Technical-analysis-in-forex-and
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Technical Analysis in Forex and Stock MarketYoung Ho SeoPublished by www.Algotrading-Investment.com, 2021.
While every precaution has been taken in the preparation ofthis book, the publisher assumes no responsibility for errorsor omissions, or for damages resulting from the use of theinformation contained herein.TECHNICAL ANALYSIS IN FOREX AND STOCK MARKETFirst edition. November 5, 2021.Copyright © 2021 Young Ho Seo.ISBN: 979-8201388317Written by Young Ho Seo.
Also by Young Ho SeoGuide to Precision Harmonic Pattern TradingScientific Guide To Price Action and Pattern TradingProfitable Chart Patterns in Forex and Stock Market:Fibonacci Analysis, Harmonic Pattern, Elliott Wave, and X3Chart PatternPredicting Forex and Stock Market with Fractal PatternScience Of Support, Resistance, Fibonacci Analysis,Harmonic Pattern, Elliott Wave and X3 Chart PatternTechnical Analysis in Forex and Stock MarketWatch for more at Young Ho Seo’s site.
Technical Analysis in Forex and StockMarket––––––––Supply and Demand Analysis––––––––Author: Young Ho SeoTrader, Engineer, and Quantitative Developer––––––––Book Version: 7.0 (7 November 2021)Publication Date: 7 November 2021
––––––––www.algotrading-investment.comRisk DisclaimerThe information in this book is for educational purposesonly. Leveraged financial trading carries a high level of riskand is not suitable for all market participants. The leverageassociated with trading can result in losses, which mayexceed your initial investment. Consider your objectives andlevel of experience carefully before trading. If necessary,seek advice from a financial advisor.
Download Peak Trough Analysis ToolIn the book, we provide some examples on the chart patterndetection. For the examples, you might need to use thePeak Trough Analysis tool. We provide Peak Trough AnalysisTool for free of charge for this book. Here is the downloadlink for the free version of Peak Trough Analysis. Pleasedownload Peak Trough Analysis before reading this book.1) MetaTrader 4 Version of Peak Trough Analysiswww.mql5.com/en/market/product/237972) MetaTrader 5 Version of Peak Trough Analysiswww.mql5.com/en/market/product/224203) Peak Trough Analysis from Algotrading-Investment.comwww.algotrading-investment.com/portfolio-item/peak-trough-analysis-tool
In addition, Optimum Chart provides its own Peak TroughAnalysis tool. Hence, you do not need to download PeakTrough Analysis if you are the Optimum Chart User.
About This BookThis book is another effort for me to introduce the scientifictrading to the trading community in Forex and Stock market.In my previous five books, I provided the details on howtechnical analysis can predict the market in conjunction withfractal wave. However, I felt that I could expand this onother technical analysis outside Support, Resistance,Fibonacci Analysis, Harmonic Pattern, Elliott Wave, and X3Chart Pattern. Hence, I chosen the supply and demandanalysis to accomplish this goal. My goal was to provide youmore trading examples. So that you can learn how to makeuse of the fractal wave in practice for your trading. Thesupply and demand analysis is simple and straightforward.It is also effective tool for your trading. Hence, I believe thatmany people will love to have this technical analysis ontheir toolbox. My latest book tends to be easier to read as Iput a lot of effort to find the simplest explanation aspossible. This book is easy to read too. However, this doesnot mean that this book is comprehensive to explain all thetechnical analysis. If you are looking to explore othertechnical analysis outside supply and demand analysis, thenI will recommend reading my previous books. In the listbelow, I put the easy to read book on top. Try to read theeasy to read book first and try to read the harder book laterto improve your trading and investment.Technical Analysis in Forex and Stock Market (Supply andDemand Analysis)
Science Of Support, Resistance, Fibonacci Analysis,Harmonic Pattern, Elliott Wave and X3 Chart Pattern (InForex and Stock Market Trading)Profitable Chart Patterns in Forex and Stock Market(Fibonacci Analysis, Harmonic Pattern, Elliott Wave, and X3Chart Pattern)Guide to Precision Harmonic Pattern Trading (MasteringTurning Point Strategy for Financial Trading)Scientific Guide to Price Action and Pattern Trading (Wisdomof Trend, Cycle, and Fractal Wave)Predicting Forex and Stock Market with Fractal Pattern(Science of Price and Time)
About The AuthorYoung Ho Seo is an Engineer, Financial Trader, andQuantitative Developer, working on Trading Science andInvestment Engineering since 2011. He is the creator ofmany technical indicators, price patterns and tradingstrategies used in the financial market. He is also teachingthe trading practice on how to use the Supply DemandAnalysis, Support, Resistance, Trend line, Fibonacci Analysis,Harmonic Pattern, Elliott Wave Theory, Chart Patterns, andProbability for Forex and Stock Market. His works includedeveloping scientific trading principle and mathematicalalgorithm in the work of Benjamin Graham, Everette S.Gardner, Benoit Mandelbrot, Ralph Nelson Elliott, Harold M.Gartley, Richard Shabacker, William Delbert Gann, RichardWyckoff and Richard Dennis. You can find his dedicatedworks on www.algotrading-investment.com. His life missionis to connect financial traders and scientific community forbetter understanding of this world and crowd behaviour inthe financial market. He wrote many books and articles,which are helpful for understanding the technology andapplication behind technical analysis, statistics, time seriesforecasting, fractal science, econometrics, and artificialintelligence in the financial market.
Pioneers in the Scientific TradingCharles DowCharles Dow co-founded Dow Jones & Company with EdwardJones and Charles Bergstresser. He also co-founded The WallStreet Journal. He created the Dow Jones Industrial AverageIndex. In 1896, he calculated Dow Jones Industrial AverageIndex using the stock price of the twelve companies. Until1902, he studied the price movement in chart and createdthe Dow Theory, the groundwork for the technical analysis.Dow Theory suggests that price shows a particular patternsbefore bullish market and bearish market proceed. In fact,Dow Theory was published much later by his colleague,William P. Hamilton in 1922.––––––––Richard WyckoffRichard Wyckoff was one of the earliest scientific trader,who tried to identify underlying trends or logic behindmarket action. He worked with many legendary traders likeJesse Livermore, E. H. Harriman, James R. Keene, Otto Kahn,and, J.P. Morgan throughout his career. He is also famouslyknown for the creator of the Wyckoff volume spread
analysis. In 1922, he was publishing educational articles forstock market, which were run in New York's The SaturdayEvening Post starting in 1922. Throughout the tradinghistory, his volume spread analysis made some influence onother technical analysis like the supply and demandanalysis.––––––––Richard ShabackerHe is one of the earliest technical analyst in the stockmarket. In 1932, he published “Technical Analysis and StockMarket Profits”. In the book, he taught many price patterns,which are still used by the trading community nearly after90 years. In his book, you can find the trace of triangle,wedge patterns, double top, double bottom, triple top andtriple bottom, head and shoulder patterns. His book is oneof the oldest book in the technical analysis.––––––––Harold M. GartleyLike Richard Shabacker, he is one of the oldest technicalanalyst in the stock market. He published “Profits in the
Stock Market” in 1935. In his book, you can find thedescription of triangle, wedge patterns, double top, doublebottom, triple top and triple bottom, head and shoulderpatterns. He is also the creator of the Gartley pattern, whichis one of the first harmonic pattern. In addition, in his book,you can find some other price patterns like the diamondpattern, circular top and square top.––––––––Ralph Nelson ElliottHe was one of the oldest technical analyst like RichardShabacker and Harold M. Gartley in the stock market. He isfamous after his “Elliott Wave Theory”. In 1938, hepublished “The Wave Principle”. In his book, he showed howto apply the Fibonacci analysis to the Wave analysis.Impulse wave and corrective wave described in his book arestill used by many technical analyst in the Wall Street. In hisbook, he tried to explain the triangle, rising wedge andfalling wedge patterns using “Elliott Wave Theory”.––––––––Benoit Mandelbrot
Benoit Mandelbrot was a Polish-born French-Americanmathematician. The term "fractal" was first used by BenoitMandelbrot in 1975. He is also known as the father of“Fractal” and “Self-Similarity”. He established the coretheory behind the “Fractal” and “Self-Similarity”. Hisresearch in “Fractal” and “Self-Similarity” influenced manyscientific fields including Statistics, Financial engineering,Economics, and Computer Science. He is also one of theinfluencer to Nassim Nicholas Taleb, the author of “the BlackSwan”. In “The Misbehavior of Markets: A Fractal View ofFinancial Turbulence”, Benoit Mandelbrot and Richard L.Hudson applied the fractal theory to understand thefinancial market. They explained that the financial marketcan impose a greater risk than it can be explained by themodern mathematical assumption. In fact, in the BlackMonday in 19 October 1987, the stock market declinedlargely unexpected. As it was pointed by Benoit Mandelbrot,this was something could not be explained by the modernfinancial mathematics.
