360 Degree Method for

Trading & Analysing Price

Patterns & Market
Structure

Master Technical Analysis and Price Charts

in the Forex and Financial Markets

Copyright © 2019-2021 by Elite CurrenSea.

Elite CurrenSea has asserted his right to be identified as the author of this work.

All rights reserved. No part of this publication may be reproduced, stored in a retrieval
system, or transmitted in any form or by any means, electronic, mechanical, photocopying,
recording, or otherwise, without the prior permission of the copyright owner.

24 August 2019 1st edition

May 2020 2nd edition
April 2021 3rd edition
Summary
This 600 page e-guide focuses on understanding technical analysis and price charts in
general. The guide reviews all of the key concepts from A to Z such as support & resistance,
price patterns, and trend & momentum.

The main focus is on the Forex market, but the ideas could apply to most price charts. We
believe that traders with various experience levels - from beginners to intermediate to
more experienced - are able to benefit from the guide.

The ecs.SWAT guide explains how traders can analyse price movements with more context
and in a quicker way. It discusses both manual trading and automated trading.

It is mostly focused on practical solutions (98%). We explain how to identify impulsive and
corrective price swings, how to spot chart patterns, the trend direction, and S&R. Candles
and price swings are like pieces of Lego as they build up to something larger. Simply said,
we show traders how to recognise patterns and trade them.

But we also show some theory (2%). We explain how patterns repeat throughout time, with
all instruments, and on all time frames because the market is fractal in nature.

We hope that the material here makes the reader a better chart analyst and a better
trader. Even if the materials help improve your skills with 10%, it is already a success. But
secretly, we hope that you gain much more out of the ecs.SWAT guide.

Summary of Contents
Chapter 1: Introduction

Chapter 2: Our View on Fundamentals

Chapter 3: Technical analysis: Price Action and the Path of Least Resistance

Chapter 4: Support & Resistance

Chapter 5: Patterns and Triangle of Analysis

Chapter 6: Making a Coherent Analysis

Chapter 7: SWAT Method and Moving Averages

Chapter 8: SWAT Method from A to Z

Chapter 9: Automated Trading Systems

Chapter 10: Decision Zones and Triggers

Chapter 11: Deeper Market Thoughts

Chapter 12: Risk Management

Chapter 13: Trading Psychology

Full Content Index

Summary 3

Biography 15
Author - Chris Svorcik 15
Elite CurrenSea - www.EliteCurrenSea.Com 17
Track record 17

Prologue 18

Chapter 1: Introduction 20

Chapter 2: Our View on Fundamentals 22

Our Prism for Analysing 22
Supply and Demand 23
Conclusion 25

Chapter 3: Technical Analysis: Price Action and the Path of Least Resistance 27
Path of Least Resistance 27
Trend, Momentum, and the Building Blocks of the Charts 28
Chart Hierarchy 32
Candlestick Basics 33
Candlesticks Explained 33
Correlation between the Open and the Close 35
Candlestick Patterns Explained 41
A) Bearish Reversal Candlestick Patterns 42
3 Black Crows 42
3 Inside Down 43
Evening Star 44
Upside 2 Crows 45
Harami 46
Bearish Abandoned Baby 46
Meeting Lines 47
Dark Cloud Cover 48
Advance Block 49
B) Bearish Continuation Candlestick Patterns 50
Falling 3 Methods 50
Bearish 3 Line Strike 51
Marubozu Bearish 51
C) Bullish Reversal Candlestick Patterns 52
Bullish 3 Inside Up 52
Bullish 3 Outside Up 53
3 White Soldiers 53
Concealing Baby Swallow 54
Morning Star 55
Piercing Line 56
Bullish Belt Hold Lines 57
Harami Cross 57
Harami Bullish 58
Tweezers 59
Bullish Squeeze 59
D) Bullish Continuation Candlestick Patterns 60
Rising 3 Methods 60
Side By Side White Lines 61
Marubozu Bullish 61
Price Swings: the 4 Types of Price Action 65
Identifying Price Swings 68
1. Strong vs Weak Price Action: Momentum and Correction 68
Impulsive Price 69
Corrective Price 73
2. HMA (hull moving average) 77
3. ECS Fractals 78
4. Time Patterns and Zigzag Pattern 79
5. Awesome Oscillator or ecs.MACD 81
Benefits of Oscillator in Wave Analysis 83
Reading the Oscillator 84
How to Find the Price Swing 85
6. Wave Patterns 89
Identifying Momentum & Correction 90
Swings Become Patterns 93
Chart Patterns 94
Bullish and Bearish Continuation Patterns 94
Bullish and Bearish Reversal Patterns 97
Seeing and Recognising Patterns 101
 Swings Form Trend 101
Defining the trend 102
Classical HH and LL 105
Moving Averages 107
Correct time frame trends 110
Range or consolidation 110
Reversals 111
Retracements 112
Retracements: how far can we expect the price to go? 116
Direction of the trend 120
Spacing between averages 121
Moving average numbers 121
Short-term MAs 122
Medium / long-term MAs 123
Combining short and long-term 123
Momentum MA 124
Trending market 125
Trend channels 127
Good angle 128
Too steep channel 128
Too shallow channel 128
Sideways channel 129
Multiple hits 130
Internal channel lines 131
Price action versus channel 132
Using single trend lines 134
Steep trend lines (inner) 135

Chapter 4: Support & Resistance 138

Support and Resistance Explained 138
Why Are Support & Resistance Levels Important? 140
What is the Benefit of S&R when Trading? 140
How do you Spot Support and Resistance Levels? 142
What Tools and Indicators Show the Best S&R? 144
Dynamic S&R Levels 144
Fixed S&R Levels 145
Semi Dynamic S&R Levels 145
Automated vs. Manual S&R Levels 147
Which are the Best Support and Resistance Levels? 147
 The Most Precise S&R Levels 148
How Can Traders Trade at Support or Resistance? 150
How “Precise” are S&R Levels? 151
S&R Plays Vital Role in Market Structure Triangle 151
Trend versus S&R 152
How Can Traders Measure Break or Bounce Chance? 153
1) Measuring Support & Resistance Strength 153
2) Measuring Trend Strength 153
3) Impact of Price Patterns 153
4) Number of Approaches 153
Examples from the Above 154
Summary of the Above 155
What is the Target of the Bounce or Break? 155
What are the Best Time Frames for S&R? 155
Summary Support and Resistance 156

Chapter 5: Patterns and Triangle of Analysis 157

Path of Least Resistance Explained 158
Flow versus Resistance 160
Price Patterns 163
Wave Patterns 163
EW Rules and Guidelines 168
Wave Degrees 168
Alternation (“expect a difference in the next expression of a similar pattern”):
168
Alternation of corrective waves: 168
Alternation of motive waves: 169
Balanced Proportions (“The Right Look”): 169
MotiveWave: IMPULSE 170
Rules: 172
Guidelines: 172
Fibonacci Retracement and Extension Guidelines: 173
MotiveWave: DIAGONAL 174
Rules: 174
Guidelines: 175
Fibonacci Retracement and Extension Guidelines: 176
Corrective Wave: ZIGZAG 176
Rules: 176
Guidelines: 177
Fibonacci Retracement and Extension Guidelines: 177
 Corrective Wave: FLAT 178
Rules: 178
Guidelines: 178
Fibonacci Retracement and Extension Guidelines: 179
Corrective Wave: TRIANGLE 179
Rules: 179
Guidelines: 180
Fibonacci Retracement and Extension Guidelines: 180
Corrective Wave: COMPLEX COMBINATIONS 180
Rules: 181
Guidelines: 182
Fibonacci Retracement and Extension Guidelines: 183
Divergence Patterns 183
Time Patterns 186
Timing of impulse 186
Timing of Correction 192
Fibonacci Patterns 194
Fibonacci Sequence Levels 195
Fibonacci Retracement 196
Why Fib discounts work and when not 200
Shallow vs Deep Retracement Fibs 201
Fibonacci Targets 201
Problems with Fibonacci 203
Fibonacci for Entries 210
Stop Loss with Fibs 211
Confluence with Fibs 213
Waves with Fibs 216
Deeper Reading of the Market Structure 220

Chapter 6: Making a Coherent Analysis 229

Case study 1 229
Case study 2 255

Chapter 7: SWAT Method and Moving Averages 273

What is SWAT? 274
Using moving averages for market structure 276
MA Process Explained 277
Benefits of MAs 281
Which MA Numbers? 284
Using MAs Without Waves (for Non-Wave Traders) 286
 Other MA factors 288
Factor 1: space between 21 ema and 144 ema. 288
Factor 2: the number of candles not hitting or touching the 21 ema. 289
Factor 3: divergence and 144 ema. 291
Factor 4: price breaking through 21 ema zone and 144 ema close. 292
Factor 5: 21 and 144 emas crossing. 293
Factor 6: Fractals versus 21 and 144 ema. 294
Short-term MA aspects 294
Using all MAs as a road map 296
Break of 21 ema with trend 297
Bounce at 21 ema with trend 298
Continuation away from 21 ema zone with trend (2nd breakout) 300
Break of 21 ema zone counter trend back to 144 ema 301
Bounce at 144 ema with trend 302
Break of 144 ema against trend 303
Impulsive price action 304
Triangles and corrections 305
Reversal candlesticks back to 21 ema zone 309
Translating Wave Counts With EMAs (for Wave Traders) 310
Difficulties with Wave Analysis 310
Using MAs for Wave Patterns 311
Waves 3, 5, or C 314
Waves A, C or 1 314
Waves 2 or 4 in momentum 315
Waves 2 or 4 in trend 316
Waves B 317
Waves WXY Complex Corrections 318
Waves ABCDE Triangle 318

Chapter 8: SWAT Method from A to Z 320

Step 1: use swat.CANDLES and tools for easier trade setups 320
What is meant by a “new” blue or red candle? 322
Not all swat.CANDLES are entries 323
What time frames? 329
When do the swat.CANDLES appear? 329
What about the other basic SWAT indicators? 330
swat.ARROWS 330
HMA 20 331
Step 2: use swat.FRACTALS for deeper patterns 334
 What is a Fractal Indicator? 335
What Does the Fractal Indicator Show? 336
Filtering out setups 338
Reversal setups 339
Breakout setups 339
Fractal Position versus MAs 340
swat.FRACTALS and Levels 341
Using the swat.FRACTALS 347
Step 3: use ecs.WIZZ for finding the space 351
Speed vs gravity with ecs.WIZZ 353
What is ecs.WIZZ? 354
ecs.WIZZ levels with different time frames 356
How to find the wide open chart spaces 360
ecs.WIZZ levels with different pairs 360
Where to place ecs.WIZZ indicator exactly 361
When to reset the ecs.WIZZ indicator 363
Using ecs.WIZZ indicator as targets 364
When to use tops/bottoms or 144 ema close 366
ecs.WIZZ indicator explained 367
Step 4: read the waves via oscillators 368
Step 5: using new ecs.SWAT indicators 374
ecs.MACD 374
swat.PULLBACK 376
swat.CS-DOTS 378
swat.IMPULSE 381
swat.OSCILLATOR 383
swat.CANDLES-MTF 384
swat.FRACTALS-MTF 385
swat.STRENGTH 387
Step 6: ecs.SWAT strategies 390
Approach 1: Wave strategies 393
Trend 1: 21 ema bounce and break via swat.CANDLES/ARROWS 393
Trend 2: 144 ema bounce via swat.CANDLES/ARROWS 396
Trend 3: 144 ema break via swat.CANDLES/ARROWS 400
Reversal 1: move back to 21 ema via candlesticks 402
Reversal 2: move back to 144 ema via swat.CANDLES 404
Stop Loss and Targets for Wave Trades 405
Approach 2: Discretionary setups with ecs.SWAT 406
Stop loss approaches for discretionary trading 410
 Approach 3: Rules Based SWAT Strategies 417
STRATEGY 1: SWAT CLASSIC 417
Basic Rules 418
Retracement Rules 423
Opposite candle in retracement 423
Grey candle in retracement 425
Wizz Rules 428
Targets 432
Stop loss 435
Trail stop loss 439
Case study 439
Other live examples 443
Final words on ecs.SWAT 443
Step 7: trade management 451
Phase 1: wait 453
Phase 2: tight 454
Phase 3: wait 456
Phase 4: tight 457
Step 8: multiple time frame analysis 458

Chapter 9: Automated Trading System 462

Live Trading Since June 2019 463
The Back Test Results from A to Z 464
The Methodology Behind the Back Testing 464
What Are the 2 Main Traps for EAs? 464

Chapter 10: Decision Zones and Triggers 465

Triangle of Entries 466
Decision Zones 468
Trigger and Entry 470
Open Spaces 481
Confirmation and Invalidation Levels & Patterns 485
Confirmation and Invalidation of price patterns 485
Confirmation and Invalidation of Your Setups 491
Candlestick close 491
Candlestick Size 493
Patterns Are Imperfect 494
Invalidation Levels 494
Breakouts and Bounces 495
Wrapping it up 496
Chapter 11: Deeper Market Thoughts 497
Price Fits within Fractal and Chaos Theory 499
Patterns Remain a Probability 501
Why Do Patterns and My Analysis ‘Fail’? 505
Tying It Together 506

Chapter 12: Risk Management 507

Using Stop Loss 509
Max Risk Leverage Per Setup 511
Limiting Draw-down 513
Account Management 515
Elliott Wave Risk Plan 516
Risk Management Ratios 517
Reward to Risk (R:R) ratio 517
Sharpe ratio 517
Sortino ratio 518
T-Statistic 518

Chapter 13: Trading Psychology 521

Part 1: Why is trading psychology important? 522
Minimizing the gap 523
Optimizing psychology and strategy 524
Part 2: Why is trading psychology so hard? 525
Greed, hope, fear, impatience 525
Fear of losing 527
Fear of missing out 527
Fear of profitable trade turning bad 528
Fear of being wrong 528
Greed 528
Hope 529
Boredom 529
Frustration 529
How to Control Emotions in Trading With Strategy 530
Conclusion: Trading Without Emotion 530
Personal and market beliefs 531
Why is a mindset important? 532
Trading Bias 532
Characteristics of a confident versus fearful trader 534
Discipline and patience 536
Discipline 536
 Discipline can be increased by creating a routine. 536
The next golden rule is to tackle goals step by step. 536
Organize yourself by writing down (on paper, pc, tablet) the tasks. 537
Patience 537
Regain control and improve patience 538
Wait 1 candle technique 538
Conclusion 538
Part 3: How do I improve trading psychology? 539
The mindset test 540
Dangers of a ‘nervous mindset’ 540
Benefits of a cool mind set 541
The mindset journey 541
A balanced confidence 543
Trading in the zone 544
Working on Detail: Accepting Losses 546
Difficulties with negative feedback 547
The market is the market 547
Working on Detail: Evaluations 547
Working on Detail: Focus 549
Working on Detail: Adjusting the Mood 550
Market movements 551
Working on Detail: React, Do Not Predict 552
Part 4: Other practical tips 553
Practical Tip 1: Removing nervousness when trading 553
Practical Tip 2: Trading conditions you want to avoid in Forex market 554
Chasing the market! 554
Jumping the gun! 554
In need of trading! 554
Proving yourself right or the market wrong! 555
Not mentally focused and ready! 555
Trading without an open attitude! 555
Practical Tip 3: Consistency is the final step 555
Conclusion 555

Conclusion and Summary 556

Thank yous 558

Biography

Author - Chris Svorcik

Chris Svorcik is a co-founder and co-partner at the website Elite CurrenSea
(www.EliteCurrenSea.com), which focuses on trading education, courses, analysis, webinars,
tools, manual trading, and automated trading within the Forex & CFD markets.

