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The Market Waves

If there is one indicator I cannot do without, it’s the Wave. It’s a simple market cycle indicator: a trio of exponential moving averages based on the Fibonacci number of 34. It provides me with a visual footprint of
the market’s trend, or lack of trend. It’s better than trendlines, support, and resistance for this specific purpose. It’s not that trendlines, support, and resistance are not effective but the fact is that these lines can be found in uptrending, downtrending, and sideways or range-bound markets, and by themselves they do not indicate the market’s cycle.

So what’s the Wave? I’m not one for proprietary indicators, and anything I use to analyze my charts can be done with some simple indicator settings, all of which I will share with you. I will tell you why I use the settings
I use, and then you will have to go about doing the real work, which is putting them on your charts and proving to yourself by watching how these studies/indicators behave that you can trust them and will use them.

That’s no small task. I’m not your mother, so “because I said so” just isn’t going to cut it.
While I am going to talk about the Fibonacci series of numbers and their relevance to traders later on, let me just set the foundation quickly here by saying that Fibonacci is a mathematical law of nature. You will find
that these numbers are not only accurate but consistent when it comes to measuring the ebb and flow, the expansion and contraction, of nature.

Now do not confuse Fibonacci numbers with the popular trading tool Fibonacci Retracement and/or Extensions. I will be using Fibonacci numbers in a much more objective way in this book. Much of what makes most traders shy away from using Fibonacci is their assumption that it’s the Retracements and Extensions or nothing. That method of using Fibonacci is and will always be very subjective, and subjectivity is something we want to come as close to eliminating from our analysis as possible.
While there are aspects of the Wave and “clock angles” that will entail a very small degree
of subjectivity, if you follow the steps I am about to share, you will substantially reduce the likelihood of seeing things “wrong” and make this tool as visually objective as possible.

It’s not going to be enough for me to tell you that the Wave is created by three 34 period exponential moving averages, one set on the high, one set on the low, and one set on the close. That would be like my giving you
three ingredients for a recipe without telling you how to prepare them. The preparation is everything. Let’s first tackle how you are going to set this trio of moving averages up.

You will need a platform that will allow you to set-up multiple exponential moving averages. Why exponential? Well, first moving averages are simply taking a set number of highs, or lows, or closes and creating an average and plotting that number on the chart. If your setting is a 34 period on the close, then you are taking the last 34 closes, adding them up, and then dividing that by 34. You get a single plot. It’s the accumulation of
those plots that make the lines you see going across the chart. That straight average is known as a “simple” moving average or SMA.

But I said we were going to use an “exponential.” So what’s the difference?
Exponential is a little “smarter” in that is takes that average of highs, or lows, or closes, but instead of a straight average, it weighs more recent price action so that it is more reflective of the current mood of the market.
How does it do that? Take a look:

EMA = p1 + (1 − α)p2 + (1 − α)² p3 + (1 − α)3 p4 +· · ·
                        1 + (1 − α) + (1 − α)²+ (1 − α)3 +· · ·

Can I tell you just how glad I am that my charting platform does the work for me?
Essentially, what you are getting is a line plotted across your chart that takes into consideration that recent price action is more important than older price action and plots the lines accordingly. So the net visual effect is
that if prices are currently more volatile, the exponential moving average (EMA) will reflect that, and if prices are consolidating, that will be factored in. I use exponential moving averages instead of simple because I feel that they better reflect the current market psychology without losing the overall feel of what has already happened.

I also mentioned that you would need a platform capable of setting this up. Again, these studies, or indicators, are fairly basic settings that even an entry-level charting platform should be able to easily produce. Your charts
and data are your view into the market, and this is not the place to get cheap or apathetic. That’s not to say you cannot find a quality, free charting platform. Forex traders all over the world use a very good one called
MetaTrader4 or MT4.

I do have MT4, however, my primary charts and data come from eSignal. Use whichever or whatever you want, but let me add that there is a difference between charting and charting/data. eSignal is a data provider, MT4 is a charting platform that relies on brokerage data. Let me digress here for a moment because I think it’s important that you understand the difference, and this is specific to the foreign exchange market
and data in this “non-exchange” arena. This will slightly alter how your indicators are plotted, how your buy and sell prices are quoted, and account for the differences you will see from platform to platform and from brokerage to brokerage.

eSignal provides what’s known as composite data. This means that they have multiple contributors that make up their feed. In the case of eSignal there are over 200 contributing banks, institutions, brokerages, and
corporations that make up their feed. I am simply using eSignal as an example.

There are other composite feeds out there– this is just the one I
personally use. Now contrast this with MT4, which is a robust charting
platform that relies on an outside data feed, most commonly a brokerage
feed. So with MT4 you are getting the feed from a single source as compared to the composite feed with multiple sources. This data feed issue
is unique to forex.
The foreign exchange does not operate from an exchange like stocks do or even commodity futures. Stocks trade from exchanges such as the NYSE or NASDAQ. The exchange sets certain requirements and also facilitates the execution of the vast majority of trades in the stocks that trade on them. This means that the price you see is the same that everyone else is seeing. Same goes for futures. Since the forex is “off exchange” there is no single entity that facilitates most or all executions of buy and sell orders.

Instead, your brokerage either directly deals with you or provides you with access to liquidity providers through their internal network. This means that there is no standard, no way you could possibly see or have access to all the different liquidity providers or bids and asks that are available.

However, most of the bid and ask quotes are typically within a few pips of the best, also known as the “inside” price. “Inside” is just another name for the current lowest ask price or current highest bid price.
There will inevitably be situations where one feed will have slightly different open/high/low/close prices, and since technical studies are calculated using the O/H/L/C, there can be some variance from platform to
platform. Also consider that your execution price will vary slightly from broker to broker, but before you start asking me, “Who’s the best broker?” there is no broker that always has the inside bid or ask.

Now that you have some background of charts, pricing, and how that affects the indicators we will use, remember that it’s not a problem as much as it is simply the reality of trading the forex. Accept it and move on. In the big scheme of things, this is not going to be an issue.

Once you plot the three lines of the Wave, which again are:
1. The 34 period exponential moving averages on the high
2. The 34 period exponential moving averages on the low
3. The 34 period exponential moving averages on the close
. . . you can begin interpreting price action. Remember, the Wave is a market cycle tool first and foremost. Later, when I discuss what I call “Lazy Days Lines,” we will look into using the Wave as dynamic support
and resistance.

The Wave is best and most easily interpreted by using what I call “clock angles.” We are comfortable with the visual of telling time on a watch, even when it has no numbers. We simply have trained our eyes to notice the
angle to see the distinction between a two o’clock and three o’clock angle.

I’m counting on this for Wave interpretation. When we work with visuals that we are already familiar with, we can shorten the learning curve.