Benjamin GrahamBenjamin Graham was a British-born American economist,and investor. He is widely known as the "father of valueinvesting”. He published two books “Security Analysis”(1934) with David Dodd, and “The Intelligent Investor”(1949). “The Intelligence Investor” is one of the mostpopular book for the stock market trader. The margin ofsafety described in his book is considered as one of themost important trading principle. He is also the greatinfluencer in the trading community. Warrnet Buffet, CharlesBrandes, William J. Ruane, Bert Olden, Irving Kahn andWalter J. Schloss are some of the famous investorsinfluenced by Benjamin Graham.––––––––Richard DennisRichard Dennis is a commodities speculator. He is thepioneer of the trend following strategy. In the early 1970s,he started trading with $1,600 and made $350 million inabout six years. Although his fund incurred significant lossesin the stock market crash of 1987, he is still considered asthe legendary trader. He created the method called “TurtleTrading”. He emphasized that price analysis is important forpractical trading, sometimes he put more weight on the
technical analysis than fundamental analysis. Since he usedATR indicator mechanically, created by J. Wells Wilder, he isalso considered as the pioneer in the mechanical oralgorithmic trading.
ContentsAbout This BookAbout The AuthorPioneers in the Scientific Trading1. Artificial Intelligence and Fractal Theory2. Magnet and Stock Market Experiment3. Peak Trough Analysis4. Understanding Technical Analysis5. How to Identify the Best Buy and Sell Timing6. Supply and Demand Analysis7. Trading with Supply and Demand Zone8. How to Improve Supply and Demand Analysis9. How to Improve Harmonic Pattern and X3 Chart Pattern10. Glossary of Terms
1. Artificial Intelligence and FractalTheory––––––––In 2008, I created my first artificial intelligence program thatpredicts the stock market. It was a simple C++ program. Atthat time, artificial intelligence was not widely used as now.But it was still interesting topic in the computer science andengineering field. There were many programming books onthe internet, introducing the artificial intelligence for C++,Java, and C#. Hence, for any one with some coding skills,creating artificial intelligence program is like building a DIYfurniture from the IKEA store. I used feedforward neuralnetwork at that time. Feedforward neural network isconsidered as the most basic type of neural network withrecurrent neural network. Now, they often show up on theartificial intelligence introductory textbook. This was beforethe community starting to use more advanced Artificialintelligence like Deep Machine Learning.
Figure 1-1: Architecture of neural network and multipleregressionAt that time, growing interest on artificial intelligence mademe to consider the post graduate degree. I wanted to learnthe industrial application with artificial intelligence. My goalwas to build the practical knowledge in applying artificialintelligence to predict the financial market. Hence, I short-listed several universities that teach artificial intelligence ineither business school or management school. I enrolled theone, who I think to offer most practical course in artificial
intelligence towards the market prediction. Studying theartificial intelligence was fun. Some professors in the courseinvolved with the international artificial intelligence datamining competition, they often share the completion resultsto inspire the student. I also had a chance to join the artificialintelligence project together with one of the biggest energycompany in Europe. Basically, the energy company wantedto predict the natural gas consumption across the nation. SoI modified my feedforward neural network to accept suchdata and to output the prediction. Besides learning artificialintelligence, I was surrounded by many renowned financialmarket experts. I often visited their office to ask somespecific questions when I tried to predict the financial marketeither using artificial intelligence or some other statisticalmethods.––––––––
Figure 1-2: Architecture of neural network with SARIMAmodel and Elman recurrent network model––––––––After the graduation, I worked in teaching and softwaredevelopment in the financial market. However, I nevercreated any artificial intelligence program that commerciallyor publically available to predict the financial market. Most of
software I have developed is based on the technical analysis.Occasionally, I created the statistical market prediction tooland time series forecasting tool. But they are far fromartificial intelligence in its working principle.In fact, I knew the pros and cons of the artificial intelligencewhen it comes to the industrial application. For example, atthat time, I could tell that artificial intelligence will be usedmore and more in our life. However, when it comes to stockmarket prediction, the artificial intelligence could have somelimitation too. I was not only one who had this thought.Later, I had a chance to talk to one of my friend. He got thePhD Degree in the topic of artificial intelligence from theOxford University. At that time, he was working in the hedgefund industry. He told me that he also do not use artificialintelligence when he analyse the financial market. He alsomentioned that he mostly used more efficient statistical ormathematical technique. His answer to artificial intelligencewas quite close to my own thought. That was the real ironyfor both of us. After we saw the unlimited potential of theartificial intelligence, we spent many years to learn and tocode artificial intelligence. However, in practice, we neveruse artificial intelligence but we prefer to use more efficienttools that has nothing to do with artificial intelligence. Ofcourse, this story is only limited to applying artificialintelligence for stock market and forex market trading.In 2010, overfitting with artificial intelligence was annoyingproblem for the practitioner. Overfitting happens whenartificial intelligence model learns the detail of the historicaldata too well. However, they fail to produce the predictionfor new data. In statistical sense, it is equivalent to thefailure in generalization. Overfitted artificial intelligence has
almost zero ability to predict the real world market. Ofcourse, you should never use any overfitted artificialintelligence model for stock and forex trading.
Figure 1-3: Overfitted model on top and generalized modelon the bottomThe good news is that the working principle of artificialintelligence is widely understood recent years. It is easy tofind many blog articles and YouTube videos that clearlyexplain the issue of overfitted artificial intelligence model.However, in 2010, sometimes, the overfitted artificialintelligence model could create some illusion on theirperformance in many information source publically available.To avoid overfitting, artificial intelligence requires somevalidation. Especially, one way to avoid overfitting is to usemore data. More data means more computation time as wellas heavy computation. They causes to invest more on theequipment, for example, buying more powerful CPU,increasing memory, and so on. Even with all the powerfulequipment, sometimes, you need to run the computer forfew days to several weeks to create one good artificialintelligence model. The real world example of the equipmentissue can be seen from the Go match between AlphaGoversus Lee Sedol in March 2016. At that time, AlphaGo used1,202 CPUs and 176 GPUs to beat one man. This wasprobably unavoidable as AlphaGo or any artificial intelligencemodel requires countless number of training data to beat LeeSedol, the professional Go player of 9 dan rank.Probably I did not make some good effort to develop artificialintelligence software for financial market because I knew allthese cons of artificial intelligence as well as some othertheoretical problem. This does not mean that I
underestimate the potential of artificial intelligence. I stilllove to explore artificial intelligence application on theinternet. That is one of my hobby in fact. There are numberof good open source artificial intelligence platforms includingGoogle’s TensorFlow, Keras, Pytorch and so on. You cancreate some interesting application with one of these opensource platforms. Especially, you would find some interestingapplication across the graphic field. For example, you cantrain artificial intelligence with thousands portrait images.After that, you can ask artificial intelligence to create aportrait. For example, this person in the picture below doesnot exist in this world. It was created by artificial intelligenceafter it was trained with several thousands of portraitimages. This technology is very interesting but not perfectyet. You will find that left year and right year does not match.In addition, the right eye and left eye are looking at differentangle. In spite of these, it is still hard to tell if this image wascreated from real human or not in first glance.
Figure 1-4: Facial photo created by artificial intelligence––––––––You can apply the same technology to draw a cartoon imagetoo. You just need to train the artificial intelligence modelwith cartoon images instead of human images. For example,the cartoon image below was not created by human but bythe artificial intelligence. You can see the image is still not
perfect but it is undeniable that artificial intelligence is aninteresting technology with a lot of potential.Figure 1-5: Cartoon image created by artificial intelligence––––––––To develop good technical analysis software, it is essential tounderstand the technical analysis and the practice. Tounderstand technical analysis, you can use severalmethodologies. For example, you can use statistical methodslike backtesting or you can use the technique to trade withreal money in the market. At the same time, one can doresearch on literatures to find out good trading strategy.Throughout my job, I guess that I tested more thanthousands trading strategies last 10 years.