He has won the FXStreet award for best technical analysis in 2018 and the award for best
education in 2016 at the UK Forex awards.

The main specialty of Chris is Elliott Wave, Fibonacci, moving average (MA), Fractals, and price
pattern analysis. Based on these concepts, he created his SWAT (Simple Wave Analysis & Trading)
method, strategies, and indicators on wave and MA concepts.

Here are some examples of accurate predictions in recent years on the basis of Wave Theory:
a) the rise of the USD/JPY in January 2012 & the continuation in September 2012
b) the crash of Gold and Silver in January 2013
c) the fall of the AUD/USD in April 2013
d) the weakening of the CAD in 2nd half 2013 + 2014
e) the crash of the EUR/USD and general USD strength in May-December 2014
f) the bearish continuation of the EUR/USD in January 2015
g) the correction of the EUR/USD up to 1.17 in August 2015
h) the decline of the GBP/USD and GBP after the brexit during June-October 2016
i) the continuation of the EUR/USD from 1.12 to 1.25 during 2017
j) the fall of the GBP/USD from 1.40 to 1.20 in 2018-2019
k) the rise of Gold from $1200 to above $2000 in 2018-2019
j) the rise of the EUR/USD from 1.12 to 1.22 in 2020-21
k) the rise of Bitcoin from $10,000 to above $50,000 in 2020-21

But the bigger moves are just a sample of the work he does on a daily basis using the 1 and 4
hour charts. He shows his accuracy not only in the big time frames, but also on the more difficult
lower time frames too.

Here is a summary of his lengthy career in working with the markets:

● Chris has been an independent technical analyst since 2010 but he studied technical
analysis actively since 2005.
● He completed two master's degrees, one in banking and finance and the second one in
economics and politics in 2006 and 2007.
● After completing his two masters, he worked for 4 years from 2007 to 2011 for a major
multinational firm, part of that time as an investment analyst.
 ● From 2013 to 2019, Chris has also worked with multiple Forex & CFD brokers to help
improve their education in the field of wave analysis and live webinars, including FXDD,
Admiral Markets, and XM.
● In 2014 Chris started Elite CurrenSea for analysis, trading, and education in the field of
Forex.
● Chris has spoken in dozens of seminars since his first one in 2013.
● Nenad Kerkez and Chris started ecsLIVE channel in 2017 where they provide live analysis
and webinars. In 2019, the ecsLIVE course was completed.
● The next 2 years in 2018 and 2019 we also had a few seminars. Here is an entire list
of seminars that Chris, Nenad and Elite CurrenSea have done:
○ October 2013: Chris speaks at two seminars in Lithuania
○ March 2015: Chris speaks in Prague, Czech Republic at CNATA - Czech
National Association of Technical Analysis
○ February 2016: Chris and Nenad are speakers at Forex seminar in London,
UK
○ May 2017: Nenad holds a series of seminars in Zagreb and Ljubljana
○ September 2018: Elite CurrenSeas organizes Forex seminar in Ljubljana,
Slovenia.
○ February 2019: Elite CurrenSeas organizes Forex seminar in Utrecht, the
Netherlands.
○ March 2019: Elite CurrenSeas organizes Forex seminar in Prague, Czech
Republic.
○ March 2019: Elite CurrenSeas organizes Forex seminar in Zagreb, Croatia.
○ March 2019: Elite CurrenSeas organizes Forex seminar in Belgrade, Serbia.
○ April 2019: Chris speaks at FPG MoneyExpo Trading in Prague, Czech
Republic
○ May 2019: Nenad speaks at seminar in Bulgaria
● In 2019 Chris focused on making an overhaul of his SWAT course with new videos,
strategies, and indicators. SWAT 2.0 was eventually launched in April 2020. It includes
22+ videos with 70+ hours of material, dozens of PDFs, strategies, methods, tools, and
this 600 page ebook.
● In 2020, Chris completed this 600 pages ebook focusing on technical analysis.
● In 2020, Chris and Elite CurrenSea launched a total of 4 EAs (automated trading systems).
Zeus EA is from ECS and the LOA.EA on EUR/AUD and Bitcoin from Carlos Cordero. Ultima
EA and Rush EA were launched by our partner Mislav Nikolic from Bull Capital.
● In 2020 and 2021, Chris and Carlos Cordero completed the first EA and automated
trading method based on Fractals. The SWAT EA is trading on EUR/USD 1H, DAX 1H, and
DAX 15M. The SWAT EA Scalp version is trading on EUR/USD 1H, DAX 15M, and DAX 5M.
● In 2021 and beyond, more EAs are expected including Let’s Dance EA by Carlos Cordero,
SWAT EA daily chart trading, dozens of ideas from me, and more EAs from our partners.

Chris was born in 1979 in the Netherlands and holds the Dutch citizenship. But has lived in
Prague for the majority of the time since 2004. His hobbies include walking, travelling, reading
fact literature, playing board games, writing, painting, watching movies and documentaries, and
politics. He has lived in multiple countries including Austria, Switzerland, Italy, the United States,
Ireland, Czech Republic, and the Netherlands.

To follow me and my work, please connect to these profiles:

● Twitter: https://twitter.com/ChrisSvorcik
● Facebook: https://www.facebook.com/profile.php?id=100009628491889
● Linked In: https://www.linkedin.com/in/chrissvorcik/
● Email: [email protected]
● Website: www.elitecurrensea.com

Elite CurrenSea - www.EliteCurrenSea.Com

Elite CurrenSea (ECS) is a website that offers education, analysis, methods, strategies, indicators,
tools, and trading ideas in the field of Forex since 2014. They have a loyal group of fans and
followers, who encouraged the two to open up their own portal. ECS has organized several
seminars on their own which attracted hundreds of attendees. They have partnerships with
well-known industry giants such as FXStreet, FXEmpire, XM, FXDD, Finance Magnates.

To follow ECS and our work, please connect to these profiles:

● Website: www.elitecurrensea.com
● YouTube:
https://www.youtube.com/channel/UCpimDN3XJ9Pg6ML9UALlLOg/featured?view_as
=subscriber
● Twitter: https://twitter.com/EliteCurrensea
● Facebook: @elitecurrensea
● Email: [email protected]
● Linked In: www.linkedin.com/company/elite-currensea

Track record
To see our current and up-to-date live trading performance and back-testing results,
please check out our myfxbook profile page, which offers a summary of our trading
results and data. (https://www.myfxbook.com/members/elitecurrensea)

Other reviews
Check out Forex peace army for reviews about ECS:
https://www.forexpeacearmy.com/forex-reviews/13736/elitecurrensea-forex-training
Prologue
Trading is more complex than just knowing how to use a pinbar candlestick for instance.
Traders often try to trade the price charts with just a few simple tools, but it is not enough
information to really understand the price movements.

Trading is like learning a language. The more words you know, the more you will be able to
understand and communicate in that language. The charts are also communicating
information to us traders with every single candle. It is up to traders to learn the charting
language sufficiently. The ecs.SWAT approach helps traders reach that goal.

Pinbars are a useful piece of information but will rarely bring success on its own. This is not
enough information to gain an in-depth understanding of the market structure and price
charts. Trading is not that easy.

To truly understand the price charts, you need to know that the financial markets move in
price swings, chart patterns, and waves, which is like the DNA of a chart and happens on all
time frames and financial instruments.

These price patterns are the most important aspect of trading. Even more important than
support and resistance (S&R), because traders can based on price patterns make an
estimate what price will do at S&R. What do we mean with an estimate?

By analysing price swing, chart patterns, and wave patterns, traders can understand,
analyse, and estimate the price charts and use it like a road map for price. Within that road
map, price will find a path of least resistance. Traders can analyse what the future path of
least resistance will be and estimate their trade ideas within that likely price path. How can
you measure the road map and price path?

Moving averages. They are a delightful tool and the best indicator for understanding the
price charts in a simple and deep way at the same time. With moving averages, traders can
estimate price swings, chart patterns, and wave patterns in a more precise and quicker
way. Together with Fractals, Fibonacci, and other proprietary tools and indicators, we built
the ecs.SWAT method that shows traders the expected price path in a simple way.

The ecs.SWAT method stands for Simple Wave Analysis and Trading. But it is more than
just waves, it’s about understanding the charts and the expected price path. Most traders
struggle to recognize a price swing, a wave, and the bigger price movements. The SWAT
book explains core concepts like moving averages, Fibonacci, Fractals, price patterns, wave
and price swings, trend, and support & resistance.

The ecs.SWAT book is most focused on practical solutions (98%). We show traders a
systematic way of identifying one price swing. We explain how to identify impulsive and
corrective price swings, how to spot chart patterns, the trend direction, and S&R. But we
also show some theory (2%) as well where we explain how patterns repeat throughout
time, with all instruments, and on all time frames because the market is fractal in nature.
Candles and price swings are like pieces of Lego as they build up to something larger.

Simply said, we show traders how to recognise patterns and trade them. More importantly,
we explain how moving averages and our SWAT tools and SWAT strategies help simplify
both the process of identifying patterns and trading them. With a simple yet deep way of
doing technical analysis based on our SWAT methods, traders can make an educated
assumption about direction and likely trades.

We hope that the ecs.SWAT book gives you as much joy as I had when writing it. Above all,
we hope that the material here makes the reader a better chart analyst and a better trader.
Even if the materials help improve your skills with 10%, it is already a success. But secretly, I
hope that you gain much more out of the ecs.SWAT book. There is certainly a wealth of
information to be discovered in this SWAT book so I hope that you embark on a life-time
trading journey with ecs.SWAT in hand.

In Chapter 1 the introduction, we dive into why trading is exciting and why it offers multiple
benefits. In chapter 2 we shortly explain our view of fundamentals. As you might know, we
are technical traders which is why chapter 2 is short and to the point and more space (99%)
is dedicated to technical analysis.

In chapter 3 till chapter 11 we discuss technical analysis only. First of all, all levels of price
action in chapter 3 before discussing support and resistance in chapter 4. Then we
continue with price patterns in chapter 5. In chapter 6 we use the information from
chapters 3, 4, and 5 for making a full scale analysis in a practical way with two cases
studies.

Chapters 7 to 10 focus more on trading then analysis. First we explain the SWAT method
that Chris has created in great detail in chapters 7 and 8. In chapter 9 we explain how you
can find more information about automated trading systems.

Then in chapter 11 there is a last overview of how traders can trade using decision zones
and triggers before moving into the last topics of the book such as deeper market thoughts
in chapter 12, risk management in chapter 13, and trading psychology in chapter 14.

Enjoy and good trading!

Chris Svorcik
Chapter 1: Introduction
Charting, technical analysis (TA), price patterns, and trading is not only our business, it’s a
hobby and a passion as well.

For us trading is and remains exciting and analysing the charts will always be fun and
challenging. Opening up the charts in the morning and using trend lines, patterns,
Fibonacci levels and technical tools is interesting and enjoyable work.

Once you finish reading this book, we believe that you will see trading in the same (positive)
light as we do.

It also offers us freedom to decide our own daily schedule and where we live and travel.

Furthermore we enjoy having “skin in the game” as traders can fully benefit from taking
calculated risks when we believe that the odds are in our favor.

Is it a must to love analysis and trading?

1. No, but it does help speed up the learning process of understanding the charts…
2. Unless you use our automated trading systems, which does the trading on its own
(more on that later on in this guide).
3. But even automated trading is not as simple as it sounds. Traders might have
problems with an EA after 2-3 trades in a row close for a loss. But such losing
streaks (called draw-downs) are perfectly normal.

Traders will always need to deal with draw-downs (losing streaks).

It’s part of the business.

That is why we wrote this guide. To help traders and investors by using charts.

After reading this guide on trading Forex and financial markets, we hope that:

a. It will help you create and implement a viable, consistent, and long-term way to
trade.
b. We also hope that you gain some enthusiasm for analysing the Forex market and
for the art of charting.

First of all, you might be wondering why trade at all?

Trading, charting, and understanding technical analysis offers a long list of benefits,
motivations, and goals.

Benefit 1: it offers traders independence from potentially boring jobs, lengthy commuting,
companies with low employee benefits, annoying bosses, and frustrating office
environments.

Benefit 2: it also allows us to live freely in the place of our choice, have the freedom to
travel, be our own boss, determine your time and agenda, and connect to like minded
people. This is of course especially valid for independent traders whereas institutional
traders are more tied to an office, albeit an exciting environment nonetheless.

Benefit 3: technical and wave analysis is also a form of financial literacy. Even if you don’t
use your analytical skills for trading purposes, they can still be useful for timing a long-term
investment. Buying a stock requires a decent amount of fundamental and sector analysis
first, but you are able to improve the timing of the purchase with charts.

Benefit 4: finally, technological trends seen in the fields of robotics, artificial intelligence,
automation, and information technology are putting regular long-term employment and
wages under pressure. Analysing and trading the financial charts offers people a potential
extra income, long-term wealth protection or expansion, and a new skill to combat these
trends.

By teaching other traders about the art and science behind analysing and trading the Forex
and financial markets, we hope to empower people to setup a path to (more) financial
freedom, wealth, health, wisdom, and knowledge.

Our vision is that people should have a larger stake (influence) in their own life path,
development, and goals. Too often, people seem to fail in shaping their destiny. Too often,
people give up on their ambitions or settle for less.

Trading offers a path for self fulfillment, more financial means, more financial freedom,
and personal freedom in general. We want to help traders with their journey, just as
trading mentors helped guide us when we started trading.
Chapter 2: Our View on Fundamentals
How does price move?

The answer will vary depending on which financial instruments you are analysing and also
probably which expert you ask.

In the world of Forex, there are a wide range of political, economic, and financial factors
pulling and pushing the supply and demand of each currency, which impact the price
movement of each currency pair.

Our Prism for Analysing

Elite CurrenSea has its own prism for analysing this.

1. We focus on price action and technical analysis because all factors weigh into price.
2. Studying price action is the ultimate short-cut for understanding the financial
markets.

That said, there are fundamental factors that have a long-term impact on the price
movement of each currency pair:

1. Interest rates
2. Quantitative easing
3. Unemployment rates
4. Trade.

The main problem with fundamental analysis in our eyes is that it’s very difficult for
individual traders to analyse all of these factors. It’s even more difficult to enter trades with
the right timing in the short-term based on those long-term factors.

Banks and funds have the manpower (entire research departments) and capital depth (lots
of money) to trade fundamental analysis in the short and long run. Many retail traders do
not have that kind of luxury.

Although we do not use fundamental analysis for our trading purposes such as intraday,
intra-week and swing trading, we do believe that fundamentals guide price in the long run.

So we will share our views on how we analyse the long-term fundamentals. For us, it has
little practical application in our day-to-day trading, although sometimes it is useful for our
swing trades at major turning points.
We want to emphasize that this is our simplified method for evaluating fundamentals in
the long run. The supply and demand of each currency is impacted by a long list of items
but in essence these are the main factors:

1) The demand for a currency is determined by the reward received for buying the
currency.
2) The supply is determined by the chance of a currency losing its appeal and value via
the risk of default and level of inflation.

