open Projected Support Levels 92
  93. 93. Trend-Continuation Entries Projected Resistance Levels Stop Projected Support Levels 93
  94. 94. Trend-Continuation Entries Projected Resistance Levels Stop Projected Support Levels 94
  95. 95. Trend-Continuation Entries Projected Resistance Levels Stop Projected Support Levels 95
  96. 96. Trend-Continuation Entries Projected Resistance Levels Stop Projected Support Levels 96
  97. 97. Trend-Continuation Entries Projected Resistance Levels New Stop 3-day High Projected Support Levels 97
  98. 98. Trend-Continuation Entries Projected Resistance Levels New Stop 3-day High Projected Support Levels 98
  99. 99. Trend-Continuation Entries Projected Resistance Levels New Stop 3-day High Projected Support Levels 99
  100. 100. Trend-Continuation Entries Projected Resistance Levels New Stop 3-day High Projected Support Levels 100
  101. 101. Trend-Continuation Entries Projected Resistance Levels New Stop 3-day High Projected Support Levels 101
  102. 102. Trend-Continuation Entries Projected Resistance Levels Getting Close: 2-day high Projected Support Levels 102
  103. 103. Trend-Continuation Entries Projected Resistance Levels Reversal Day- Exit Projected Support Levels 103
  104. 104. Trend-Continuation Entries Projected Resistance Levels McDonalds files Chapter 11 on credit losses. Projected Support Levels 104
  105. 105. Bear Market S&P 500 Activity• We will now go through a step-by step walkthrough of the entire Bear Market, from the beginning.• It will begin very detailed, but eventually just show the method is working. 105
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  119. 119. Note: I am deliberately counting this section differently from at the beginningof this presentation. And it still works! This shows the versatility of these techniques. 119
  120. 120. Note: I am deliberately counting this section differently from at the beginningof this presentation. And it still works! This shows the versatility of these techniques. 120
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  158. 158. Choosing the SpreadHere’s our example from before. We said we are expecting approximately$123 to $133 sometime in the middle of January.Always target the worst-case scenario: Assume the stock goes to $133.We therefore want a bear put spread with the short put at $133. For long put, choosean ITM option with strike above stop loss. The more ITM, the better.
  159. 159. Choosing the SpreadSo, we have established a bear put position: SPY @ $144.84. (Dec 11, 2007). Stop @ $150 Long Put: Jan 2008 $160 Short Put: Jan 2008 $133At VIX = 30, the following are the most likely prices: (Spread is better when Long Put: $16.37 Put Spread: $14.93 extrinsic value in short option Short Put: $1.44 is greater than extrinsic value in long option)If we hit stop at expiration (worst-case scenario): Long Put: $10.00 Put Spread: $10.00 Short Put: $0.00If we hit profit target tomorrow (again, not as good as if it happens next month): Long Put: $27.15 Put Spread: $22.02 Short Put: $5.13 159
  160. 160. Choosing the SpreadIf we hit profit target at expiration: Long Put: $27.00 Put Spread: $27.00 Short Put: $0.00 So, if we are right, spread will be worth between $22.02 and $27.00, which, considering the original spread cost was $14.93, represents profits of 47% and 81%. If wrong, spread will be worth $10 and will represent a loss of 33%. If we hit stop tomorrow (not as bad): Long Put: $12.26 Put Spread: $11.56 (loss of 23%) Short Put: $0.70 160
  161. 161. Risk ManagementIf we risk our whole account every time, eventually we’ll be wrong three timesin a row and lose 50% three times (thus losing 87.5% of the account). That’s not good.We solve this by only risking 3% of our account on any trade.We said the risk in the spread was 33%.To position size, simply divide 3% by 33%: 0.03 / 0.33 = 9.1%Therefore, we can buy 9.1% of the account on this option spread. The restshould be held in cash. On a $100,000 account, we buy $9100 of this spread.Since the original spread price was $14.93, we buy a 6-contract spread.If we are right, we should get a return between 47% to 81%. We’ll say 65% forsake of argument.65% return on 9.1% of your account is 5.9%.For intermediate-term investing, you will trade a spread around 10 times per year.(Wrong 10 times: -26%). 161
  162. 162. Special Thanks To:Dynamic Trading, by Robert Miner Little of anything presented today is original. I now credit my primary source And direct you to this book for more detailed instruction if you are still interested. 162
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  164. 164. 5 2 C 4 2 A4 1 1 4 3 B C 5 A 3 B 164 5

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