––––––––My personal opinion after reading many technical analysistextbook is that they focus on sharing the personalexperience but they lack on the scientific explanation on thetechnical analysis. This is not only limited to technicalanalysis text book. It is more or less similar on manytechnical analysis video materials. Of course, it is a bravething to share your personal experience. It is also the firststep of many things in our life. However, if we have toexperience everything to learn something, it would cost a lotof time and money. In addition, experience might besubjective. Not all the trader can take the personalexperience of another person for his own use. Hence, weoften turn our experience to the scientific knowledge andpass them to our next generation. Therefore, our nextgeneration can use the general knowledge to createsomething better without incurring too much cost. Like this, Ifeel that we need some scientific explanation connectingtechnical analysis to the contemporary science. Apparently,the bridging knowledge between technical analysis and thecontemporary science was missed in the most of place onthe internet teaching technical analysis.This scientific explanation can help new or existing trader tolearn the technical analysis with less number of trial anderror. In addition, the scientific explanation can help toimprove the existing technical analysis. The scientificexplanation can help you to filter out highly subjectiveexperience for your own trading. In the beginning of 2010,newbie trader could be exposed on all sort of good and bad
trading strategies on the internet. Some trading strategiesare highly speculative and guaranteed to lose money at theend. However, good technical analysis also lacks on scientificexplanation too. The gap between technical analysis and thecontemporary science makes myself surprised because weare on the time that artificial intelligence robot walks on thestreet and we are prepared to go on Mars next several years.On YouTube and SNS, there are plenty of videos and blogs toexplain the science behind many real world applications. Butwhy such scientific explanation is lack in technical analysisalone? Especially, it is irony that you are thinking of putting alot of money in Stock market or Forex market with suchtechnical analysis that you cannot explain its scientific logic.It is probably that many of us are just get used to notquestion what exactly technical analysis is. Being used couldbe the worst enemy for us.I strongly felt that I could try to fill the gap between thetechnical analysis and the contemporary science. I decidedto deliver some bridging knowledge between the technicalanalysis and the contemporary science. In fact, since theyear 2016, I started to publish the technical analysis book.Thereafter, I published several other technical analysis bookson similar spirit. Can you imagine where I or you can start toexplain thousands technical analysis existing on theinternet? Just like you, I was clueless for the first few years.So I asked my four old teachers. My four old teachers are theengineering, statistics, time series forecasting andeconometrics. According to my four old teachers, if we wantto predict future based on the data, then we need to knowthe characteristics of the data.
So what is the characteristics of the stock market data aswell as forex market data? As described by Nassim NicholasTaleb, the author of “the Black Swan”, the market is often hitby some unexpectedly large event. Due to this unexpectedlylarge event, it is hard to explain the financial market usingwell known normal distribution curve. In another words, thatfamiliar methods we know around the normal distribution arehard to work in the financial market too. For example, in theBlack Monday in 19 October 1987, the stock market declinedlargely unexpected by 29.2%. In addition, the value of Britishpound declined to a 31-year low on currency markets afterthe vote to leave the European Union in June 2016. Suchunexpected event is hard to be explained by statistics or byother science because they only occur rarely. For example,there is only one vote to leave the European Union for Britainfor its entire history. Statistics, artificial intelligence, andother similar methods requires many samples to explainsomething. Hence, they are limited to explain stock andforex market with such unexpectedly large event. However,there is a theory that are less fragile even to suchunexpectedly large event in the financial market. That is theFractal Theory. According to Fractal theory, in Stock andForex market, small cycles makes up bigger cycle. Biggercycles and smaller cycles are similar in geometry and this iscalled self-similarity. In Fractal theory, such unexpectedlylarge event is considered as natural. For example, in Fractaltheory, 29.2% drop in in the Black Monday in 19 October1987 or 31 year low after the Brexit vote are viewed as theprocess to create the bigger cycle that are similar to smallcycles.Fractal theory also explains the market correction after thebullish market or after the bearish market. For example, ittells that, after extensive price rise, the price must fall to
realize the overvaluation of the price. There will be somepeople exiting market with profits. Likewise, after extensiveprice fall, the price must rise to realize the undervaluation ofthe price. There will be some people entering market to buythe cheap stock. The term “Fractal” was first used by BenoitMandelbrot in 1975. The core theory behind the “Fractal”and “Self-Similarity” were established by this geniusmathematician, Benoit Mandelbrot throughout manydecades.Last 10 years, I used the “Fractal” and “Self-Similarity” to fillthe gap between technical analysis and the contemporaryscience. In fact, the result was much better than I expected.When you apply “Fractal” and “Self-Similarity” to Forex andStock market, even newbie can learn the technical analysismuch faster and more accurately. In addition, it is also mucheasier to improve the existing technical analysis too because“Fractal” and “Self-Similarity” provide the set of action itemsfor the trader. For example, in 2020, I also published onebook “Predicting Forex and Stock Market with Fractal Pattern:Science of Price and Time”. In the book, I have proposed thenew technique called “Fractal Cycle Analysis”. With this newtechnique, we can compute the turning point probability andthe trend probability at any point in the price path. In theday trading point of view, the turning point probability andtrend probability provide a way to quantify every price actionyou see in the chart. This provides you the ability to combinethe technical analysis with the quantitative trading approach.In the mathematical point of view, the turning pointprobability and trend probability in Fractal Cycle Analysisprovide the way to predict the stochastic cycle, which wasconsidered as the hard task in the mathematics. Forexample, assuming that price is making endless fractal wavecycle from repeating up and down movement, the turning
point probability can help us to predict if next price move isabout to turn or to continue.So far, it might sound like “Fractal theory” is the hard coremath. In fact, this is not entirely wrong. In the field of math,Fractal theory shares some common attribution with theChaos theory. If you want to learn the Fractal theory in themathematical point of view, indeed, it can be a hard coremath. However, there is one good news. For the tradingpoint of view, Fractal theory does not require muchmathematical skills. As long as you are fine with addition,subtraction, multiplication and division, you are good to learnFractal theory for trading. The most important skills you needto apply Fractal theory in stock and forex trading is eitherconnecting points in the straight line or measuring the ratioin your chart. Hence, many traders love to learn Fractaltheory in Forex and Stock market because they are practical.Finally, we can compare the artificial intelligence and Fractaltheory. Artificial intelligence is the evolutionary computerprogram that mimics the functionality of human brain.Fractal is the theory to learn how universe and nature aremade up to deliver the energy and life in this world. Forexample, as artificial intelligence can draw a portrait ofhuman, we can also use Fractal theory to draw somethingthat looks real. For example, we can create a tree ormountain that look real using Fractal equation.
Figure 1-6: Tree created by Fractal equation (Source:Wikipedia)Both theory have the high potential for the human world.Artificial intelligence is widely used across differentindustries including IT, graphic design, music, and robotics,engineering, and so on. Fractal theory is also used widelyacross many industries including IT, graphic design,architecture, investment technology, mechanicalengineering, space science and so on. I reckon that it is alsopossible to combine artificial intelligence and Fractal theory.This Fractal artificial intelligence or Fractal intelligence might
be the next generation of the intelligence which combinesthe best of the both world.
2. Magnet and Stock MarketExperimentIn Forex and Stock market, it is best if you can learnsomething without incurring too much cost. Unfortunately,sometimes, cost of learning in the financial market could beexpensive. Hence, I created two experiments to help you tounderstand the Stock market and Forex market with thecost of less than 6 dollars.
Figure 2-1: Photo of two magnetsIn the first experiment, you need to buy two bar magnetsand 100 grams of iron filings. These costed me around 5dollars. You might get these cheaper than 5 dollars. Just
straight red and blue bar magnets are fine but the twomagnets should be identical in size and shape. Put one ofthem on the desk. Place a thick white paper, plastic cover orglass cover above the magnet. You might need to placesome cubic rubber around the four corner of the cover tokeep small distance between the magnet and the cover.Now, scatter the iron filings onto the cover to reveal themagnetic field of the bar magnet. Now the iron filings willreveal the magnetic field of the bar magnet. You should beable to see that iron filings are aligned to make thecurvature from North Pole (N) to South Pole (S).Figure 2-2: Magnetic field of a bar magnetThe magnetic field is not visible to us but we can check theirexistence with the iron filings. With the iron filings, we can
observe that the magnetic field lines go from North Pole toSouth Pole.Figure 2-3: Schematic diagram of the magnetic field aroundthe bar magnetNext, we will break another bar magnet into two pieces. Barmagnet is not hard. Hence, in my case, I hit the bar magnetagainst the concrete floor. As long as you can break that barmagnet into two pieces, it is fine. Just make sure that youconduct your experiment safely. If necessary, wear someplastic goggles as well as other body protection equipment.Do not break the magnet while other people are around.
Figure 2-4: Broken magnetYou can place either of the broken magnet on the desk asbefore. Place a thick white paper, plastic cover or glasscover above the magnet. Now, scatter the iron filings ontothe cover to reveal the magnetic field of the broken barmagnet. You should be able to see that the iron filings arealigned to make the curvature from North Pole (N) to SouthPole (S) as before.