This is of course valid for free floating currencies, not for currencies that are “pegged” at a
fixed rate or endure any strong intervention by a central bank.

Supply and Demand

What factors impact supply and demand?

The list of factors is endless long and consists of dozens of data points such as:
GDP growth, GDP revisions, housing starts, retail sales figures, unemployment figures,
consumer figures, production levels and many more that are not mentioned here.

But in our view there is a straightforward formula that can be used, it’s called reward to
risk:

1. A currency which offers more reward and less risk will see increased demand.
2. A currency which offers less reward and more risk will see decreased demand.

What is vital for demand?

Interest rates. They offer a direct reward for buying a currency. Higher Interest rates
relative to another currency can push demand for the first currency (with the higher rates).
If the USD is offering 2+% interest rate whereas the EUR is at 0%, then there will be more
demand for the USD than for the EUR. There is more reward for buying USD than for the
EUR, which pushes up demand for the USD. Also higher expected interest rates can have a
significant impact. Lower (expected) rates have the opposite effect.

But there is a long list of other factors. We will not dive into all of the factors but a booming
economy or strong stock market can also offer reward for investors. Here are some more:

● Large government debt.

● Risk of currency devaluation or default.
● High levels of inflation.
A large government debt (in relationship to a country’s GDP) will burden the currency as
investors might see an increase in the default risk, which is when the government fails to
pay back what it owes. The risk of default is not gradual and investors usually don’t pay
attention to it unless the debt spirals out of control. This is why and when the currency
suddenly and quickly loses value. Defaults seem to be rare but actually occur regularly over
the past centuries.

Other risks are inflation. For instance, moderate levels of inflation for instance can indicate
the potential for interest rates to rise as many central banks are committed to keep
inflation levels at or around 2% Inflation erodes the value of the currency but is only
noticeable when inflation reaches high levels. Here is a summary:

● A modest inflation rate of two per cent per year does not endanger the value of the
currency and in fact promises above zero interest rates which is good for the return
side of the equation (see above paragraph).
● Low levels of inflation could be bad for the currency as the economy might be
struggling to rebound and improve and interest rate gains seem unlikely.
● Super high levels of inflation fully erode the value of savings and make the currency
extremely undesirable.

Who impacts supply?

Central banks and creation of new currency. And in recent times, the purchase of assets via
quantitative easing programs to combat recessions and bubbles.

Although quantitative easing helps smooth out major recessions, there are potential
disruptions it could cause in the future such as asset bubbles. It also means that more of
the same currency is printed, which could lower the value of the currency.

Devaluations are a direct hit for the value of the currency because the central bank or
government is basically reducing the purchasing power of each currency unit. Direct
devaluations used to be a regular tool for governments to become competitive, but their
usage seems to be less frequent now.

The balance between demand and supply. Ultimately this reward to risk ratio will
determine the demand and supply for each currency:

● Each currency pair is basically a relative measurement between two currencies.

● For instance, one currency might not do so well but an even worse currency will still
lose ground (compared to the first one).
● The reward to risk ratio is in fact the long-term scorecard for each currency versus
other currencies.
● Price shows that scorecard in the long run.
What about news events? Of course, news events do impact the charts.

First of all, they have a certain degree of influence on the long-term balance of supply and
demand. A good or bad consumer inflation figure will make an interest rate increase or
decrease slightly more or less likely (the larger the divergence between the actual and
expected number, the more impact the statistic could have). The data points offer the
market a way to correct its vision to the current most accurate assessment.

Secondly, they have an immediate effect on the chart, which is noticeable on lower time
frames such as the 1 minute, 5 minute, 15 minute, and 1 hour charts. Huge events can
even impact the 4 hour and daily candle.

We are no fans of news trading. It is vital to keep in mind that the strategies and trading
based on news are more volatile and risky. We prefer setups based on clear technical
analysis.

What is considered a “big” news event? We consider big news to be red tagged events on
the economic calendar or any speech of a central bank president or even board member.

In our view, swing traders on the 4 hour are not impacted by regular red tagged news
events unless there is an interest rate decision on that trading day for that currency or
when the market expects a FOMC (statements from US central bank) meeting minutes or
NFP (Non-Farm Payroll) figures.

Conclusion
Fundamentals do guide the financial markets but mainly for the long-term. News events
impact the very short-term (movements during some hours). However, fundamentals and
news events are not able to fully explain the price movements in between the news events
and long-term direction on their own.

Price moves up and down in most instruments and especially in the Forex market, each
and every day. But the fundamentals do not change every hour and day… This creates a
gap. Why does price move even though fundamentals have not changed and/or no news
event has occurred? In our opinion, there must be something else that can explain price
movement in the short and medium-term.

Luckily there is and it’s called:

1) Technical analysis
2) Wave analysis
With both wave and technical analysis, traders are able to fully understand and grasp the
path of least resistance - which is what we will explain in the next chapter.

Supply and demand for an instrument or currency pair are heavily impacted by
fundamental and news factors in the very short and long-term.

But analysing fundamentals and news does not help much when analysing the charts in the
short and medium term.

Technical and wave analysis provide a 360 degree view of the chart and allow traders to
understand the battle between supply and demand from an entirely different perspective.

Technicals are key for understanding all time frames, short-term, intermediate, and
long-term. For long-term trading or investing decisions, technicals play a secondary role
compared to fundamentals. But technicals offer the most help in short-term and
intermediate run trading.
Chapter 3: Technical Analysis: Price Action and the
Path of Least Resistance
This ebook offers you a full overview of our views on price action and technical analysis.

Path of Least Resistance

Traders use a wide range of techniques to understand the price chart and find profitable
entry points, such as technical analysis, wave analysis, price action, candlestick patterns,
and indicators. All of these methods are based on past and current price movement.

Technical traders analyse these price charts to study to understand how price could move
in the (near) future.

Historical data is also used for instance to understand, improve, and forecast traffic jams,
weather, economic trends, consumer patterns and a whole range of fields. Historical data
is usually a key component of any analysis.

Analysis of price via technical analysis is not different in this regard. Generally speaking,
analysing the past helps us predict the future. The same is true for charts: analysing past
price helps us predict the future of price movement.

But traders must realise that the accuracy rate goes down when looking further into the
future, which is why it's more accurate to say: analysing the past helps us predict the
immediate future.

Why do we emphasize the “immediate” future? Because forecasts are most reliable in the
short-term and become more difficult when applied to the more distant future.

The reason is simple: the further we look into the future, the more difficult it becomes to
analyse all aspects - including current, hidden, and unknown factors - because there are
more variables along the way that can impact the future.

The path of the future can run in many different directions and so it is much easier to make
a forecast when analysing events close(r) to now. This is also valid for the markets and the
charts.

When analysing the charts now, traders can make a decent assessment about the next few
hours or days ahead. But the longer a trader looks into the future, then there is an
increasing chance that unknown variables might appear and impact the price in an
unexpected way. This in turn makes it more difficult to predict long-term price movements.
The further a trader tries to forecast into the future, the more difficult it becomes to
forecast with a higher degree of accuracy. Of course, making an incorrect forecast would
not lose you any money unless you make a bet. However, entering a trade setup that is
aiming for a target 2 years from now is just simply more difficult because the market can
undergo many changes.

The entire ECS team uses technical and wave analysis to understand how price moved in
the past. We use this analysis to make estimates about how price is expected to move in
the immediate future and then we look for potential trade setups. Sometimes we find
setups and sometimes we don’t, which depends on how probable a certain trade setup is
and whether the current circumstances match our system rules. Some charts are easier to
analyse - and hence more reliable to predict in the near future and more potential to find a
high probability trade setup - whereas other charts can be enormously tricky and difficult.

So now that you know why we use technical and wave analysis for analysing the financial
markets, price charts, and assets, it is time to explain our methods. But before we can do
that, we will be explaining how we analyse the charts first of all.

To analyse each and every chart, we use an approach that is called “triangle of analysis”
which analyses:

1. Trend & momentum

2. Support & resistance
3. Price patterns.

The next 3 chapters will explain each segment one by one. We start with trend and
momentum.

Trend, Momentum, and the Building Blocks of the Charts

Before we can explain what is trend and momentum, we must take a step back and explain
the type of price chart used.

We mostly use candlestick charts.

The candlestick is the basic and smallest unit of measurement on the chart - regardless of
the time frame. The candlestick is like the 1 cent coin with the Euro or US Dollar, because
there is a not smaller unit of accounting. Of course, there are some traders that use bars
while others use line, renko or range bar charts.
Nowadays most traders choose the candlestick as the basic building block of a chart… We
use candlesticks so the focus of this book will be on them.

The credit for candlestick development and charting goes to a legendary rice trader named
Homma from the town of Sakata, Japan. There is a high probability that his original ideas
were modified and filtered over time, eventually evolving into candlestick trading we use
today. Steve Nison introduced the concept to the West.

Candlesticks provide a wide range of visual hints and thanks to them we can understand
price action trading in a much easier way. Trading with Japanese candlestick charts also
allows traders to grasp market sentiment.

All of the candlesticks on a given chart represent the flow of price of a particular
instrument and time frame.

1. Each single, individual candlestick represents one building block of that larger
picture.
2. Traders can connect those building blocks to construct larger structures. For
instance, traders can (sometimes) connect multiple candlesticks to build bigger
entities like candlestick patterns.
3. The same logic can be used for language. Words form sentences which again form
paragraphs. Or, you can compare candles to pieces of Lego (the children’s toy),
which are used to build bigger structures like a house.

With trading it works like this:

1. Candlestick = the basic unit on the chart.

2. Candlestick patterns = a group of 1-4 candles that form specific patterns which in
turn provide information about the direction of the chart.

3. Price swings = a group of candles, usually more than 5, that indicate a larger price
movement. A price swing is when a series of candles form one larger unit or “leg”,
which has (mostly) the same direction (sideways, up, down) and speed (impulsive or
corrective).
4. A price pattern = a group of swings that connect to form a pattern. The pattern
either indicates bullish or bearish and continuation or reversal.

5. Trend or range = multiple price swings that can be connected to form a larger
direction. A channel would have multiple price swings in it. The overall angle of the
channel could be up, down or sideways. A trend channel is either up or down
whereas a range is always going sideways.
Chart Hierarchy

In the next section we will explain step by step all of the building blocks that make up the
larger market structure. As mentioned above, the single candle is the smallest unit and the
largest is the entire market structure of the chart. Here is the sequence for a full overview.
The next paragraphs will discuss all of these building blocks.

Bottom of sequence (smallest)

1. Candlestick: 1x candle is smallest unit of chart

2. Candlestick pattern: 1-4x candlesticks to form a pattern
3. Price swing: candlesticks and candle patterns make a swing
4. Price patterns: multiple price swings make price patterns
5. Trend or range: multiple price swings and price patterns
make trend and/or range
6. The entire chart: multiple trends, ranges, and price patterns
make up the chart and market structure

Top of sequence (largest)

Let’s dive into each of these steps. First of all, we review the basics of the candlestick before
we will analyse more details about the candlestick and candlestick patterns. Then we will
discuss price swings, price patterns, and trend / range.
Candlestick Basics

Candlesticks Explained

The candlestick offers four data points per candlestick:

1. Candle open (O): the starting price of the candlestick.

2. Candle close (C): the closing price of the candlestick.
3. Candle high (H): the high price of the candlestick.
4. Candle low (L): the low price of the candlestick.

The same information is provided for each candlestick regardless of the time frame and
financial instrument. All candles have the exact same composition. So a candlestick on the
daily chart would show the price of the open, close, high and low for each day. The 4 hour
or 15 minute charts also indicate the open, close, high and low but of 4 hour and 15 minute
chart. Basically, the chosen time frame indicates the time length of each candlestick seen
on the chart.

The main difference between the time frames is how quickly a new candlestick appears on
the chart. A daily chart will only get a new candle at the start of each trading day. A weekly
chart will take a full week before a new candlestick is available. Lower time frames change
quicker. For instance, a 15 minute chart will get a new candle every 15 minutes - as long as
the market is open.

The importance of a candlestick does depend on the time frame. The candlesticks from
higher time frames offer more value than from lower time frames. A daily chart candlestick
has more weight and significance than a candlestick from a 30 minute chart. The same is
true for a 60 min candle, which has more importance than a 1 minute candlestick. That
said, sometimes important information about candlestick patterns or price patterns playing
out can only be seen only in lower time frames. So in this case, the smaller time frames can
sometimes give extra information about the state of the chart. But this is mainly valid at
key moments. Usually speaking, candles on higher time frames offer more information and
predictive value - on average. But once again, there are some specific moments where
lower time frames reveal more information at certain decision zones. How price action
reacts there can sometimes turn out be a leading indicator for what happens later on
higher time frames.

The candlestick is bullish, bearish, or indecisive (Doji) as follows:

● Bullish: a price closing higher than where it opened will produce a white candle by
default - bullish.
● Bearish: a price closing lower than where it opened makes a black candle by default
- bearish.
● Indecision: a price closing equal to where it opened means that the candle is neither
bullish or bearish, but indecisive (Doji). This is also valid if the price closes near to
where it opened.
 ○ We use the 10% rule, which means that a candle body that is less than 10% of
the total candle size (high minus low) is considered a Doji and more than 10%
is a bearish or bullish candle.

The candle consists of a body, nose, and the wick (also called tail or a shadow):

● Body: the box that is formed by price action is called "the body" of the candle (a
candle with a close that is equal to the open has no body).
● Wicks: the extremes of the daily price movement, represented by lines extending
from the body, are called wicks (or tails, shadows).
○ Some traders call the small part of the candle “the nose”, although others
speak about the wick on both sides of the candle regardless of the size.

Correlation between the Open and the Close

Keep in mind the character of the candle is never fully known until the candle closes. So a
15 minute, 4 hour, and daily candlestick is only considered closed and final when their
respective time period has finished. A candle that is not closed is still “open”. The
information from this candle is very small because price action can still move and change
the character and outlook of the open candle. In many cases, candles that have not closed
also retrace first before moving into the dominant direction. It is always best to use
information from closed candles.

Candlestick charts provide great insights into the market dynamics based on the shape and
colour of the candle’s body when comparing it to previous candles.

Key Dynamics of Each Candlestick

Each closed candlestick provides a ton of value and information. Here are some vital
questions it covers (C=close, O=open, L=low, and H=high). Some of the information was
already covered at the start but we will add it again for a full review:

1. What is the direction of the candlestick: bear or bull?

a. C vs O.
b. This is answered by analysing the candle close versus candle open.
c. A candle close above the open indicates a bullish candle.
d. A candle close below the open indicates a bearish candle.
e. A candle close that is equal to the open is called a Doji candlestick pattern
and indicates indecision.
2. Which side is in control of the candlestick, bear or bull?
a. C closes near H/L.
b. This is answered by analysing the candle close versus the high or low.
c. A candle close near the high indicates that the bulls are in control.
d. A candle close near the low indicates that the bears are in control.
e. A candle close near the middle of the candle indicates correction and
indecision.
f. Here is how traders can assess the control:
i. 0-5%: extremely strong. The close is almost right at the high or low
which is indicating extreme strong candlestick close. The bulls or
bears have a dominant and clear control of the candle. First candle on
the left.
ii. 5-10%: very strong. The bulls or bears have a dominant and clear
control of the candle.
iii. 10-20%: strong. The candle is under control by the bears or bulls but
not as dominant as the first two groups. Second candle from the left.
iv. 20-25%: decent. The control is weaker but one side is still dominant.
Analyse other parts of the charts to understand the overall picture.
Second candle from the right.
v. 25-30%: mild. Be careful, control of one side is becoming much
weaker. Context is important.
vi. 30-35%: weak. There is significantly less control of one side and candle
looks more indecisive.
vii. 35-50%: very weak. There is no control of one side and the candlestick
is corrective. First candle from the right.
3. Is there selling or buying pressure in the candlestick?
a. C and O away from H/L
b. This is answered by analysing how far the candle open and close are
compared to the high or low. This is called a candle wick.
c. A candle close and open that is far away from the high indicates selling
pressure.
d. A candle close and open that is far away from the low indicates buying
pressure.
i. Less than 50% wick: probably no extreme selling or buying pressure in
that candle.
ii. Bottom/top 50% of the candle is wick: some pressure to up or down
but if candle open and close are equal, then this could also mean
indecision and no pressure.
iii. Bottom 65% of the candle is wick: significant pressure to up. First
candle on the left is an example.
iv. Top 65% of the candle is wick: significant pressure to down. Second
candle on the left is an example.
v. Bottom 80% of the candle is wick: significant pressure to up. Second
candle on the right is an example.
vi. Top 80% of the candle is wick: significant pressure to down. First
candle on the right is an example.

The wick length can represent selling or buying pressure when comparing it with an
 open or close price from the body of the candle. This may provide insights on the
market’s rejection for a resistance or support price level.

The longer the wick, the more likely it indicates a trend reversal because it indicates
as trong reaction. A wick at the bottom of the candle could indicate the end of the
downtrend for instance. Conversely, wicks at the top of up-trending candle bodies
may indicate that demand is slowing or supply is increasing.

Again, a large wick, relative to the real body, may signify a stronger reversal, with the
strongest being when a pinbar candlestick pattern is formed.

4. What is the size of the candlestick?

○ A larger candlestick has more weight and importance than a smaller
candlestick.
○ The relative size of the candlestick compared to the candlestick of the same
time frame and on the same chart is the key aspect. The absolute size is not
important.
 2. Sequence of 2 candlesticks:
○ A trend is visible when price shows:
■ Lower lows and/or lower highs for a downtrend
■ Higher highs and/or higher lows for an uptrend
■ Especially a new candle low or high is considered to be more
important than a higher low or lower high.

○ The close versus the close:

■ A close below the previous close indicates bearishness.
■ A close above the previous close indicates bullishness.

Quiz time!

Now it's time to check your progress after finishing the first part on candlesticks.

Question 1: What does the candlestick with the purple box indicate to traders?

Which answer is correct?

Answer A) indecision, there are no significant wicks on either side, which means indecision.

Answer B) bullish, the candle closed bullish so an uptrend continuation is likely.

Answer C) bearish, there is a strong wick on the top of a candle with a close near the low.

Question 2: What does the candlestick with the purple box indicate to traders?

Which answer is correct?

Answer A) indecision, there is no wick. Candles provide little information.

Answer B) bullish, the candle is a retracement of a larger uptrend.

Answer C) bearish, the candle closed near the low, is a reasonable size and closed below
the previous close.
Curious what the answers are?

The answers to the quiz questions are:

1) C - large wick on top indicates selling pressure and a potential reversal.
2) C - candle close near the low indicates that bears are in control.

Candlestick Patterns Explained

Now that we covered the basics, it’s time to discuss candlestick patterns. Candlestick
patterns are one of the core methods of price action trading. In some cases one specific
candlestick can also be a candlestick pattern but other times you need to see a group of
candles display a certain pattern.

One of the most used candlestick patterns is the so-called “Pin Bar”. Pin Bars effectively
indicate current buyers and sellers. If the tail is longer than the body, then it’s a strong
signal that the price might turn.

As mentioned above, candlesticks are the basic building blocks for every trader. Some
candlesticks will have more “value” than other candles due to their size, wick, or strong
candle close, whereas other candles will be insignificant and offer no extra insight because
they could be relatively small or close as a Doji (close is equal to open).

Candlestick patterns indicate an even bigger message. Although each candlestick

provides some information to traders, candlestick patterns provide more value as their
meaning and impact is larger than just a single candlestick.
As you probably have noticed, traders can analyse the charts in a much deeper way when
using candlesticks and candle patterns. The main benefit is that the information from
candles is instant and without any lag (delay), such as most indicators.

This section will dive into all of the candlestick patterns. It includes an explanation of how
to read candlesticks but also a full overview of the main candlestick patterns and how to
interpret them. Candlesticks and their patterns are a main aspect of our trading systems at
Elite CurrenSea (ECs).

The next parts will explain bearish and bullish candlestick patterns. We also divided the
article in reversal and continuation candlestick patterns, which means that there are 4
parts:

● Bearish reversal candlestick patterns

● Bearish continuation candlestick patterns
● Bullish reversal candlestick patterns
● Bullish continuation candlestick patterns

Let’s first start with the bearish ones.

A) Bearish Reversal Candlestick Patterns

3 Black Crows

The number of candles in the configuration – 3

1. The market is characterised by an uptrend.

 2. Three consecutive normal or long bearish candlesticks are seen in the chart.

3. Each candlestick opens within the body of the previous candle.

4. Candlesticks progressively close at new lows, below the preceding candle.

5. HIgher chance of success: if price can manage to break support and bullish impulse
should be less strong than the bearish decline

3 Inside Down

The number of candles in the configuration – 3

1. The market is characterised by a prevailing uptrend.

2. We see a Bearish Harami (or a Harami Cross) pattern in the first two candles.

3. After that, we see a bearish candlestick on the third candle with a lower close than
the second candle.
Evening Star

The number of candles in the configuration – 3

1. The market is characterised by an uptrend.

2. We see a bullish candlestick as the first candle.

3. After that, we see a short candlestick on the second candle that gaps in the direction
of the uptrend.

4. A bearish candlestick is spotted as the third candle.

Upside 2 Crows

The number of candles in the configuration – 3

1. The market is characterised by a prevailing uptrend.

2. A normal or long bullish candlestick appears as the first candle.

3. The second candle is a short bearish candlestick that goes down.

4. On the last candle, another bearish candlestick opens at or above the open and
then closes below the close of the previous candle, though still above the low of the
first candle.
Harami

The number of candles in the configuration – 2

1. The market is characterised by a prevailing uptrend.

2. A bullish body is observed as the first candle.

3. The bearish body that is formed on the second candle is completely engulfed by the
body of the first candle.

Bearish Abandoned Baby

The number of candles in the configuration – 3 or 4

1. The market is characterised by an uptrend.

2. A bullish candlestick is observed as the first candle.

3. Then we see a Doji on the second candle whose shadow stretches above the upper
shadow of the previous candle.

4. Third or fourth candle’s bearish candlestick moves in the opposite direction.

Meeting Lines

The number of candles in the configuration – 2

1. The market is characterised by an uptrend.

2. A bullish candlestick is observed as the first candle.

3. We see a bearish candlestick as the second candle.

4. The closing prices are the same or almost the same on both candles.
Dark Cloud Cover

The number of candles in the configuration – 2

1. The market is characterised by an uptrend.

2. A white candlestick appears as the first candle.

3. A black candlestick opens on the second candle and closes more than halfway into
the body of the first candle.

4. The second candle fails to close below the body of the first candle.
Advance Block

The number of candles in the configuration – 3

1. The market is characterised by an uptrend.

2. 3 bullish candlesticks appear with each candle having a shorter body

3. The candle open of the 2nd and 3rd candle are within the body of the previous
candle

4. The wicks of the three candles gradually become taller, especially the last candle
B) Bearish Continuation Candlestick Patterns
Falling 3 Methods

Number of candles in the configuration – 3-6

1. The first candle in the pattern is a long bearish candlestick within a defined
downtrend.

2. A series of ascending small-bodied candlesticks that trade within the range of the
first candlestick.

3. A long bearish candlestick creates a new low, which cues that the sellers are back in
control of the direction.
Bearish 3 Line Strike

Number of candles in the configuration – 4

1. The first three candles make up the Three Black Crows formation or similar two
candlestick patterns (variant 2).

2. The last candle is a bullish candle that opens below the third candle and closes
above the first candle’s open or the second candle’s open (variant 2).

Marubozu Bearish
Number of candles in the configuration – 1

Marubozu defines strong sell off resistance or strong buying off the support. Marubozu is
also known as momentum candles.

C) Bullish Reversal Candlestick Patterns

Bullish 3 Inside Up

The number of candles in the configuration – 3

1. Connected to bullish Harami Pattern.

2. The first candle is bearish and downtrending.

3. The second candle is bullish.

4. The third candle has a higher close than the second candle.
Bullish 3 Outside Up

The number of candles in the configuration – 3

1. The market is characterised by a prevailing downtrend.

2. Followed by the engulfing candle.

3. The third candle has a higher close price then the second candle.

3 White Soldiers
The number of candles in the configuration – 3

1. The market is characterised by an uptrend or end of downtrend.

2. We see a bullish marubozu candlestick as the first candle.

3. Next two candles make higher highs.

Concealing Baby Swallow

The number of candles in the configuration – 4 (very rare pattern)

1. Two falling bearish Marubozu candles at the beginning confirm the downtrend.

2. The third candle is a short bearish with or without a downside gap.

3. The third candle trades into the previous candles’ body, producing a long upper
shadow.

4. The fourth bullish candle completely engulfs the third candle, including the shadow.
Morning Star

The number of candles in the configuration – 3

1. The market is characterised by a downtrend or retracement in a bullish trend.

2. Bearish candlestick is observed as the first candle.

3. Followed by a doji or small candle.

4. The third candlestick is a bullish momentum candle.

Piercing Line

The number of candles in the configuration – 2

1. The first candle is a bearish momentum candle.

2. The second candlestick opens up, goes slightly down and closes more than halfway
into the body of the first candle.

3. The second candle fails to close above the body of the first candle.
Bullish Belt Hold Lines

The number of candles in the configuration – 1

1. After the drop in the price, we observe a bullish Marubozu candle at the support.

2. Double or triple bottom support precedes the Belt Hold Lines pattern.

Harami Cross

The number of candles in the configuration – 1

 1. A doji candlestick appears at support.

Harami Bullish

The number of candles in the configuration – 2

1. The market is characterised by a prevailing downtrend.

2. A bearish candlestick appears as the first candle.

3. The next candle is characterised by a bullish body which is completely engulfed by

the body of the first candle.
Tweezers

The number of candles in the configuration – 2

1. The first candle is a bearish candle and it closes near the support or daily low.

2. The second candle completely negates the first so it erases all losses of a previous
candle.

Bullish Squeeze

The number of candles in the configuration – 3

 1. A bearish candlestick appears on the first candle.

2. The second and the third candles each have lower highs and higher lows than the
previous candle.

3. Their direction is not important; the size of the three candles does not matter.

D) Bullish Continuation Candlestick Patterns

Rising 3 Methods

Number of candles in the configuration – 3-6

1. The first candle is a strong bullish candle that retraces the next three candles,
though the second, third and fourth candle remain within the range of the 1st
candle.

2. Those are characterised by consecutive lower highs where wicks may slightly vary.

3. The final candle breaks resistance to the upside and makes a bullish continuation.
Side By Side White Lines

Number of candles in the configuration – 2

1. The first candle we see is a long bullish candle that appears at resistance.

2. The second candle is a bullish candle that follows the first one, making a
breakthrough resistance.

Marubozu Bullish
Number of candles in the configuration – 1

Marubozu defines strong buying off the resistance or strong buying off the support.
Marubozu is also known as momentum candle.

Here is a summary of all candlestick patterns:

Quiz time!

Question 1: What candlestick pattern is visible in the purple box?

Which answer is correct?

Answer A) bearish engulfing twins.

Answer B) bullish squeeze.

Answer C) harami cross.

The correct answer is A!

The previous two parts showed you how to read candlesticks and how to understand
candlestick patterns. This will become important later on in the book when we are
analysing how price action is behaving when reaching a key decision zone and we need to
measure whether price is bouncing or breaking. Now it’s time to discuss the next concept
in the list of price hierarchy: price swings!

Price Swings: the 4 Types of Price Action

Price swings are groups of candles next to each other that form one larger unit. The
candles make up one swing because the majority of the candles share the same
characteristics.

Swings are considered to be a group of candlesticks where the majority share both:

1. Common direction (bearish or bullish)

2. Strength (strong or weak).

Simply said, price swings are either impulsive (strong) or corrective (weak) and they are
either bullish or bearish.

It is important to know that strong price movement is called impulse or momentum

whereas weak price action is known as corrective or consolidation. The strength or
weakness of price flow can be understood by analysing whether price is behaving
impulsively or correctively.
This creates four different types of price movements, which in some ways can be seen as
the “DNA” or “heart beat” of the market:

Direction / Speed Impulsive Corrective

Bullish Bullish impulse Bullish correction

Bearish Bearish impulse Bearish correction

Each of these four variations represents a seperate “price swing” or “wave”. Every price
swing is either bearish or bullish and either impulsive or corrective.

It takes time and experience to recognise which price action belongs to one price swing...
But the above table provides a key starting point. You will also be able to spot price swings
better when using the SWAT rules and guidelines mentioned in this ebook and in my online
SWAT course.

GBP/USD 4 hour chart: blue arrows indicate bullish momentum, green arrows indicate bullish
correction, red arrows indicate bearish impulse, and orange arrows indicate bearish correction.

You might be wondering: what is the benefit of knowing this information about the price
swing?

Price swings provide key information about the market structure. Traders that correctly
analyse and understand price swings have the following advantages:
 ● Understand the past price swing swings: ability to analyse past price swings to
estimate the past, current, and future chart patterns more accurately.

● Character of current price swing: ability to analyse past price swings to estimate the
current price action more accurately.

● Length of current price swing: ability to analyse the current price swing (character /
direction) and thereby also understand how long the price swing will last and when
it could end.

● Character of the next price swings: ability to analyse past and current price swings
to estimate the character of the next swing price swing.

Price swings are important because of these reasons:

1) It allows traders to understand what type of price swing they are trading.
2) It explains what to expect from the current swing in terms of movement and
volatility (impulse versus correction).
3) It explains what target could be expected and what stop loss works better.
4) It indicates what the direction of this and the next price swing could be.
5) It also shows whether the next price swing will be corrective or impulsive.
6) Traders can do wave analysis and understand wave patterns based on price
swings, which are the building blocks of swing.
7) Traders can use the Fibonacci tool with more accuracy and precision by
placing the Fib on the most accurate price swing.
8) Traders are better able to estimate the time aspect and expected length of a
trade setup.
9) Traders can identify price patterns quicker and easier plus use these patterns
for better trading decisions.

Traders must have a clear and logical system of identifying one price swing because
without a rules based approach, traders will misinterpret the chart and be unsure about
their analysis.

In fact, most traders fail in trading, analysing the waves, and trading the waves because
they do not use a systematic method for understanding and reading price swings.

Based on the above info, traders can make better decisions about their trades, such as
skipping setups, managing open trades, and entering trade setups. Price swings are not the
only factor for trading decisions, of course, but certainly play a key role in our analysis.

The next step is how can you recognise price swings, which we will explain in the next
paragraph. Just by identifying price swings correctly, traders are able to gain a significant
edge over a larger group of traders who are not aware of price swings, price patterns,
impulse and correction. After that, we will discuss how to use price swings in more detail.