Figure 2-5: Magnetic field of the broken bar magnetThe magnetic field lines from the broken magnet looksimilar to the unbroken bar magnet. Only difference is thatthe magnetic field in the broken magnet is smaller in scale.Likewise, if we break the broken magnet into another twopieces, we will get the same results. The magnetic field ofthe smaller magnet always look similar to the biggermagnet. The shape of the magnetic field will repeatendlessly, regardless how many times you break them. Theyare just different in scale. We call this process of repeatinggeometry as Fractal.
Figure 2-6: Conceptual diagram of Fractal behaviour of themagnet––––––––Electromagnetic force is one of the four fundamental forcesin nature (i.e. gravity, the weak force, electromagnetism,and the strong force). As we can see from our experiment,this electromagnetic force shows the fractal characteristic.You might guess how widely fractal is spread over theuniverse. In fact, there are countless fractal examples in ourlife including Romanesco broccoli, coastline, mountains,snowflakes, structure of our brain and so on. In theseexamples, the same or similar patterns are occupying theentire structure of an object. Even if they are broken offfrom the bigger piece, the smaller piece do look like the bigpiece.
Figure 2-7: Picture of Romanesco Broccoli––––––––Now, we will conduct our second experiment. Firstly, weneed to download the historical data for Dow JonesIndustrial Average price (=Dow Jones Industrial Average or^DJI) from Yahoo Finance (https://finance.yahoo.com) orfrom other similar website. Download the monthly historicaldata from 1992 February 1 to 2021 October 1 includingopen, high, low, and close price. You can download daily or
weekly data to carry on the same experiment. But the datamight be too many to draw on the chart. Hence, themonthly data is fine for the experiment. In my case, I havecopied 357 rows of the data in Excel. Now draw thecandlestick chart in Excel using the data. If you do not knowhow to use the Excel, then you can use other charting toollike Yahoo finance or etc. All you need is to print the chart inA4 paper twice from 1992 February 1 to 2021 October 1.You should have two A4 papers with the Dow JonesIndustrial Average candlestick chart.Figure 2-8: Candlestick chart of Dow Jones IndustrialAverage (www.algotrading-investment.com)
In the first chart, draw small circle at the starting price at1992 February 1 (Point A). Next, draw small circle at theprice before the market decline due to the Covid 19 crisis at2020 January 1 (Point B). Finally, draw the small circle at thelowest price due the Covid 19 crisis on 2020 March 1 (PointC). Now connect point A, B and C to create one triangle. Thisis the biggest market cycle we can identify from the databetween 1992 February 1 and 2021 October 1. Covid 19crisis had the large bearish impact in the market cycle ofDow Jones Industrial Average index.Figure 2-9: Candlestick chart of Dow Jones IndustrialAverage with a big cycle––––––––
In the second chart, draw small circle at the starting price at1992 February 1 (Point 1). Draw small circle at the highprice on 2007 September 1 (Point 2). From 2007 September1, we have the subprime mortgage crisis. Hence, the priceis declining sharply. In 2008 September, Lehman Brothersfiled up for bankruptcy-court protection. Draw small circle atthe low price on 2009 February 1 (Point 3). From 2009February 1, the price is going up again. Draw small circle atPoint B of the first chart (Point 4). Draw small circle at PointC of the first chart (Point 5). Overall, we made five points.We can create first triangle by connecting Point 1, 2 and 3.We can create second triangle by connecting Point 2, 3 and4. We can create third triangle by connecting Point 3, 4 and5. By comparing the two charts, we can tell, when we breakthe big triangle (=Point ABC), we have three small triangles(=Point 123, Point 234 and Point 345). These small triangleslook similar to the big triangle. On the other hands, we cansay that the big triangle is made up by combining thesesmall triangles. It does not matter which way you think. Theimportant things is that Dow Jones Industrial Average priceis fractal.
Figure 2-10: Candlestick chart of Dow Jones IndustrialAverage with small cycles––––––––This second experiment with Dow Jones Industrial Averageprice is in fact called Peak Trough Analysis among thetrading community. In fact, the peak trough analysis helpsyou to visualize the fractal structure inside the stock andforex market just like the iron filing helps us to visualize thefractal geometry of the magnetic field of the two magnets.Precisely speaking, the fractal structure inside the stock andforex market is fractal wave as the price is recorded in timedimension. You can conduct the same experiment using any
stock market data as well as forex market data. Most oftime, the peak trough analysis will confirm you that themarket data shows the fractal structure. Although the peaktrough analysis can be performed manually, most of time,we use the peak trough analysis done automatically by thealgorithm. Most of traders use the automatic peak troughanalysis in the chart to visualize fractal structure of thestock and forex market. Hence, there is no need to worryabout doing this peak trough analysis manually for yourtrading. In addition, most of charting platform provide anindicator or algorithm to do automatic peak trough analysisfor free to make your technical analysis faster and easier.You just need to understand what they are and how theywork.
3. Peak Trough Analysis––––––––In the Magnet and Stock market experiment, we haveshown that the peak trough analysis acts like iron filings toreveal the fractal wave of the stock market as well as theforex market. We can perform the peak trough analysis inboth qualitative and quantitative ways. We have shown thequalitative way in the Magnet and Stock market experiment.Quantitative way refers to using algorithm to automate thetask. In practical trading, most of time, we will stick with theautomatic peak trough analysis although some seasonedtrader will use the manual peak trough analysis for somecrucial decision making. Understanding the peak troughanalysis will provide you the shortcut to learn all theimportant technical analysis developed last 100 years.Automatic peak trough analysis uses a certain algorithm tomake your technical analysis easier. Hence, we will providesome explanation on the algorithm behind the peak troughanalysis.
Figure 3-1: Peaks and troughs detected in EURUSD Dailychart.––––––––We can start with the Bill Williams Fractal indicator. In theBill Williams fractal indicator, the peak and trough isrespectively defined as up fractal and down fractal. Upfractal (i.e. peak) is identified with the highest highs in thesuccessive five candle bars. Likewise, down fractal (i.e.
trough) is identified with the lowest lows in the successivefive candle bars.––––––––Figure 3-2: Definition of Up Fractal and Down FractalWhen this logic is applied, this will mark up the peak andtrough on your chart. There are two limitations with thismethod although this fractal indicator is a good startingpoint to understand the idea behind the peak troughanalysis. Firstly, there are too many peaks and troughs in
your chart. Secondly, this indicator shows the repeatingpatterns. However, it does not show fractal wave yet.Figure 3-3: Peaks and troughs detected with the Bill WilliamsFractal indicator in EURUSD D1 timeframeHence, we can modify the Bill Williams fractal indicator tomake it better. For up fractal, we can increase the number ofcandle bars in the left side to 10 or more if you like. Hence,the up fractal will be identified when we detect the highestprice in the ten successive candle bars in left. Up fractal willbe confirmed after next two candle bars make lower inprice.
––––––––Figure 3-4: Up fractal, the highest high in 13 bars (10 bars toleft and 2 bars to right)Likewise, for down fractal, we can increase the number ofcandle bars in the left side to 10 or more if you like. Hence,the down fractal will be identified when we detect thelowest price in the ten successive candle bars in left. The
down fractal will be confirmed after next two candle barsmake higher in price.Figure 3-5: Down fractal, the lowest low in 13 bars (10 barsto left and 2 bars in right)In fact, we can make more general version of the modifiedfractal indicator by setting any number of candles for leftand right. For example, you can choose to have 20 candleson left and 2 candles on right and so on. In the modified
version of the fractal indicator, we can now see fewer peaksand troughs. But they are more significant than the fivecandle bar Fractal indicator. The chart looks much neaterwith few significant peaks and troughs. However, themodified fractal indicator still does not provide the peaksand troughs in wave form.Figure 3-6: Peaks and troughs detected with the modifiedFractal indicator in EURUSD D1 timeframeFinally, we can improve the modified fractal indicator furtherby identifying one peak and one trough in alternating order.This is the main idea behind the peak trough analysisindicator like the ZigZag indicator, Renko chart and so on.For example, in the ZigZag indicator, a peak is detected
after a trough and a trough is detected after a peak. Theindicator repeats this algorithm to reveal the endlesslyrepeating fractal wave structure in the market.Figure 3-7: Peaks and troughs detected with the Zig Zagindicator in EURUSD D1 timeframeOne important difference between the ZigZag indicator andthe modified fractal indicator is that the ZigZag indicatordoes not confirm the location of peak or trough after 2 newcandle bars arrived. In the modified fractal indicator, thiswas the case. In the ZigZag indicator, price can go up ashigh as it can in the latest peak. The location of latest peakis only confirmed after new trough appears. This allows theZigZag indicator to adapt any size of market shock without
breaking its wave detection algorithm. Likewise, in theZigZag indicator, price can go down as low as it can in thelatest trough. The location of latest trough is only confirmedafter new peak appears. In spite of this robust wavedetection algorithm, the ZigZag indicator can provide thesource of repainting for the technical indicator that uses theZigZag indicator to detect price pattern.––––––––For example, say that Facebook stock price made a sharprise to 300 USD. Say that this is the latest peak detected bythe ZigZag indicator. After few minutes, if the Facebookstock price jumps to 350 USD, then the ZigZag indicator willoverride the peak to 350 USD over its previous peak at 300USD. Likewise, if the Butterfly Pattern was detected at thepeak of 300 USD, the Butterfly pattern might be notavailable in the chart as the new peak was overridden at350 USD. This is called repainting in the trading community.Having said that, the repainting due to new price overridingis natural behaviour of many technical indicators orautomatic pattern scanners. There is nothing wrong with it.It happens as it continuously update new price informationin the real time chart. For example, any technical indicatoreven including simple moving average indicator will adjustits value when new price arrives. If you do not like therepainting indicator, then you just have to use the non-repainting part of the calculation. Then you are lagging withthe information. Hence, you have to choose between thelagging indicator and repainting (i.e. fast) indicatorsometimes. Many seasoned traders value more on fast
information than lagging information as the successfultrading often requires to act early for more profits.