Once again, please keep in mind that it is very important to use a systematic approach for
spotting price swings... Without it, traders will not be able to properly analyse the price
charts. It would be similar to a ship sailing on open waters without a compass. Recognising
price swings, knowing the start and end of such swings, and analysing that information
properly is key.

Identifying Price Swings

The ecs.SWAT method uses six distinct approaches to find and identify the correct AND
best price swings:

1. Momentum and correction concept

2. HMA moving average
3. Awesome Oscillator (AO) and ecs.MACD
4. ECS fractal indicators
5. Time patterns and zigzag indicator
6. Wave patterns

In some cases these 6 methods will indicate the same price swing but be aware that each
method could also indicate a different price swing. And that is perfectly acceptable. Price
swings can vary depending on the tools and methods used and all of them can be equally
logical. It is up to the trader to choose the price swing that makes the most sense in each
case but the mentioned methods will provide a solid basis. We do not recommend using all
6 methods at the start but rather focus on a few that work best.

1. Strong vs Weak Price Action: Momentum and Correction

The first approach is the actual price movement itself. Impulse and corrections form
separate price swings.

By identifying the character of price action, you can identify the correct price swings.

Here is once again the definition of impulsive (strong) or corrective (weak) price action:

A. Impulsive: strong price action is quick and moving in one direction.

B. Corrective: weak price action is moving indecisively, slow, and sideways.

Now you might be wondering how do you find the correct impulsive and corrective price
swings on the price chart. Let’s review some of the rules we use for identifying price swings.
Impulsive Price
Impulsive price action is characterised by a couple of main factors:

1) Majority of candles move into 1 direction

Most of the candlesticks in the group (price swing) have a close in the same
direction (bullish or bearish).
a) Once +/- 65% or more of the candles in the group are either bullish or
bearish, then the swing is more likely to be a bearish or bullish momentum.
The 65% rule can be seen as a rough estimate.

Most candles are bearish in this bearish momentum. Approximately 70% of the candles are
bearish, not counting smaller candles that are “dojis” (open is near to candle close). Also many
bearish candles close near low.

2) Candle close near high or low

Many of the candlesticks show strength by closing near the high or low.
a) Strong bullish candles close near the high.
b) Strong bearish candles close near the low.
c) The close is important because it shows that the bulls or bears are in control
of that time period.
Bullish example where majority of candles are bullish candles. Most bullish candles close near
high. The larger candlesticks are bullish. Also a new high is regularly posted. All characteristics of
an impulse.

3) A new higher high or lower low

The impulse is still strong if price has recently made a new higher high or lower low
when compared to the previous candle(s).
a) A new high or low confirms the impulse.
b) A price swing might lose its momentum if a candle fails to make a new high
or low and could start a correction.
c) Some momentum is lost when 2 candles fail to break for a high or low
whereas ECS prefers to use the rule of 5 to 6 candles (see time pattern in
chapter number 5).
d) Impulsive price action is considered to be active when 3 bullish or bearish
candles show a higher high or lower low in a row (or at least 3 candles out of
a group of 5-6).
The purple arrows indicate where price confirms the bullish impulse with a new higher high.

4) 3 candles out of a group of max 6

Identifying momentum is often easier done after the fact but this rule will help
traders recognise it in real-time for the current ongoing price swing.
a) Once there are 3 candles in a row in one direction with a close near the high
or low and at least 1 or 2 larger sized candles, then an impulse is likely
starting or continuing.
b) The impulse is even stronger if all candles have a higher high or lower low.
c) Although 3 candles in a row is the best, it is also fine if the 3 candles occur in
a group of 4, 5, or even 6 candles. This is often the starting momentum of a
bullish or bearish swing.
d) The image below shows how 3 candles out of a group 6 (red box) can also
indicate the start of an impulsive price action. But it is important that this
does occur with the trend because counter trend movements can sometimes
show 3 momentum candles too (blue box) but just be a pullback within the
trend. The green box shows a spot where a counter trend momentum has a
higher chance of working out because of the visibility of divergence (purple
line).
5) Large candlesticks
The impulsive candles are usually larger and more ‘dominant’. The size of the candle
is measured by simply calculating the distance between the candle high and low.
a) Impulsive price action often offers a couple of candles within the price swing
that are large(r) and a few that are moderately large in comparison with the
other corrective candles.
b) There is no fixed rule of what is considered a large, medium or small
candlestick. The best is to make a simple comparison on the time frame you
are analysing with the most recent price action and check whether the
candles are larger than the estimated average. Simply said, visually compare
the candles in question with the rest of the chart. If the candles are relatively
large compared to the rest of the chart, then those could be impulsive
candles. Traders can also use an ATR (Average True Range) indicator to get
an idea about the price volatility in the recent history.
The purple boxes indicate areas where candlesticks are relatively large compared to the opposite
candles and candles from other parts of the chart.

Corrective Price
Corrective price action is characterised by factors that are mostly the opposite of impulsive
candles:

1) Mixture of candles
No side (bullish or bearish) has a clear majority.
a) The candles are a mixture of bull and bear candles with no particular
sequence.
b) Price action is mostly going sideways or is showing a light angle up or down.
Price action is messy and choppy in most parts of this chart with the exception of a few parts
where price was a bit faster, most notably on the left of the middle.

2) Candle closes near the middle

The candle close indicates indecision by not closing near the high or low but rather
around or close to the middle.
a) Of course, some of the candles might still close near the high or low but
usually this occurs a lot less often than when compared with impulsive price
action.

Typical corrective price action where price is choppy, moving sideways, and has less clear
sequence. There are a few larger candles which represent mini pieces of impulse but overall, the
price is choppy.

3) No sequence of highs or lows

Corrective price action is mostly price action that goes sideways.
a) Within the corrective zone, there might be parts where price moves
impulsively but overall the price action looks choppy and indecisive.
b) Part of the reason why price action looks corrective is simply because one
side is unable to control the direction, which means that there is no
sequence of higher highs (for an uptrend) or lower lows (for a downtrend).

Typical corrective price action where price is choppy, moving sideways.

4) Smaller candlesticks
Corrective price action is usually characterised by smaller candles.
a) There might be an occasional candle that is bigger but a large majority of the
candles should be relatively smaller.
Corrective candles are usually smaller than impulsive ones.

To sum it up, most candlesticks are small, indecisive, and show no particular direction
either up or down. Relatively small when compared to impulsive candles is valid for both
bullish and bearish candles.

Test: What groups of candles represent impulsive price action in this chart? Are A, B, C, and
D indeed considered to be impulsive pieces of price action? Write true or false for all four
answers and check the correct answer at the end of the chapter.
2. HMA (hull moving average)

The HMA moving average (we use setting 20) helps identify what is momentum and what is
a correction. An angle change from bearish to bullish and vice versa often is a warning
signal that a swing might be completed.

The main advantage of the HMA (compared to impulse and correction) is that approach is
fully automated because the HMA is an indicator. Hence it removes any need for
discretionary decisions.

The HMA offers extra benefits compared to other moving averages and price action
because it does offer a smoothing effect (like other moving averages) but the lag is way
shorter and more in sync with current price action movement.

Candles that are moving around the HMA indicate periods of correction. In a range the
HMA angle will frequently switch from up to down and down to up whereas in a trend price
will create a sustained HMA angle for a longer period of time.

Another perspective to consider is the candlestick close or open and low or high versus the
HMA. When the candle is fully above or below the HMA, then this often indicates a decent
or strong momentum.

The image below shows how price is in a range (on the left) and how it builds several
swings up and down within the range before moving down lower with a strong impulse.
Once price is moving lower impulsively, the HMA stays bearish until there is a small
pullback before continuing lower again with a bearish HMA. Each HMA change can be
considered a completed swing.
Price action at the top is corrective, the price drop is impulsive.

3. ECS Fractals

The fractal indicator helps traders find key support and resistance levels, which are also
potential turning spots on the chart. Those turning spots can indicate the start and end of
price swings.

Traders can either use the standard fractal indicator on their MetaTrader4 platform or use
the ECS fractal indicator for the MT4 platform. Each fractal indicator, just like the HMA
moving average, is automatically plotted on the chart.

The fractal indicator will be explained later in this book in more detail but for now, it is
important to know that it can help with determining swings. Here are the details:

A. If price is moving fast into one direction then no fractals will appear, which is an
impulsive price swing.
B. If many support and resistance fractals appear, then the price is (probably) building
corrective price swing(s). The up and down turns are in fact creating the fractals.

A trader can use the points from one fractal to the next fractal as a price swing. The price
action between a support and a resistance fractal could be considered as a separate price
swing.

If there are two fractals on the same side (either at support or resistance), then it is best to
use the fractal that provides the longest price swing. Simply said, all price action between
one support and one resistance fractal is considered a price swing.

Here below we added an image:

 ● All the purple boxes and arrows have been added to indicate the start and end of
each price swing.
● Each arrow is one price swing.
● The orange box represents fractals that are not used for a price swing because
there are 2x support or resistance fractals present. In these cases it is best to use a
larger price swing.

For your information, normal fractal indicators would indicate the same as the ECS fractal
indicator for the purposes of identifying price swings.

But ECS fractal indicator provides us with deeper information about the trend,
retracement, and potential for reversal. This information is explained later in chapter 7.

4. Time Patterns and Zigzag Pattern

Time patterns are already visible when using the ECS fractal indicator but they deserve
their own paragraph for determining swings. Time patterns in fact are a key part of the
pattern family but will be explained later on in this book in chapter 5 in more depth.

For the moment, its best to use automaticated tools that represent time patterns by using
a fractal indicator (with value 5 rather than 2 if you can change it in your trading platform)
or the zigzag indicator with settings 10-5-3 (depth-deviation-backstep) for finding
intermediate price swings on the chart that closely reflect the idea used with time patterns.

Let’s first start with a fractal indicator value of 5. What does that mean? Let's explain:

1. A candle will either make a higher high or lower high and lower low or higher low
when you compare the current to the previous candle.
 2. A candle with a higher high or lower low confirms impulsive price action (new high
confirms uptrend and new low confirms downtrend).
3. When price shows multiple higher highs or lower lows, then impulsive price action is
taking place, which is considered to be one price swing.
4. The impulsive price swing is considered to be over once 5 to 6 candles fail to break
the last high or low.
5. Then a price swing can be marked as completed and a new price swing is starting.

All of these purple boxes indicate a high or low that is higher or lower than 5 candles to the
left and 5 candles to the right. All of the purple boxes are also a fractal but as you can see
from the image, there are many fractals that did not qualify when using a setting of 5
candles. All the purple arrows indicate a price swing.

The image below shows the price swings that are valid for the zigzag indicator. Some of the
price swings are similar to the time pattern ones, but there are a couple or price swings
that are actually excluded as well.
5. Awesome Oscillator or ecs.MACD

Elite CurrenSea uses the Awesome Oscillator (AO) as a swing and wave trend indicator. The
AO, which is created by the Elliott Wave expert, legendary trader, and Fractal creator Bill
Williams, is in our view the best oscillator for analysing the waves of the Forex, CFD, and
other financial markets.

The middle line (called zero line) is key. We analyse the AO bars that move away and back
to the zero line for that purpose of identifying price swings:

A. AO bars moving above the 0 line and back is one bullish price swing.
B. AO bars moving below the 0 line and back is one bearish price swing.

The trader needs to analyse whether price action is corrective or impulsive in the place
where price moved away and back to the 0 line.

An equally useful tool is our own proprietary MACD indicator called the ecs.MACD.
Although there is a wide range of wave trend indicators that are mentioned online, the AO
and the ecs.MACD are two of the most accurate wave trend indicators.

You might be wondering, can Indicators really help with identifying price swing and waves
(based on Elliott Wave Theory)?

Yes, they can. But keep in mind that not every trader will agree. We believe that both price
action and the oscillator indicator can be of enormous help in understanding the Elliott
wave structure. But there is a disagreement among wave analysts and some believe that
indicators do not play any (significant) role.

In any case, it can’t hurt to be open to both styles and to see which one fits your own
analysis and trading the most. Based on your own experience, you can then choose
whether you analyse Elliott Waves fully based on price action or whether you will follow our
advice and combine price with (an) oscillator(s).

In our view though, the AO and ecs.MACD are both extremely valuable for identifying the
correct price swings with a rules based approach.

They are also equally valuable in determining wave patterns because wave analysis is
simply an analysis of price swings.

Once you understand price swings, you will be able to understand wave patterns quicker
too.
Benefits of Oscillator in Wave Analysis
In the field of Elliott Wave analysis, both oscillators provide key information about the exact
price swing, wave count, and wave pattern outlook.

Here are the three major benefits of using the AO or the ecs.MACD as a wave trend
indicator:

1) Helps identify the correct price swings.

2) Indicates and confirms momentum and correction.
3) Helps label the wave patterns.

If you do not use the AO or ecs.MACD, the problem is twofold when applying a
discretionary approach to your wave analysis (and not a rules based method based with
oscillators):

1. Beginners and intermediate traders will struggle to identify a wave correctly and in a
timely manner without a wave trend indicator. Here’s why:
a. There are numerous waves on the charts and even waves within waves.
WIthout any indicator help, how can you spot a price swing or wave and can
you repeat the same logic on each and every chart day in and day out? In
most cases, traders cannot manage this level of consistency.
b. Most traders will not have the required experience to analyze waves without
fixed rules. This is especially true for beginners but also for intermediate
traders (unless you have a decade of analysing waves under your belt).
 2. You will not have sufficient confidence when trading: although analysing the charts
might work out fine, trading your wave analysis with actual capital always requires
more confidence.

Reading the Oscillator

As you can see, the key to success in analysing and trading both price swings and the Elliott
Wave Theory is by applying a systematic way of identifying one single wave, which can be
done via the AO and ecs.MACD.

Here are the key factors to analyse:

● The zero (0) line: the key point part of the oscillator is the “zero” line. Every time the
AO or ecs.MACD bars cross the zero line, a new price swing is in process.
● Blue or red bars: blue bars indicate bullishness whereas red bars indicate
bearishness.
● Bars versus zero line:
○ Blue bars above the zero line indicates bullish momentum or impulse.
○ Red bars above the zero line indicates a bullish correction.
○ Red bars below the zero line indicates bearish momentum or impulse.
○ Blue bars below the zero line indicates a bullish correction.

With this in mind, we can make the following conclusions:

● Price is not hitting the zero line recently:

○ Price is in momentum when the AO bars move away from the zero line.
■ Bullish: bars are above the zero line.
■ Bearish: bars are below the zero line.
○ Price is in a retracement when the AO bars are moving back to the zero line.
 ● Price is near the zero line:
When the AO bars are back at the zero line, price has completed an old price swing
and is building a new price swing. This means that it has reached a decision spot:
○ Price is in a reversal if the AO bars are moving away from the zero line after
recently crossing the zero line.
○ Price is in a retracement or range if the AO bars go sideways.
○ Price is in a trend continuation if the AO bars continue in the same direction.

How to Find the Price Swing

How do you recognize what is the correct price swing when analysing the zero line of our
wave trend indicator (the AO or ecs.MACD)?
 1. As you now know, a new price swing is valid every time the AO bar crosses the zero
line.

2. Once this occurs on the AO indicator, traders must analyse the price charts at the
same moment as the AO bars are crossing the zero line.

3. Then look for the most recent top or bottom which is the end of the previous price
swing and the start of the new price swing.

4. The current swing lasts until the AO bar retraces back to the zero line again.

As indicated above, the cross of the zero line is key for understanding price swings and
wave patterns. Here is an example of how traders can understand the process in more
detail.

The 1) indicates where the AO bar crosses 0 line. Find the same spot on the price chart (2). Find
the most recent major bottom (or top) since that point (3). Swing is valid till price goes back to 0
line again (4).

The above image is an example where we zoom into one spot of the chart. Let’s now show
a chart now which shows a larger piece of the price action.
The above chart shows purple arrows, which indicate each time the AO bars cross the zero
line. Each crossing of that zero line indicates the end of a price swing and wave pattern too.

The purple boxes on the chart indicate the turning spot of each swing, which means the
start and end of the price swings.

The arrows show whether the price swing is a:

● Bearish impulse: red arrow

● Bullish impulse: blue arrow
● Bearish correction: green arrow
● Bullish correction: orange arrow

Compare the above chart to the same chart below but naked without any visual aid. Would
you be able to achieve the same consistency with the AO as without the AO? Would you
truly be able to recognise the price swings as quick and with the same consistency?

That is possible for traders who have more experience but is much more difficult for
traders that are beginning or intermediate. They are much better by using a rules based
approach. All the rules connected to this and much, much more is what we fully explain in
our ecs.SWAT methodology. (https://elitecurrensea.com/forex-cfd/swat/)
All in all, the AO and the ecs.MACD are a major asset when analysing the charts, price
swings, and wave patterns because it helps you:

1) Identify the correct price swing:

Use the crossing of the AO bars below and above the zero line to recognize past and
current price swings. You then know the start and end of each price swing on the
chart as well (see above).

2) Understand the direction of the price swing:

When AO bars are above the zero line, this means that price is either showing
bullish momentum or a strong bullish correction which depends on the context of
the past price swings. In both cases though, the bulls are in control of the current
price swing. Same is true of course when the AO bars are below the zero line, which
means that the bears are in control.

3) To understand the behavior (impulse or correction) of the price swing:

Traders can also understand the behavior of the price swing and estimate whether
it's impulsive or corrective. If price is showing a strong push (momentum / impulse)
above the zero line, then a move back to and even below the zero line is often a
retracement. But if the AO bars are crossing the zero line after a divergence pattern
(AO bars showing a failure to make a higher high or lower low but price is making a
higher high or lower low - see chapter 5 about divergence patterns), then the chance
of a reversal is increasing. A trend continuation is often impulsive, a retracement is
often corrective whereas a reversal will most likely become impulsive.

4) To determine the wave patterns of each swing:

Once traders can find the correct price swing, they can then analyse whether its
 bullish or bearish and whether its corrective or impulsive. Traders can then use that
information to analyse, judge, label, and evaluate the most likely wave patterns.

5) To determine the same information (direction, behavior, wave sequence) for

the next price swing and even multiple price swings after the next price swing.

Analysing wave patterns is nothing more or less than understanding the sequence of price
swings.

It is a question of understanding the story behind the price action.

With this information, mastering wave analysis is now within your reach.

But keep in mind that knowing how to do wave analysis is absolutely not necessary if you
trade our ecs.SWAT method. The beauty of SWAT (Simple Wave Analysis & Trading) is that
you can trade the waves without knowing the waves.

We built our SWAT methodology in such a way that you can benefit from the waves without
needing to use the wave patterns themselves.

6. Wave Patterns

Knowing the Elliott Wave Theory helps you identify price swings too. When price is building
a specific wave (1, 2, 3, 4, 5, A, B, C, D, E, W, X, Y or Z), then it will help traders understand
the context and what can be considered one full price swing and what is the character of
each past price swing, the current swing, and the price swings of the near future.

A wave 1, for instance, is clearly a separate swing and suggests a wave 2 for the next price
swing. A wave 2 often has 3 price swings: an ABC zigzag.

If you are able to recognize a wave, then traders can connect previous waves to reveal a
larger pattern. This pattern helps them estimate the current swing, next swing, and swings
after that.

We will not address Elliott Wave Theory in this part as yet because it will be explained in
more detail later in this book in chapter 5.
Identifying Momentum & Correction
Take a look at the chart below. It shows a currency pair with the SWAT software (MT4
indicators and template - https://elitecurrensea.com/forex-cfd/swat/).

Please examine the chart while keeping in mind all of the tools and ideas that were
mentioned so far. Then see how it compares to our analysis of this chart, which is
summarised below.

Here is our summary:

 1) This chart shows strong AO bars moving away from the zero line (first red arrow on
the left).
2) On the price chart you can also see the confirmation as the price is moving away
from the moving averages (MA) with price below the short-term MAs and the short
MAs are below the long-term MA.
3) The strong impulse is likely (decent probability) to see a bearish continuation due to
the lack of divergence and clear bearish impulse. The retracement zone is the
short-term MAs, which occurs a little later (green arrow).
4) The AO bars go back to the zero line and complete a bullish correction and
retracement.
5) A strong breakout candle (and ecs.SWAT candle) start the downtrend again. This
candle is visible at the start of the 2nd red arrow (2nd from the left). Strong AO bars
again emerge as they move away from the zero line, which signals a bearish
continuation as expected.

A similar scenario takes place on the next image. Take a look:

Here is our summary:

1) A large retracement is taking place on this 1 hour chart because price did not only
make a pullback to the short-term moving average (MA) but all the way to the
long-term MA. This indicates a larger pullback that is also visible on the 4 hour chart.
2) After the deep retracement, we can see early signs of a trend continuation when
price is close to the zero line and then falls below it (red arrow).
3) Both price and the AO bars fall dramatically a bit later (see red arrows) with a few
smaller and one larger pullback to the short-term MA. The last lower low in turn
creates a divergence pattern, which is a warning that the trend is running out of
steam.
Before we move on to the next section (swings becoming patterns), we owe you the answer
to our quiz. The correct answer to the Quiz on impulsive price action is:

a) False. In this box there are no 3 bearish candles in a row that have a lower low.

b) False. Here are only 2 bullish candles, not 3.

c) True. Yes, there are 3 bullish candles in a row with higher highs.

d) True. Yes, here are 3 bullish candles with a higher high out of a group of 6 candles.

The image below highlights the impulsive parts of price action. The red boxes indicate
bearishness and the blue boxes show bullishness. This image indicates exactly where price
shows impulsive price action.

Of course, eventually the entire swing up is seen as one price swing (see image below). But
there are 5 parts within the price swing that are considered to be most impulsive (5x blue
boxes).
Swings Become Patterns

The next step on the chart hierarchy after price swings is price patterns.

Price swings can be connected with each other to identify larger price patterns. By
combining multiple price swings together, traders analyse larger price patterns which are
also known as chart patterns.

Keep in mind, however, that not all price swings form a larger price pattern. It’s a
possibility, not a must.

Chart patterns provide traders with deeper information about the chart dynamics and
indicate more information about:

1. The anticipated direction (up/down/sideways).

2. Character (impulse/correction).
3. Sentiment (continuation/reversal).

All of these patterns can be grouped together into four groups:

1. Bullish continuation chart patterns.

2. Bearish continuation chart patterns.
3. Bullish reversal chart patterns.
4. Bearish reversal chart patterns.

Chart patterns provide traders with another layer of chart, technical, and wave analysis.
Chart Patterns

Bullish and Bearish Continuation Patterns

Continuation patterns indicate a continuation of the current trend. They are basically the
same pattern for both an uptrend and downtrend. The main difference is of course the
direction.

The main continuation patterns are summarised here:

1) Flag pattern: price action shows momentum which is then followed by a slow grind
to the opposite direction. The retracement usually goes to the 26.6% or 38.2%
Fibonacci level (when placing the Fib on the impulsive part) and certainly not deeper
than 50% Fib otherwise the flag pattern is invalidated.The corrective price action
with a shallow angle is called a flag.

a) A bear flag indicates more downtrend.

i) It is a bearish impulse, followed by a shallow angled bullish channel,
and then completed or confirmed with another bearish continuation
below the flag.
ii) A break above the resistance of the flag or above the 50% Fib
invalidates the bear flag pattern.

b) Bull flag indicates more uptrend.

i) It is a bullish impulse, followed by a shallow angled bearish channel,
and then completed or confirmed with another bullish continuation
above the flag.
ii) A break below the support of the flag or below the 50% Fib invalidates
the bull flag pattern.
2) Contracting triangle pattern (also called a pennant): price action is unable to
break the tops and bottoms and keeps moving sideways. It often follows after a
strong momentum up or down. The triangle then indicates pause. Wave C should
not break beyond wave A, wave D should not break wave B and wave E should not
break Wave C. If it does, then the triangle is invalidated.

a) Bullish break above the resistance of the pattern indicates potential triangle
confirmation and uptrend.

b) Bearish break below the support of the pattern indicates potential triangle
confirmation and downtrend.
3) Sideways range or consolidation zone: price is going flat and sideways, often after
a strong impulse but not always. A range can sometimes be best seen if zooming
out to a higher time frame or zooming in to a lower time frame. The support and
resistance levels of the box indicating breaking / confirmation points.

a) The break below or above support or resistance is key, just as the triangle
pattern.
 4) Ascending and descending triangle (also called wedge): in this pattern, price is
building a flat top or bottom but the other side is approaching closely. A flat bottom
with a descending resistance line indicates a descending wedge whereas a flat top
with an ascending support indicates an ascending wedge. The wedges can break to
both directions but an ascending wedge is usually bullish and a descending wedge is
usually bearish. That said, there are plenty of examples where price breaks to the
opposite direction, especially if the price is showing bullish momentum before a
descending wedge (rather than bearish momentum) or bearish momentum before
an ascending wedge (rather than bullish momentum).

a) The break below or above support or resistance is key, just as the triangle
pattern.

Bullish and Bearish Reversal Patterns

Reversal patterns are basically the same pattern, one indicates bullishness and the other
confirms bearishness. The main difference is again the direction.

1) Double bottom or top. A double bottom indicates the end of the downtrend and
the potential for a bullish reversal. A double top indicates the end of the uptrend
and the potential for a bearish reversal. An early confirmation of a double top or
bottom could be a price action candlestick pattern that shows a reaction at support
or resistance. A stronger confirmation takes place if price is able to break and show
a higher higher (after a downtrend) or a lower low (after an uptrend).

a) Double bottom indicates a potential bullish reversal.

 b) Double top indicates a potential bearish reversal.

2) Triple bottom or top. This pattern is the same as double top or bottom. The only
difference is that there are three bounces in a row, rather than 2.

a) Triple bottom indicates a potential bullish reversal.

b) Triple top indicates a potential bearish reversal.

3) (Inverted) head and shoulders (H&S) pattern: price is running out of steam and a
trend reversal could take place. A head and shoulders is when an uptrend is
vulnerable to a bearish reversal whereas an inverted head and shoulders is when a
downtrend is vulnerable to a bullish reversal. The neckline connects the starting
point of the left shoulder and head. A break beyond this level indicates the
confirmation of the reversal whereas a break beyond the top (level of the head)
invalidates such a reversal.

a) H&S indicates potential bearish reversal.

b) Inverted H&S indicates potential bullish reversal.

4) Falling or rising wedge: this pattern indicates that the trend is running out of speed
and losing momentum. In an uptrend, there will be a higher high but the break
above the previous top is shallow. In a downtrend, there will be a lower low but the
break below the previous bottom is shallow. A rising wedge and falling wedge
should indicate reversal but sometimes price continues strongly with the trend
despite the pattern. It is therefore wise to keep an eye on both support and
resistance trend lines.

a) Falling wedge indicates potential bullish reversal.

b) Rising wedge indicates potential bearish reversal.

Learning to use patterns takes time. You need to see / find the pattern, recognise it, know
what to expect from it, and understand how to measure a pattern continuation, pattern
failure (false breakouts (fakeouts)), and even false fakeouts.

This does not happen overnight and takes time and effort to build up the experience and
skill set needed to implement pattern trading in a proficient manner.

The ecs.SWAT method (https://elitecurrensea.com/forex-cfd/swat/), however, shrinks that

learning time and allows traders to master the skills needed in a much quicker time frame.
Seeing and Recognising Patterns

The best way to gain experience is by looking at hundreds of price patterns so that your
brain becomes trained in spotting them on the chart.

Pattern recognition skills are trainable - and the more patterns you see, the easier it is for
the brain to instantly see and recognise them.

Experience with patterns is a big help in trading these formations too.

1. The best way to practice and build up experience is by analysing charts in the past.
2. Look for price patterns on the price charts and see how the patterns behaved.
3. Repeat this exercise dozens, even hundreds of times.
4. The best way to train your brain for pattern recognition skills is by doing this
exercise at least 50 times, per pattern.

Swings Form Trend

Price swings are also the back-bone of the trend and range, not just price / chart patterns.

The very first thing that beginning and aspiring traders hear from other more experienced
traders is probably: focus on trading with the trend. The trading philosophy “the trend is
your friend until it bends” is well-known to traders.

Determining the trend sounds simple and easy but requires more attention than many
traders expect.

Buy on dips and sell on rallies seems simple enough as a message... However, traders face
real life issues when applying it on real charts.

● What is the real trend (multiple time frames show major differences)?
● At what point will the trend continue?
● How long will the trend last before a bigger reversal occurs?
 ● Should I expect a shallow or deep pullback?

Due to Murphy’s law, traders often encounter a winning streak when they start out trading.
Their success is mostly possible due to the presence of a very strong trend. They trade
along with it but are unaware that trends do eventually stop. They are not able to recognize
that the market structure has changed and they lose their profits as price reverses or falls
into a ranging environment.

Understanding the trend is therefore a very important process of analysing the charts.

It is absolutely vital that traders understand the market structure and are able to assess the
presence of a trend and chance of trend continuation.

The purple boxes indicate moments where the trend ran out of steam and reversed. Many
traders get trapped into trading with the trend at the wrong spot before seeing price move
into the opposite direction.

Defining the trend

Price can either be a) trending, b) reversing, or c) consolidating.

The presence of a trend is needed for both trending and reversing price action; whereas a
lack of a trend implies consolidation.

A trend is characterised by the presence of multiple price swings. It is a combination and

mixture of multiple impulsive price swings and corrective price swings.
1. An uptrend will be dominated by more bullish impulsive price swings and bearish
corrective price swings.

2. A downtrend will be dominated by more bearish impulsive price swings and bullish
corrective price swings.

3. Both up and downtrend however can also have impulsive price swings in the
counter trend (opposite) direction and corrective price action with the trend.
Simply said, a trend is established by connecting impulsive and corrective price swings
together. These price swings form a trend.

Trend and range are in fact opposites of each other. The market is either trending or
ranging.

But when we add multiple frames, then trend and range can mix.

For instance, a range can take place on the 4 hour chart within a trend on the daily chart.

There are many ways to define the trend but we focus on a couple of favourite techniques:

1) Classical HH and LL - purple boxes

2) Moving averages - orange/green lines
3) Trend channels (or lines) - red lines
4) Fractals - swat.FRACTALS indicates by green and red diamonds and circles
Classical HH and LL
There are multiple tools that make good sense for understanding the trend.

One of my favorites is the classical sequence of lows and highs, which is a solid approach
when analyzing the markets.