Figure 3-8: Repainting price pattern exampleThe process is more or less similar in Renko chart too. TheRenko chart also detects the peak and trough in alternatingorder. The biggest difference between the ZigZag indicatorand Renko chart is that the Renko chart compresses thetime present in the candlestick bars. Hence, the timelocation of the peak and trough in the Renko chart are nolonger compatible with normal candlestick chart.Fortunately, this does not happen in the ZigZag indicator. Inaddition, the Mathematical interpolation technique was usedas the peak trough analysis by Benoit Mandelbrot in hispaper, the Godfather of Fractal Theory. Hence, there areseveral choices for your peak through analysis algorithm. Itis even possible that you can develop any novel algorithmthat improves over the existing peak trough algorithm.
Figure 3-9: Peaks and troughs detected with Renko chart inEURUSD chart using 20 pips brick height––––––––Once the peak trough analysis like the ZigZag indicator,Renko chart and so on are done in your chart, you can usethem for the technical analysis. There are few ways of usingthe peak trough analysis for your technical analysis. Forexample, the simplest technical analysis is to connect peaks
and troughs to draw support and resistance. Support andresistance are the most basic but important technicalanalysis because it lands the foundation for the advancedtechnical analysis like triangle pattern, rising wedge pattern,falling wedge pattern, channel and so on.––––––––
Figure 3-10: Connecting peaks and troughs to identify thetriangle pattern for buy set up (www.algotrading-investment.com)In addition, with peak trough analysis in your chart, now youcan start to measure the ratio as in Fibonacci analysis.When we connect three points, which are either peak ortrough, we get one fractal triangle. The fractal triangleconsists of swing high and swing low always. We get theratio by dividing the price height of right swing by the priceheight of left swing. Just like the simple support andresistance provide the foundation for more advancedtechnical analysis, this simple ratio measurement can beexpanded to the advanced technical analysis like Fibonaccianalysis, Harmonic Pattern, Elliott Wave, X3 Chart patternand so on.Ratio = Price Height in Swing Right / Price Height in SwingLeft––––––––
Figure 3-11: Swing high (left) and swing low (right) in GoogleStock price
4. Understanding Technical Analysis––––––––Peak trough analysis is the starting point of any technicalanalysis related to Fractal wave. In addition, understandingthe peak trough analysis provides the shortcut to learn allthe important technical analysis because many crucialtechnical analysis built on the peak trough analysis. For yourinformation, we provide a list of technical analysis thatmake use of peak trough analysis. In the list, some of themwere around 100 years whereas others are only around fewdecades. This is not the exhausted list. However, there aremany other technical analysis not on this short list too. Youcan have a look at the list. You will find that some of themare familiar if you are already in the trading business. Herewe will explain some of these technical analysis in brief toprovide you some basis before we go on to the supply anddemand analysis.Support and Resistance (Horizontally drawn lines)Support and Resistance (Diagonally drawn lines, also knownas trend line)Fibonacci Ratio analysisHarmonic PatternElliott Wave Theory
X3 Chart Pattern FrameworkSymmetrical TriangleAscending Triangle PatternDescending Triangle PatternFalling Wedge PatternRising Wedge PatternChannelRenko ChartSupply and Demand ZonePoint & Figure ChartDouble TopDouble BottomTriple TopTriple BottomHead and Shoulder patternReverse Head and Shoulder patternMany Swing Trading StrategiesABC or 123 patternTurning Point Probability and Trend ProbabilityAnd many more
––––––––Process of the technical analysis in the list can be explainedeither by point connecting exercise or by ratio measurementexercise. For example, you can draw support line in yourchart by connecting more than two points in a straight line.The points refer to peak or trough in your chart. To drawmore conservative support line, you can connect more thanthree points in a straight line.––––––––
Figure 4-1: Support example on GBPUSD H4 timeframe(www.algotrading-investment.com)Drawing support line is simple. However, it often providesgood clue about the future price movement. Typically,around support, we can expect high energy. Due to this highenergy, the support line is a good place to set up reversaltrading or breakout trading. Typically, support line is notused alone. However, this simple support line is often usedas the secondary confirmation technique for other technicalanalysis, which predict the market direction.Figure 4-2: Support Example on USDJPY H4 timeframe
You can draw resistance line in your chart by connectingmore than two points in a straight line. The points refer topeak or trough in your chart. To draw more conservativeresistance line, you can connect more than three points in astraight line.––––––––Figure 4-3: Resistance example on GBPUSD H4 timeframe
Drawing resistance line is simple. However, it often providesgood clue about the future price movement. Typically,around resistance, we can expect high energy. Due to thishigh energy, the resistance line is a good place to set upreversal trading or breakout trading. Typically, resistanceline is not used alone. However, this simple resistance line isoften used as the secondary confirmation technique forother technical analysis, which predict the market direction.Figure 4-4: Resistance example on EURUSD H4 timeframeSo far, we have shown the example of support andresistance lines drawn horizontally. However, you can also
draw the support and resistance lines diagonally too. Thediagonally drawn support and resistance lines aresometimes called as the trend line too. Drawing thediagonal support and resistance lines are exactly the sameas drawing the horizontal support and resistance. We justneed to connect more than two or three points in our chart.
Figure 4-5: Support example on EURUSD H4 timeframe––––––––Trading with diagonal support and resistance are notdifferent from horizontal support and resistance lines. Thesediagonal support and resistance lines can provide a goodplace to set up the reversal trading or breakout trading.Once again, we recommend using these diagonal supportand resistance line as the secondary confirmation techniquefor other technical analysis.––––––––
Figure 4-6: Support example on EURUSD H4 timeframeAs we have mentioned before, support and resistanceprovide the basis for more advanced technical analysis. Forexample, if we combine one support and one resistanceline, then it is possible to detect triangle pattern. Especially,the triangle pattern represents the gradually decreasingvolatility. The triangle pattern often provides the goodbreakout trading opportunity. The tip of the triangle patternmight be seen within the chart or not. However, beforesetting up the breakout trading, make sure that the triangle
pattern provides sufficiently narrow ranging movement.Otherwise, they are more suitable for reversal trading thanbreakout trading.Figure 4-7: Triangle pattern constructed from the PeakTrough analysis on EURUSD H1 timeframe(www.algotrading-investment.com)In addition, the idea of constructing rising wedge patternand falling wedge pattern is similar to construct the trianglepattern. We just need to combine one support and oneresistance. We provide the schematic diagram for all these
price patterns that can be detected by combining onesupport and one resistance.Figure 4-8: List of Triangle, Wedge, and Channel patterns
––––––––In addition, we can use peak trough analysis for the ratiomeasurement exercise too. The simplest ratio basedtechnical analysis is the Fibonacci analysis. With Fibonaccianalysis, we can detect Fibonacci retracement or Fibonacciexpansion. In Fibonacci retracement, we concerns threepoints that are peak or through in your chart. Hence, weneed to deal with one fractal triangle to detect the Fibonacciretracement. Fibonacci retracement is identified when theright swing retrace back 38.2%, 50% or 61.8% to left swing.Fibonacci retracement is often used to predict the depth ofcorrection in the trendy market. It is simple but powerfultool for reversal trading setup.