For a trend to take place, traders are looking for:

● Multiple higher highs (HH) and higher lows (HL).

● Multiple lower lows (LL) and lower highs (LH).
The trend is taking a pause - called retracement or pullback - when the market is unable to
post a new extreme (high/low). This means that a lower higher in an uptrend or a higher
low in a downtrend.

● In the image below the uptrend made a lower high and a lower low, but the overall
price action was corrective.
● The bullish break above the bull flag chart pattern indicates an uptrend continuation
(blue arrow).
● The lower high and lower lower, however, indicated a retracement in the uptrend.

The trend has officially ended when:

● Price builds a lower low within an uptrend and breaks the dominant bottom of the
uptrend.
● Price builds a higher high within a downtrend and breaks the dominant top of the
downtrend.
 ● The above image shows a clear uptrend (blue arrows).
● Price then makes a lower high followed by a lower low.
● The bearish break also pushed below the dominant bottom (green box), which was
the bottom of the last bullish swing in the uptrend.
● In this case, price also showed strong bearish momentum.
● The break of the bottom and the strong momentum indicate that a reversal is more
likely than a bearish correction.

Moving Averages
The presence of a trend can also be simply spotted when using moving averages.

The key aspect for an uptrend is that price is above a short-term moving average with the
short-term moving average above the long-term moving average.

Here is a simple formula for the uptrend:

● Price above short MA above long MA.
● Price > short-term MAs > long-term MAs (the > sign indicates greater than).

For a downtrend the opposite is valid: price is below the short-term moving average, which
is below the long-term moving average.
Here is a simple formula for the downtrend:
● Price below short MA below long MA.
● Price < short-term MAs < long-term MAs (the < sign indicates less than).

It is possible to use a 3rd layer, 4th layer, and even 5th layer of moving average(s). Traders
can add various short-term and long-term MAs to the chart.

Personally, I use about 5 layers:

● Ultra short-term: HMA 20 (5 or 8 ema works well too).
● Short-term: 21 ema high and low.
● Medium-term: 144 ema close.
 ● Long-term: 233 ema and 610 ema close.

Here below is an example where my short-term MA has been added.

The Fractal indicator is a tremendous help in spotting the sequences of lows and highs with
great ease.

The fractals are visually appealing and make the trend analysis much faster. I therefore
always use fractals on my charts.
Correct time frame trends
Another key step is to know which time frame to use. The trend can in fact be defined on all
time frames depending on the time frames you prefer to enter.

We recommend using 1 and/or 2 time frames higher than your entry chart. Here is an
overview:

● Entry 5 min chart --> 30 / 60 min charts for trend.

● Entry 15 min chart --> 1 / 4 hour charts for trend.
● Entry 1 hour chart --> 4 hour charts for trend.
● Entry 4 hour chart --> day charts for trend.
● Entry day chart --> week charts for trend.

Range or consolidation
A range indicates a lack of trend.

It can be spotted by price action which is moving sideways.

● When connecting tops and bottoms, the angle is either flat or (very) shallow).
● When analysing the moving averages, the short and long-term moving averages are
hitting each other (no space between price and MAs and between MAs).
● A trend is pulling the long and short-term moving averages away from each other so
when the averages are on top of each other, then the market is building a
consolidation.
Reversals
The difference between a reversal and a consolidation is the fact that price is pushing into
the opposite direction of the trend. Eventually a reversal will drag the short-term MA over
the long-term MA.

● In an uptrend the reversal occurs when:

○ Price fails to continue with the sequence of higher highs and higher lows.
○ Price breaks below the support and key bottom of the uptrend channel.
○ Price crosses below the long-term MA.
○ The short-term MA will pull below the long-term MA to the downside.

● In a downtrend the reversal occurs when:

○ Price fails to continue with the sequence of lower lows and lower highs.
○ Price breaks above the resistance and key top of the downtrend channel.
○ Price crosses above the long-term MA.
○ The short-term MA will be pulled above the long-term MA to the upside.
Retracements
Not all price action that is going against the trend, however, is a reversal.

Lighter and deeper retracements, also called pullbacks, indicate various degrees of pauzes
within the trend.

When price is retracing, it essentially means that price is making a small correction but it is
expected to continue with the trend.

● A light pullback takes place when price reaches and bounces at the 21 ema zone.
● Whereas a deep retracement occurs when price moves back to the 144 ema close.
● The difference between a deep retrace and a reversal is that price should not
significantly break away from the 144 ema close into the opposite direction and the
21 ema should remain aligned too.

Let’s review for bulls and bears:

● Downtrend and bullish pullback:

○ Price remains around the 21 ema zone.
○ The 8 ema or 20 hma might be dragged into the 21 ema zone and the space
between 21 ema zone and 144 ema becomes smaller.
● Downtrend and bullish retracement:
○ Price is above (!) the short-term MA and price is around or at the 144 ema.
○ The short-term MA remains below or around the 144 ema close.
● Uptrend and bearish pullback:
○ Price remains at or just below the 21 ema zone.
○ The 8 ema might be dragged into the 21 ema zone and the space between 21
ema zone and 144 ema becomes smaller.
● Uptrend and bearish retracement:
○ price is below (!) the short-term MA and around or at the 144 ema.
○ The short-term MAs remain above or around the 144 ema close.
Here is a useful summary:

● Price bounces at 8ema or 20 HMA: momentum continuation.

● Price bounces at 21 ema: shallow pullback.
● Price bounces at 144 ema: deep retracement.
● 21 ema crosses 144 ema: reversal.
● 21 ema keeps touching/hitting 144 ema: sideways range.

Retracements: how far can we expect the price to go?

1. The trend typically stops at a point when momentum becomes weaker and in an
area where support and resistance (S&R) shows strong confluence.
 2. This is when a light pullback, deep retracement, or a reversal usually starts and
when price develops a motion against the direction of the trend.

The main question is: can a trader know which counter trend price movement is likely to
take place? The good news is: yes, we can analyze and estimate whether price will only
make a light pullback, a deep retracement, or actually reverse.

Divergence is an important factor in answering this question. When multiple time frames
are all showing divergence, then a reversal becomes more likely. The more time frames
that have divergence, the more likely that a reversal is about to start. For instance,
divergence on the weekly, daily and 4 hour chart would seriously endanger the chance of
trend continuation and increase the chance of a trend reversal.

However, if the price is not showing divergence or only divergence on a lower time frame,
then it is more likely that price is making a light pullback or deep retracement before the
trend continues.

Of course, anything in between no divergence or divergence on multiple charts is a grey

area. Typically on a 1 hour chart or lower, single divergence will cause a light pullback and
double divergence will cause a deeper retracement.

Single divergence on 1 hour chart:

Double divergence on 1 hour chart:

On a 4 hour chart or higher, any type of divergence has a higher chance of creating a
deeper retracement or reversal.
The moving averages are from this perspective used as targets. Here is a summary:

● The main target when a single divergence appears on a 4 hour chart or higher
is the 144 ema close.

● If divergence appears on multiple charts or multiple times on a 4 hour chart or

higher, then a reversal could also be possible. Aiming for beyond the 144 ema close
is realistic, although the 144 ema always remains a good target.
 ● Single divergence on the 1 hour chart sends price often to the 144 ema close too,
but less frequently than on a higher time frame.
● Double or triple divergence on the 1 hour chart is a more reliable measurement that
price will make it to the 144 ema close.
● Single divergence on a chart lower than the 1 hour time frame is not a strong signal
but double or triple divergence could create a retrace to the 144 ema too.

Keep in mind that when the price reaches the 144 ema close, then the single divergence
pattern does not carry any importance anymore. Why? Because the price has already
reached the minimum target. Once again, this is valid for single divergence (one divergence
appears on the chart) but not for double divergence or more because in that case a
reversal is becoming more likely.

Although divergence is a useful pattern to keep an eye on, its effect on price and reversal
are not always immediate. Divergence is a good warning for trend traders that the trend
might be losing steam. It is however not enough information to enter a reversal setup. To
trade against the trend, traders should seek more confirmation such as a confluence of
support or resistance and candlestick confirmation.

Direction of the trend

All in all, defining the trend might not be as simple as it sounds when taking into account
multiple time frames, various moving averages, different channels and multiple trend lines.

Price moves on many different levels and the ‘stories’ of the various time frames can
quickly become confusing. Conflicting messages are certainly not uncommon. Consider the
following question that many traders face each trading day: “am I viewing a pullback within
a new trend or is the ‘old’ trend still valid and has price just changed gears?”
Let’s try to resolve this issue by using our favourite methods: trend lines, trend channels,
and above all, moving averages.

Spacing between averages

For a proper trend to be confirmed, it is important to see space between the moving
averages. In fact, the bigger the space between the moving averages, the more momentum
there is on the chart. When price is showing momentum:

A. Price is able to move further away from the short-term MAs.

B. The short-term MAs are in turn pulled away from the long-term MAs.
C. An increasing gap is visible between the short-term and long-term MAs.

At this point the momentum / trend is often quite strong and price could use the MAs as a
support or resistance zone for a trend continuation.

Moving average numbers

I prefer EMA’s (exponential moving average) more than SMA’s (simple moving average) but
which MA type and which MA number(s) are used is in our eyes not so important.

Personally I use MAs which are based on the Fibonacci sequence levels. This means 21 or
34 ema for short-term and 144 ema for long-term whereas others like the 89 ema.

That said, we think that almost all EMA (and SMA) numbers are valuable whether you work
with 10-20-40-50-100-200 combinations or with Fibonacci sequence levels as we do.
In our opinion, the most important part is to acquire and build up experience with the
moving average numbers of your choice.

Short-term MAs
As mentioned before, I personally use a set of 21 ema moving averages. This is the 21 ema
close, 21 ema low, and 21 ema high, which I call a band.

Nowadays I tend to only use the 21 ema low and high because the 21 ema close is simply in
the middle of those 2 MAs and hence 2 MAs are in fact sufficient. Basically, the 21 ema high
and low show the boundaries of the 21 ema zone even without using the 21 ema close.

The reason why I prefer a band of 21 ema’s rather than just a singla MA is because it:

1) Provides a zone of support and resistance rather than one specific spot.
2) Is based on Fibonacci sequence levels, which work great on charts.
3) Does a great job of capturing momentum bursts.
Medium / long-term MAs
I personally use 144 ema close. This is again an MA that is based on Fibonacci. Price tends
to highly respect the long-term moving average as a spot where price either continues with
the trend or reverses.

For long-term MA purposes, I like to use the 233 ema and 610 ema close.

Combining short and long-term

I like combining the 2 sets of 21 and 144 ema because it’s flexible and trends are simple to
spot.
A clear trend is present when the 21 is above/below the 144. When the 21 is crossing the
144 a trend reversal is potentially occurring.

A range or consolidation is taking place when the 21 ema is on top of the 144 ema.

Momentum MA
Using a very short-term moving average is also useful because it provides more
information about the momentum. For instance, an 8 ema close or 20 hma provide
important details about the strength and speed of price action.

Anything from 3 up to 13 ema works well for measuring impulsive price action. I personally
use 5 or 8 ema close for this purpose or the 20 hma.
Trending market
I personally combine classical highs and lows, trend channels, fractals, and above all
moving averages to answer that question for my own trading.

I use 4 hour charts to determine trades for intra-week setups and a combination of 1 and 4
hour charts for intra-day trades.

In the section below I will discuss 4 various market structures 1) trending, 2) retracing, 3)
reversing, and 4) consolidating.

When price is aligned with the MA’s and the MA’s are aligned as well, then there is a very
clear conclusion: the market is trending.

Let’s review for bulls and bears:

A. Bullish trend:
a. MA’s: price is above the short-term MA (moving average - I use 21 ema),
the short-term MA is above the long-term MA (I use 144 ema).
b. H/L: traders should be able to clearly see a sequence of higher highs and
higher lows, especially higher lows.
c. Fractals: usually the fractals that are at/just below the 21 ema are very
important and often act as S&R zones. Fractals above the 21 ema are
less relevant and not so important as a support level.
d. Trend channels: in some cases we are able to draw a channel on the
chart connecting multiple tops and bottoms. With a channel there are
 many rules to be aware of, which will be discussed in a later post. Key is
that the uptrend channel connects at least 3 hits on the bottom.

B. Bearish trend:
a. MA’s: price is below the short-term MA (moving average - I use 21 ema),
the short-term MA is below the long-term MA (I use 144 ema).
b. H/L: traders should be able to clearly see a sequence of lower lows and
lower highs, especially lower highs.
c. Fractals: usually the fractals that are at/just above the 21 ema are very
important and often act as S&R zones. Fractals below the 21 ema are
less relevant and not so important as a resistance level.
d. Trend channels: in some cases we are able to draw a channel on the
chart connecting multiple tops and bottoms. With a channel there are
many rules to be aware of, which will be discussed in a later post. Key is
that the downtrend channel connects at least 3 hits on the top.
Most of the time the 21 ema and the 144 ema will show an angle that is equal to the trend
direction. So a bullish (bearish) trend should see bullish (bearish) ema’s as well.

Trend channels
The best trend channels are characterized by a few important aspects:

A. A good angle is visible which is not too steep nor too shallow.
B. There are multiple price hits on the channel (minimum 2, best 3 on the bottom
of an uptrend or the top of a downtrend).
C. Price respects the internal channel lines.
D. Most price action is contained in the channel.
E. Some of the price action can be outside of the channel.

Let us now review these points in more detail.

Good angle
A trend channel is not supposed to be too steep or too shallow. A trend channel needs to
have a balanced angle because then the price is moving in a rhythm that is showing trend
strength and sustainability.

Too steep channel

This is not a trend but a momentum or impulse. Price can keep moving strongly within the
momentum but eventually price will lose its steam and need to make a bigger correction.
The correction will break the channel because of its steep angle.

Too shallow channel

In this case the price is not showing sufficient momentum in the direction of the trend. A
weak angle in fact shows a corrective pattern.

Sideways channel
In this case the price is not even able to build an angle, which means that price is building a
range or sideways price action zone. Price cannot trend if it’s moving flat.

What is good, too shallow and too steep? These terms are very discretionary but we will try
to quantify them, although they remain rough figures at best.
First of all, it’s best to use a chart setting where 150 to 230 candles are visible. This chart
setting shows the best “market memory”. Anything more and the chart is too squeezed.
Anything less and the chart is too zoomed in.

Secondly, an angle of +/- 25-45 degrees is considered to be an optimal angle for a trend
channel (see red lines in image below). Anything below 25 degrees is shallow and above 45
degrees is steep. Steeper and shallower channels are still useful and good channels but are
not considered trend channels.

Thirdly, a steep channel mostly has very impulsive price action (see orange lines in image
below). A trend channel will have both momentum and corrections which give it the
medium angle. A sideways or shallow channel has only corrective price action but few
parts with momentum.

Multiple hits
The minimum number of hits on the channel is 3 (on one side).

● In case of a downtrend channel we need to see 3 hits on the bottom. The 3rd hit on
the bottom in fact changes the potential trend channel into a confirmed downtrend
channel.

● In case of an uptrend channel we need to see 3 hits on the tops. The 3rd hit on the
top changes the potential trend channel into a confirmed uptrend channel.

Anything lower than 3 is considered a potential channel. A channel becomes more

established and valuable when more hits are visible.
There is nothing wrong with drawing multiple channels on the chart as long as it remains
relevant for your analysis. Often price is able to respect multiple trend lines and channels.
Eventually, of course, one of the channels and trend lines will become obsolete and then a
trader can remove the tool.