Figure 4-9: Bullish 61.8% Retracement example in EURUSD––––––––In Fibonacci expansion, we concerns four points that arepeak or through in your chart. Hence, we need to deal withtwo fractal triangles to detect the Fibonacci expansion.Fibonacci expansion is identified when the right swingexpand to 61.8%, 100%, 161.8% or 261.8% to left swing.Fibonacci expansion is often used to identify the end oftrend phase in the market. It is simple but powerful tool forreversal trading setup.
––––––––Figure 4-10: Bearish 100% Expansion example in EURUSD––––––––Just like support and resistance provide the foundation forthe price patterns like triangle, rising wedge, falling wedgeand so on, Fibonacci analysis also provides the foundationfor other advanced technical analysis too. For example,Harmonic pattern, Elliott Wave pattern, and X3 Chartpattern can be considered as the advanced Fibonaccianalysis. To help your understanding, consider the Gartley
Harmonic pattern. To detect Gartley Harmonic pattern, weneed five points that are either peak or trough in your chart.These five points are typically denoted as XABCD points.Figure 4-11: In EURUSD H1 Chart, five points were selectedto exam Gartley 222 pattern
Firstly, we check if the ratios for the fractal triangle XAB,ABC, and BCD are respectively near 61.8%, 88.6%, 113%.Then we check if the ratio of the fractal triangle XAD is near78.6%. The ratio can not be dead accurate most of time. Weidentify the pattern if the ratio is within the acceptablerange. This task to detect Harmonic pattern is morecomplicated involving to check ratios for several fractaltriangles. However, it is still the extension of the Fibonaccianalysis. Likewise, identifying Elliott Wave pattern or X3Chart pattern is more or less similar.––––––––
Figure 4-12: EURUSD H1 Chart, Fibonacci ratio confirmationfor Gartley Pattern––––––––For your information, we have summarized how to performsome important technical analysis. Most of technical
analysis requires either the point connecting exercise orratio measuring exercise. For some technical analysis, youneed both point connecting exercise and ratio measuringexercise.Figure 4-13: Technical analysis summary tableSo far, we have shown how the peak trough analysisprovides the foundation for other technical analysis. Besidesthe capability, the peak trough analysis itself can bequantified. Hence, we could reveal the cycle of fractal wave.We can do this by measuring the distance between peakand trough in price and time dimension. This brand newmethod was introduced as the Fractal Cycle Analysis in thebook “Predicting Forex and Stock Market with FractalPattern: Science of Price and Time”. In fact, this fractal cycleanalysis is multiple level cycle analysis like the Fouriertransformation, Wavelet Analysis, Principal ComponentAnalysis, Empirical Mode Decomposition, and so on. In thisbook, we will not discuss the fractal cycle analysis in depth.However, we will just clarify the concept of the turning point
probability and trend probability used in the method for ourtrading.In trading, the turning point probability can be viewed as thefirst attempt to quantify the price action. In science, it is thepioneering concept towards modelling the stochastic cycle.Practically speaking, the method helps with market timingfor our trading. In any sort of cycle, when the object risessufficiently high, it should hit the peak and it should falltowards trough. The turning point probability applies thesame principle in Forex and Stock market data. Hence, theturning point probability answers the question “How closethe price is to peak so the price will start to fall towardstrough?” This is an important question to ask for the traderbecause this prediction often helps us to make money.––––––––
Figure 4-14: Measuring the price height and time width inswing highWe can not answer the question in the deterministic sense.However, we can answer the question in the probabilisticsense. Higher turning point probability means that the priceis close to the peak. So we have a high chance to see thatprice makes a turn. For example, if the turning pointprobability is over 90%, there is a high chance that pricecan start to fall in the near future.
Figure 4-15: Fibonacci Probability Graph measuringprobability for the peak (www.algotrading-investment.com)––––––––On the other hands, lower turning point probability meansthat the price is still far from the peak. Hence, there is ahigh chance for the price to continue to rise. For example, ifthe price is near 30% turning point probability, then we cansay that there is a high chance for the price to go up. Of
course, this is true in the cyclic sense only as the price willrepeat up and down endlessly. However, this quantifiedinformation is still useful for our trading. In fact, for theconvenience, one can use the turning point probability toget the trend probability. Simply, you can subtract theturning point probability from 100% to get the trendprobability. Hence, as a rule of thumb, 30% turning pointprobability is equivalent to 70% (=100% -30%) trendprobability as there is high chance for the price to continueto rise in this case.Figure 4-16: Turning point probability 30% example (= 70%trend probability) for peak
So far, we have given the turning point examples for thecase of peak. When we talk about measuring the turningpoint probability for trough, everything will be mirroredhorizontally. In the case of trough, the turning pointprobability answers the question “How close the price is totrough so the price will start to rise towards peak?” If onecan answer this question accurately, surely one can makegood profits. To be useful, we can answer this question inthe probabilistic manner.––––––––
Figure 4-17: Measuring the price height and time width inswing lowSince the probability graph is mirrored, the turning pointprobability is measured from peak to the latest price. Usingthis turning point probability, you can estimate if there is ahigh chance to go down or to go up for the price in thecyclic sense.––––––––
Figure 4-18: Turning point probably 62% example for trough––––––––The good thing is that the turning point probability goes wellwith most of technical analysis. In the book “Science OfSupport, Resistance, Fibonacci Analysis, Harmonic Pattern,Elliott Wave and X3 Chart Pattern: In Forex and Stock MarketTrading”, we have shown how to combine the turning point
probability with support and resistance. In the approach, theturning point probability complements the power of supportand resistance for our trading. Likewise, in this book, we willshow how to combine the turning point probability withsupply and demand analysis to improve its performance.
5. How to Identify the Best Buy andSell TimingTrading is practical. We trade to make the profits from ourtrading. Hence, if you are a trader, the most importantquestion to ask is “Where is the winning opportunity?”. Inanother words, how can we decide the best entry in ourtrading? This is the question every trader should and mustask. In fact, we can seek the answer to this question fromthe market timing point of view. The simple answer is thatthis image can visualize such a winning opportunity.Figure 5-1: Conceptual drawing to demonstrate best buyentry
Say that EURUSD or Bitcoin have the large cycle and smallcycle. Your best buy opportunity will be in the area whereboth small and large cycles are boosted together shown asthe dotted line in the image. That is the thin intersectionwhere both experienced momentum trader and experiencedreversal trader are jumping in together. However, there isone problem in this image although its concept is perfectlysound. For example, the market does not have thedeterministic cycle, which we can track its peak and troughwith fixed time interval as in the sine curve of the Physicstext book. Hence, this image is only educational toconceptualize the best buy entry. If it was like that, themoney making in Forex or Stock market would have been somuch easier buying EURUSD on Monday low and selling atFriday high something like this or similar. In fact, whatmakes us hard is that the market cycle is non deterministicbut it is stochastic.––––––––
Figure 5-2: Market cycle in EURUSD D1 timeframeMarket cycle is fuzzy and dirty. Sometimes, price moves inslow cycle and sometimes price moves in fast cycle.Sometimes price swings around big amplitude andsometimes price swings around only small amplitude. It isthe observations we can make every day in Forex and Stockmarket, the fuzzy and dirty cycles instead of the clean sinecurve. Hence, any technique that does not consider thisuneven and rough surface of the market will likely to fail topredict the market.
Figure 5-3: Fractal cycle demonstrationThe good news is that understanding the fractal wave canhelp us to predict the market tremendously. It is becausefractal wave is the best tool to represent the fuzzy and dirtycycles in Forex and Stock market. Theoretically, it is one ofthe best tool to model stochastic cycles in the Forex andStock market. Hence, peak trough analysis is the right firststep as it visualizes the fuzzy and dirty cycles in readableform for us. Therefore, the technical analysis making gooduse of this peak trough analysis is the right tool to predictthe market.Now going back to our question, how can we catch themoment where the small and large cycles are boostedtogether using the technical analysis? Although thetechnical analysis is the good tool to predict the stochasticcycle, it still does not imply that they are designed tocapture the multiple cycles. So our question is not fullyaddressed yet. In fact, the answer is pretty straightforward.Catching the timing where the small and large cycles areboosted together can be done by combining two or moretechniques to gauge your entry instead of just using onesingle technique. Let each technique to capture the goodentry based on one cycle. Hence, when you use multipletechniques, you have a high chance to capture the bestentry where both small and big cycles are boosted together.––––––––
In addition, using two or more timeframe analysis could addsome value to improve your trading performance too. Goodmixture of these two will yield the fruitful results. Hence, ifyou want to become a successful trader, then training andpractice are a must requirement. Here is one final note. Asthe market is non deterministic meaning that the marketonly follows the probabilistic cycle, your outcome is notgoing to be bullet proof. Therefore, we should trade with thehigh probability setup. You need to understand that tradingis about quality and not about quantity. In addition,identifying the best sell entry is exactly the same asidentifying the best buy entry. We just need to look for thetiming where both small and large cycles are fallingtogether using two or more technical analysis.
6. Supply and Demand AnalysisSupply and demand analysis is known as several differentnames in the trading community like the supply demandanalysis, demand supply analysis, supply demand zonetrading, demand supply zone trading, and so on. In fact, allthese various names are referring to the same tradingstrategy. We will use the name “supply and demandanalysis” throughout this book. In essence, supply anddemand analysis is one form of price pattern trading. Thetrading idea comes from understanding the supply anddemand curve often appears in the Economic textbook.
Figure 6-1: Supply Demand curve in EconomicsIn terms of the trading history, the supply and demandanalysis shares some common characteristics with thevolume spread analysis (VSA) devised by Richard Wyckoff in1930s. In the volume spread analysis, Richard Wyckoffbelieved that the market shows the sideways move beforemaking a strong bullish rise or bearish fall. He pointed thatthis sideways movement is the key area for our trading. Henamed this key areas as accumulation and distribution
respectively for bullish and bearish trading. The key areaconsists of two prices forming a box zone. Similarly, thesupply and demand analysis involves defining the key areato trade.Figure 6-2: Schematic drawing of accumulation anddistribution area in Volume Spread Analysis––––––––
In the practical trading, the supply and demand analysisinvolves identifying two key areas where supply is greaterthan demand (= supply zone) and where demand is greaterthan supply (=demand zone). Identifying the two key areasare done by looking at the price pattern. For example,supply zone is identified where the price drops at highspeed from peak. Likewise, the demand zone is identifiedwhere the price rise at high speed from trough.Figure 6-3: Supply example on S&P 500 H1 timeframe
Figure 6-4: Demand example on Ethereum H1 timeframe(www.algotrading-investment.com)In this book, I introduced this supply and demand analysisfor two reasons. Firstly, the supply and demand analysis issimple and straightforward. There is nothing wrong withsimple strategy as long as they are effective. Secondly, thisis another trading strategy to predict the fractal wave inForex and Stock market. I think this trading strategy is agood demonstration on how to predict fractal wave (i.e.market cycle) for the starter.
Supply and demand analysis is comparable to support andresistance. Broadly speaking, supply and demand analysiscan be considered as support and resistance up to someextent. However, there are some differences too. Firstly,support and resistance on their own are more or lessvolatility prediction tool. In another words, they predict theprice level with potential high volatility. However, supplyand demand analysis provides the direction to trade.Secondly, support and resistance use the line whereas thesupply and demand analysis use the key area, which is theprice range between two prices. In spite of these twodifferences, there are some cases where supply anddemand zone are formed in the same location as thehorizontal support and resistance. Hence, there could besome theoretical debate. However, such a debate may benot important for the trader.––––––––Now, let us have a look at the main elements of the supplyand demand analysis. Supply and demand analysis involvesidentifying the price pattern. It is much easier to identifythese price patterns with peak trough analysis as they cansuggest the good entry and exit price at the top or bottomof the price cycle. In supply and demand analysis, weconcern reversal trading and continuation trading. Inreversal trading, the price pattern for buy entry is calleddrop base rally pattern. The base is the short rest locatedbetween two strong movements. Typically, the base consistsof few to several candle bars. As you might guess, the drop
base rally pattern looks quite similar to double bottompattern. If you find hard to recall the shape of the drop baserally pattern, you might recall the shape of double bottompattern. However, the buy entry for the drop base rallypattern is started when the price touches the demand zone.Hence, you need to remember that trading operation is notthe same as the double bottom pattern.––––––––Figure 6-5: Schematic drawing of drop base rally pattern forreversal trading
Figure 6-6: Drop base rally pattern on GBPUSD H4timeframe––––––––In reversal trading, the price pattern for sell entry is calledrally base drop pattern. The base is the short rest locatedbetween two strong movements. Typically, the base consistsof few to several candle bars. As you might guess, the rallybase drop pattern looks similar to double top pattern. If you
find hard to recall the shape of the rally base drop pattern,you might recall the shape of double top pattern. However,the sell entry for the rally base drop pattern is started whenthe price touches the supply zone. Hence, you need toremember that trading operation is not the same as thedouble top pattern.Figure 6-7: Schematic drawing of rally base drop pattern forreversal trading
Figure 6-8: Rally base drop pattern on GBPUSD H4timeframe––––––––In continuation trading, the price pattern for buy entry iscalled rally base rally pattern. It is important to observe twosharp rises in price with some short rest in the middle (i.e.base). The buy entry is nearly identical to the case ofreversal trading. We take the buy entry when the pricetouches the demand zone.
Figure 6-9: Schematic drawing of rally base rally pattern forcontinuation trading
Figure 6-10: Rally base rally pattern on EURUSD H1In continuation trading, the price pattern for sell entry iscalled drop base drop pattern. It is important to observe twosharp falls in price with some short rest in middle (i.e. base).The sell entry is nearly identical to the case of reversaltrading. We take the sell entry when the price touches thesupply zone.
Figure 6-11: Schematic drawing of drop base drop patternfor continuation trading
Figure 6-12: Drop base drop pattern on GBPUSD H4timeframe
7. Trading with Supply and DemandZone––––––––Say that you want to trade with the continuation buypattern (i.e. rally base rally pattern) in D1 timeframe forBitcoin. Hence, we will trade with demand zone for buysetup. After identifying the demand zone, you need todecide your stop loss and profit target. Typically, the stoploss comes at the bottom of the demand zone. However, Ido not recommend to put the tight stop loss at the bottomof the demand zone because sometimes the price can touchthe bottom of the demand zone before making a sharpupward movement. Hence, try to give some margin belowthe bottom of the demand zone. If you can draw sufficientlyhigh profit target, you can have bit more margin. Hence, thesize of margin really depends on the Reward to Risk ratio.Next, the sensible place to set your profit target is near thepeak of the last rally. However, if you believe that thesurrounding market condition is strong bullish, then you canset the profit target higher. Hence, depending on thesurrounding market condition, you can set your profit targetabove the peak or you can set your profit target below thepeak. In our case, we have set the profit target slightlyabove the peak of the last rally. This provides us the reward4.3 times bigger than the risk. Typically, we recommendusing the reward twice bigger than risk (i.e. 2:1 =Reward:Risk) as the minimum. For 2:1 ratio, we can make
profit with even 50% winning rate. Hence, 4.3 reward to riskratio is good trading opportunity.Figure 7-1: Bitcoin D1 timeframe trading example––––––––When you trade with supply and demand zone, it is better touse multiple timeframe analysis. This often improves yourtrading performance. Before placing the buy order, it isbetter to check if the price has the enough room to moveupwards. We can do this by checking W1 timeframe(=weekly) or MN1 (=monthly) timeframe since we aretrading on D1 timeframe. For example, in our case, the price
was in between supply zone and demand zone in MN1timeframe. The price had more room towards the supplyzone. Hence, this added more confidence in our buydecision.Figure 7-2: Bitcoin MN1 timeframe––––––––As you can see, the price moved upwards without too muchhesitation. In fact, the price hit the profit target at the singlewave. This was a good demonstration to show how easy buteffective supply and demand zone trading is. However,sometimes, the price might be staying around the demand
zone for some time and they can touch the stop loss targettoo. Hence, we need to understand that this is not the bulletproof trading strategy. Therefore, it is important to take thetrading opportunity when you believe there is a high chanceto win.Figure 7-3: Bitcoin D1 timeframe trading example––––––––Let us have a look at another demand zone tradingexample. In this time, we will show you the reversal tradingsetup with demand zone. Hence, we will have a look at thedrop base rally pattern. In our example, we had the demand
zone identified on Dow Jones Industrial Average H1timeframe. We have set the stop loss slightly below thebottom of the demand zone. We have set the profit targetnear the peak of the last rally. This provided us 2.4 rewardto risk ratio (2.4:1 = Reward:Risk).––––––––Figure 7-4: Dow Jones Industrial Average H1 timeframetrading example
In addition, we have checked the price location of Dow JonesIndustrial Average in the higher timeframe. In this example,we used H4 timeframe. Since the current price is near thedemand zone, we reckoned that there is sufficient room forthe price to go up.Figure 7-5: Dow Jones Industrial Average H4 timeframe––––––––In fact, the price moved up without too much hesitation. Ithit the profit target at the single wave. However, this is not
always the case. Sometimes, the price can stay in thedemand zone for some duration before making a sharpupwards movement.Figure 7-6: Dow Jones Industrial Average H1 timeframetrading example––––––––
In trading, you need to know how often you need to becorrect to make profit. This statistic is called the win rate inthe trading. In addition, the breakeven win rate is referred tothe minimum win rate to breakeven. In another words, youwill make money if your win rate is above the breakeven winrate and you will lose money if your win rate is below thebreakeven win rate. Then what sort of win rate will you needto make money? In fact, they depend on the reward to riskratio. For your information, I provide the list of the win ratefor various reward to risk ratio scenarios. For example, if thetarget profit is twice bigger than the stop loss in size, thenyou can make good profit even with 50% win rate. Inanother words, you just need to have 5 successful tradesout of 10 trades to make profit. You will break even if yourwin rate is 33%. You will lose money if your win rate is 20%.In supply and demand analysis, we recommend using atleast 2:1 ratio and more is better. Hence, you need tocarefully plan the place for the target profit and stop loss.––––––––
Figure 7-7: Breakeven win rate for various reward to riskratio
8. How to Improve Supply andDemand AnalysisThe supply and demand analysis does not require anycomplicated technical indicator and it bases its analysismostly on the price itself. In fact, supply and demandanalysis is another confirmative trading strategy that makesuse of the fractal wave structure present in the forex andstock market. In another words, from the patternidentification to setting up the profit target and stop loss,the peak and trough play a crucial role. This characteristic issimilar to other technical analysis like Triangle pattern,Fibonacci Analysis, Harmonic Pattern, Elliott Wave patternand X3 Chart Pattern. Now, we will show you one way toimprove supply and demand analysis with the knowledge offractal wave.In the previous chapter, we have shown our tradingexamples using a virgin supply and demand zones. Thevirgin supply and demand zone refers to the zone that arenot touched by price after the pattern formation. We canimprove the accuracy of this virgin supply and demand zonewith the turning point probability. For example, when wetrade with demand zone, we can ensure that the pricelocation is in the high turning point probability. In theexample, the price in its first touch of the demand zone waslocated around 70% turning point probability for S&P 500index. In addition to the higher timeframe check-up, thisturning point probability ensures that price is near thetrough before going up.
––––––––Figure 8-1: S&P 500 index H1 timeframeLet us have a look at the supply zone trading example. Inthe example, the price in its first touch of the demand zonewas located around 50% turning point probability for Goldagainst US dollar. Practically, it is recommended to confirm
at least 50% turning point probability in one of the cycleanalysis.Figure 8-2: Gold against US Dollar (=XAUUSD) H4 timeframe(www.algotrading-investment.com)––––––––The turning point probability helps us to do two things here.Firstly, it helps us to check the chance of getting the turningpoint after the price touches the zone. Secondly, it helps us
to assess the curvature of the price path before it touchesthe zone. From my experience, the curvature of the pricepath is one of the key factor for the successful supply anddemand zone trading.
Figure 8-3: Curvature marked in red for demand zone (top)and supply zone (bottom)
9. How to Improve Harmonic Patternand X3 Chart PatternWe have explained why two or more techniques isrecommended to catch the best buy or sell entry concerningthe market cycles. Just like the turning point probability canimprove the supply and demand analysis, the supply anddemand analysis can improve other technical analysis too.In this book, we will provide some examples on how supplyand demand analysis can improve the Harmonic pattern andX3 Chart patterns for your trading. The simplest method isto find the opportunity where both technical analysisconfirm the same direction. For example, when the bullishHarmonic pattern or X3 chart pattern is formed on thedemand zone, this often provides accurate buy entry foryour trading.
Figure 9-1: Combining Harmonic pattern with demand zoneon S&P 500 index H4 timeframe (www.algotrading-investment.com)––––––––Likewise, when the bearish Harmonic pattern or X3 Chartpattern is formed on the supply zone, this provides theaccurate sell entry for your trading too. In my previous book“Guide to Precision Harmonic Pattern Trading: MasteringTurning Point Strategy for Financial Trading (2016)”, Iintroduced this sort of combination strategy as the mutual
pattern turning point strategy. You can also check theexplanation and example in my other books too.––––––––Figure 9-2: Combining AB=CD pattern with the supply zoneon EURUSD H4 timeframeIn addition, the supply and demand analysis can be used toimprove Elliott Wave theory too. For example, you can applybullish Elliott Wave pattern together with demand zone.Likewise, you can apply the bearish Elliott Wave patterntogether with supply zone.
Figure 9-3: Combining the Supply Zone with the CorrectiveABC Wave on GBPUSD D1 timeframe
10. Glossary of TermsM1: One minute timeframe in chartM5: Five minute timeframe in chartM15: Fifteen minute timeframe in chartM30: Thirty minute timeframe in chartH1: One hourly timeframe in chartH4: Four hourly timeframe in chartD1: One day timeframe in chartW1: One week timeframe in chartMN1: One month timeframe in chart
Artificial Intelligence: Any intelligence demonstrated bymachines, in contrast to the natural intelligence displayedby humans and other animals.Bear Market: A market in which stock prices are falling.Bearish: Believing that a particular security, sector, or theoverall market is about to fall. Opposite of bullish. “Bear” isa trader who believes the market will fall.Bitcoin: The first global, decentralized currency.Bull Market: A market in which stock prices are rising.Bullish: Bullish refers to having a positive outlook on aparticular security or an investment. A situation wheregroups of financial securities are rising.Commodities: Products used for commerce that are tradedon a separate, authorized commodities exchange.Commodities include agricultural products and naturalresources such as timber, oil and metals. Commodities arethe basis for futures contracts traded on these exchanges.
Dow Jones Industrial Average: The Dow Jones IndustrialAverage (DJIA), also known as the Dow 30, is a stock marketindex that tracks 30 large, publicly-owned blue-chipcompanies trading on the New York Stock Exchange (NYSE)and the Nasdaq. The Dow Jones is named after Charles Dow,who created the index in 1896 along with his businesspartner Edward Jones.Equities: Common and preferred stocks, which represent ashare in the ownership of a company.Ethereum: A public blockchain network and decentralizedsoftware platform upon which developers build and runapplications. As it is a proper noun, it should always becapitalized.EURUSD: EURUSD is the rate that euros can be exchangedfor US dollars. If the rate is 1.50, it means it takes 1.5 USdollars to buy 1 Euro.Fractal: In math, a fractal is an infinite pattern that appearssimilar no matter how closely you look at it.GBPUSD: GBPUSD is the rate that British pounds can beexchanged for US dollars. If the rate is 1.20, it means it
takes 1.2 US dollars to buy 1 British pounds.Rally: A brisk rise in the general price level of the market orprice of a stock.Range: The difference between the highest and lowest priceof an asset during a given trading session.Securities: Transferable certificates of ownership ofinvestment products such as notes, bonds, stocks, futurescontracts and options.Spread: The difference between the bid and the ask pricesof a stock.S&P 500 Index: S&P 500 index is the Standard & Poor's 500Composite Stock Price Index, a widely recognized,unmanaged index of common stock prices. You may notinvest directly in the S&P 500 Index, and, unlike the Fund,benchmark indices do not incur fees or expenses.
About the AuthorYoung Ho Seo is an Engineer, Financial Trader, andQuantitative Developer, working on Trading Science andInvestment Engineering since 2011. He is the creator ofmany technical indicators, price patterns and tradingstrategies used in the financial market. He is also teachingthe trading practice on how to use the Support, Resistance,Trend line, Fibonacci Analysis, Harmonic Pattern, Elliott WaveTheory, Chart Patterns, and Probability for Forex and StockMarket. His works include developing scientific tradingprinciple and mathematical algorithm in the work ofBenjamin Graham, Everette S. Gardner, Benoit Mandelbrot,Ralph Nelson Elliott, Harold M. Gartley, Richard Shabacker,William Delbert Gann and Richard Dennis. You can find hisdedicated works on www.algotrading-investment.com. Hislife mission is to connect financial traders and scientificcommunity for better understanding of this world and crowdbehaviour in the financial market. He wrote many books andarticles, which are helpful for understanding the technologyand application behind data mining, statistics, time seriesforecasting, fractal science, econometrics, and artificialintelligence in the financial market.Read more at Young Ho Seo’s site.
About the PublisherAlgotrading-Investment.com is the Software Developer andResearch Company in the Financial Market. We are thespecialist in the Financial Trading and Investment Researchusing computerized approach. We are here to connectFinancial Trading to Scientific Advancement for everyone onthis planet.