Price action needs to be within 30 pips from the top or bottom of the channel on a 4 hour
or daily chart to be able to consider it a full hit on the channel.

Internal channel lines

A good trend channel has internal lines which are respected by price action. There are 3
internal lines, which consist of a middle line and 2 quarter lines.

Well formed trend channels will have price action which respects the middle line as it tends
to act as support and resistance.

The quarter levels are important too:

1. Selling in the top quarter or half of a downtrend channel is ideal because there is
lots of space within the trend.
2. Selling in the bottom quarter of a downtrend channel is dangerous because there is
no space before the price reaches the bottom of the channel.
3. Buying in the bottom half or quarter of an uptrend channel is ideal because there is
lots of space within the trend.
4. Buying in the top quarter of a downtrend channel is dangerous because there is no
space before the price reaches the top of the channel.
Price action versus channel
The value of a trend channel diminishes if a lot of price action is hanging outside of it. But
some price action is allowed to be below or above it.

This is technically called an overthrow and under throw. Price has then overextended
beyond the channel but eventually could revert back into the channel.

It’s OK to place a channel on the chart which cuts through parts of price action. Preferably
the channel only has wicks outside of its boundaries but even entire candles are acceptable
if this increases the number of channel hits or improves the channel angle.
Occasionally price will not be making an overthrow or under through but it will actually
break the channel. It could break the channel in the opposite direction of the trend and
indicate a potential reversal break.

Or it could break the channel in the same direction and in fact accelerate the trend.

Whether price only places a high or low outside of the channel OR whether price manages
to post 1-3 full candles outside of the channel are important factors to analyze if price has
overextended or has broken the channel.
Using single trend lines
It is not a must to use trend channels. A single trend line could offer the same benefits and
the same characteristics of a trend channel are valid for a trend line too.

Proximity and relevance: trend lines are only useful obviously if they are relatively near
price action. A trend line that is hundreds of pips away from a 1 hour trend line will
probably not add much value to your charting analysis.

Multiple trend lines: there is no rule that tells traders they can draw only 1 trend line on
the chart. Feel free to connect multiple points and keep them on the chart because all of
them represent a decision spot. Although you can add as many trend lines as you feel are
needed, make sure not to over crowd your chart because you want to avoid paralysis of
analysis.

Old trend lines: keeping some of the older trend lines on the chart is OK especially when
you expect them to provide support and resistance in the opposite direction. Old trend
lines can be great points of chart confluence.

Cutting through candles or wicks (dark red): trend lines can cut through part of the
candle or wicks of the candle if the trend line becomes a "better" trend line due to more
hit(s), a more sustainable angle, and/or more space between the hits.
Steep trend lines (inner)
A steep trend line indicates that price action is behaving very impulsively. Price is moving
quickly in momentum and therefore the trend line is steep as well. Any angle more than 45
degrees on a chart with +/- 150-230 candles is considered steep.

These trend lines can be used for finding continuation trades within the momentum. But
be careful not to get carried away with this practice because eventually price will fail to
continue in the momentum and will show a larger correction.

The breakout of a steep trend line could be an entry setup as well, however this needs to
be treated with even more caution. The break of a steep trend line could just be an
expanded correction and nothing more. Traders run the risk of price going only a bit in
their favor before the trade setup runs into trouble. The counter trend break could make
sense, however, if the momentum is going against the trend direction of a larger time
frame.
Medium trend lines
Price is showing periods of impulse and corrections which makes the channel angle not too
steep or shallow. An angle less than 45 degrees but more than 20 degrees on a chart with
+/- 150-230 candles is considered medium. These trend lines offer both bounce and break
opportunities.

Shallow trend lines (outer)

Price is showing a correction which makes the channel angle shallow. An angle less than
20-25 degrees on chart with +/- 150 candles is considered shallow. These trend lines offer
better break out opportunities and sometimes bounces in the direction of the bigger trend.
Shallow trend lines occur when price is correcting so it makes sense to look for breakouts
above the correction, most notably when price has made an impulse prior to the
correction.

A bounce setup could occur in the correction pattern as well, such as a bullish bounce and
long setup at the bottom of a bull flag or a bearish setup at the top of a bull flag.

Trend lines are not only useful for determining the trend but also for analysing support and
resistance (S&R), which is the next major concept that traders must know so that they can
understand the charts and technical analysis in a more proficient way.
Chapter 4: Support & Resistance
Support and resistance (S&R) levels are a basic pillar of technical analysis (TA). S&R plays a
key role in the field of TA, which is based on patterns in price data.

Learning how to understand, recognise, use, and trade based on S&R will, in our view,
make your analysis and trading more robust.

Sounds good, but what is S&R?

The simplest way to think about support and resistance is this:

They are price levels or price areas where price changes direction or moves sideways.

In other words, S&R is a price level or a price zone where price has bounced and/or could
bounce.

Support and Resistance Explained

Support levels:
● Are always found below the current price.
● Indicate buying pressure.
● Offer a potential bullish bouncing spot or break breakout.
Resistance levels:
● Are always found above current price.
● Indicate selling pressure.
● Offer a potential bearish bouncing spot or bullish breakout.

We wrote potential bounce or break. How high is this chance?

That depends on both the strength of the S&R zone and its confluence (multiple levels). But
be aware that price reactions tend to be strong(er) on higher time frames.

S&R remains valid when price is reversing or “bouncing” at S&R:

● Bullish bounce: price is bouncing at support.
● Bearish bounce: price is bouncing at resistance.

S&R becomes invalid when price manages to break through it:

● Bullish breakout: price is breaking through support.
● Bearish breakout: price is breaking through resistance.

Once S&R is broken, their role can turn around like this:
● Broken support becomes a potential new resistance level.
● Broken resistance becomes a potential new support level.

Examples of support and resistance levels are tops, bottoms, and round levels. This
chapter will dive into more examples and which ones I use later on.
Image shows S&R levels being respected (red/green) and trend lines being broken (orange/blue).
Purple box shows broken support level becoming resistance (dark red).

Why Are Support & Resistance Levels Important?

Support and Resistance (S&R) levels are a key part of any market analysis or chart for a
number of reasons:

1. Respected: the market uses S&R levels for breakouts and bounces.
2. Big market players: every technical analyst uses S&R, also traders at banks and
funds.
3. Universal: they appear on all instruments and time frames.
4. Market phases: they appear during trends, ranges and reversals.
5. Time frames: higher time frames are more important because a larger part of the
market is using these levels.
6. Path of price: S&R are key to understand the “path of least resistance” (more info
below).

Support and resistance levels are like the “footprints” of the big market players. Other
traders can understand their moves better if they analyse S&R.

What is the Benefit of S&R when Trading?

Support and resistance lines are a key aspect of trading and it is one of the key
components of understanding the market structure.
Without it, traders would be lost in the woods, it would be the equivalent of driving on the
roads blindfolded.

The 3 major benefits of S&R are:

1. Identifying high probability reversal zones.
2. Avoiding low probability trades close to or trading into S&R.
3. Trade setups upon the break below/above or bounce at S&R.

Let me show you a practical example. There was a downtrend visible on the USD/JPY 1 and
4 hour charts but the currency pair was approaching a large support zone (green box) on
the daily chart. The bearish momentum is indicated by the orange arrow (on the right of
the chart) on the image below.

Let’s review all 3 benefits when reviewing this chart:

1. Identifying reversals: MAYBE. Was the price going to break or bounce? This was
probably a 50-50% coin flip, but we will provide more information about this later on
but there are other conclusions traders can make.
2. Filtering weak trend trades: YES. It’s usually not a good practice to enter a short
trade right in front of the S&R.
3. Trade setups: YES. Waiting for both a break or bounce is valid. A bearish breakout
below the zone or a pullback and continuation signal on a lower time frame is a
valid approach. A bullish bounce if price action shows a turn around is also valid.
How do you Spot Support and Resistance Levels?
There are a number of mistakes traders make when drawing S&R on the chart.

Mistake 1: they expect a support level to act as support even though the price has already
broken below the level or zone. The same is true for resistance when price has already
broken above it. Traders must look for unbroken support or resistance levels.

Mistake 2: they use levels from a very long time ago. Always keep in mind that the most
recent price action has more weight and more importance.

Mistake 3: they treat all S&R levels the same. Support and resistance levels are more
important if price has bounced significantly at this level in the past. So start on the right
and then work your way back to the left.

Mistake 4: they think trading each and every S&R level is the right way to go. The truth is
that this just creates a messy chart, which does more harm then good. Focus on only
drawing the significant S&R levels.

The main step is to look for recent S&R levels that have been “respected”. The market
respects a support and resistance level by bouncing at this level. The stronger the bounce,
the more powerful the S&R level becomes.
Another tip is to draw a “zone” rather than a single level because price can overshoot S&R
due to price momentum and market volatility. We use these buffer zones for S&R for all
tools and indicators like moving averages. This is also why we prefer to work with moving
average bands (high, low, close) rather than just one moving average.

Also do not be afraid to indicate differences between S&R levels. Some S&R levels will be
more important than others and it’s good to indicate S&R as major or minor levels. The
best way to do so is to use different shades of color for the S&R lines.
What Tools and Indicators Show the Best S&R?
There are various ways of analyzing support and resistance levels. Here are the main
categories:

● Dynamic S&R levels

● Fixed S&R levels
● Semi-dynamic S&R levels
● Automated S&R levels
● Manual S&R levels

Dynamic S&R Levels

Dynamic levels are support and resistance levels that change when price action moves or
changes. A moving average for instance is S&R level that is updated with each new candle.
The same is true for the Ichimoku indicator. Each new candle will create a new calculation
of the S&R.

Here is a part of the list:

● Moving averages and Alligator.
● Ichimoku.
● Keltner channels, Parabolic and other bands.
● Average true range.
● Murrey Math and many more.

Image shows Parabolic (green dots), Keltner Channel (orange lines), and ecs Murrey Math (purple
lines).
Fixed S&R Levels
Fixed levels are support and resistance levels that do not change no matter how much
price moves. A 1.10 round level will always remain S&R at 1.10 regardless of how price
moves. The same is true for a top, bottom and Fractal.

Here is a part of the list:

● Round levels.
● Quarter levels.
● Tops & bottoms .
● Fractal levels.
● Pattern levels.
● Candle low & high, candle open, and candle close.

Semi Dynamic S&R Levels

Semi-dynamic S&R levels are a mixture of dynamic and fixed levels. They tend to change at
a fixed / steady rate of increase and decrease. This is different when compared to a fixed
level because: a) the fixed one does not change at all and b) the dynamic one changes more
rapidly.
The trend line is a perfect example for instance as it has a steady angle. The same is true
for a Fibonacci level, the Fibs can be moved once the trader changes the tool.

The Camarilla Pivot Points are a perfect example as well. The Camarilla levels are changed
automatically at each new candle, such as 4 hour, daily or weekly candle. In the image
above you see the ecs Camarilla indicator, which has special features such as multiple time
frame Camarilla levels.

Here is a summary of the semi dynamic S&R levels:

 ● Pivot Points.
● ecs.Camarilla Pivots.
● Fibonacci.
● Trend lines.

Automated vs. Manual S&R Levels

Automated support and resistance requires zero work from the trader whereas manual
levels need to be adjusted manually.

Automated S&R levels are moving averages because the MT4 platform does the
calculations for you. Manual S&R levels are Fibonacci levels and trend lines.

In the image below you will find an overview of some of the S&R indicators.

Which are the Best Support and Resistance Levels?

We certainly have our own favourite support and resistance levels... This will vary from
trader to trader as well. For instance, my main tool is moving averages.

But as I explain in ecs.SWAT approach, the best S&R level also depends on the time frames:

● General: round and quarter levels.

● Monthly/weekly: tops, bottoms, Fractals, candle highs and lows.
● Daily chart: Murrey Math levels, tops, bottoms, Fractals.
● 4 hour chart: moving averages, trend channels, Fibonacci levels.
● 1 hour chart: moving averages, ecs.WIZZ, Fractals, trend lines.
● 15 min chart: moving averages, ecs.WIZZ, Fractals, trend lines.

These might seem like a lot but I do not use all of them at the same time. I am only listing
my favourite S&R levels per time frame. When trading the markets, I always use 3 time
frames to make the best decisions about S&R.
Now it’s time to explain more about these indicators.

The Most Precise S&R Levels

Murrey Math Levels for filtering setups: the best indicator for the daily chart is the Murrey
Math indicator, which is based on Fibonacci levels and octaves. It plots automated support
and resistance levels and is also updated automatically.

Fibonacci tool for finding entries and targets: the Fibonacci levels are a music to my ear.
They provide excellent and precise reversal spots, entry spots and targets.
Fractals for stop loss placement: Fractals show where the price action respects S&R. Using
them for a stop loss is useful as it provides an extra layer of defense.

Moving averages (MAs) for bounce or break spots: the MAs are an excellent tool for
measuring the psychology of the market and offer excellent break or bounce spots.

The ecs.WIZZ tool: the tool shows where there is space between S&R level or not. It plots
key targets on the chart and traders can see where price is expected to be corrective or
impulsive.
How Can Traders Trade at Support or Resistance?
The next part addresses the most important question: how can traders take trades at
support and resistance?

Traders can trade in two ways:

● Breakout: a breakout occurs when price pushes through the S&R level.
● Bounce: a bounce occurs when price respects the S&R level.

The best concept for trading S&R is by using the “BPC” concept:
● B stands for breakout or bounce.
● P stands for pullback.
● C stands for continuation.

Breakouts and bounce: candlesticks . The best way for traders to measure breakouts or
bounces is by using candlesticks, which help measure the reaction of price in the decision
zone or point of confluence (or control).

Example: a bullish 4 hour candle above a 4 hour trend line with a close near the high will
probably create a good breakout.

Pullback: FIbonacci tool. Once price has bounced or broken, there could be a retracement
first before price continues with the bounce or break. The best tool for this is Fib levels.

Example: a bearish break of the trend line and fractal sees a bear flag chart pattern correct
up to the 38.2% Fibonacci level, which could be a good retracement spot.

Continuation: trend lines, Fractals, MAs. Once price has completed its pullback, it could
be ready to continue in the same direction as the first breakout. A new break of the trend
line, Fractal and/or moving average (MA) would be the best way to measure it.

Finally, pending orders and market orders are the two entry options. I prefer market orders
as I often use candlestick patterns and candle reactions for entries.
How “Precise” are S&R Levels?
Pretty precise, but not as precise as you might think. Here are my thoughts:

1. When price approaches a round level of 1.10, this does not mean that only the 1.10
level is important.
2. It is key to realize that support and resistance levels are only rough zones. Price can
push slightly above or below them or even miss them by a bit.

For instance, the round level of 1.10 would indicate to me that price could stop anywhere
between 1.0975 and 1.1025 and it would still be considered a respect for the 1.10 level.

Of course, bigger round levels like 1.10 have more weight and importance then smaller
levels like 1.1350. But even with the latter S&R level, price might stop within a margin of 5
pips above or below it.

The same is true for all other support and resistance levels, including Fibonacci levels,
moving averages, trend lines, etc. S&R levels are always a zone, never ever just one level.

How can traders assess it? It’s time to see if it’s possible to measure the breakout chance.

S&R Plays Vital Role in Market Structure Triangle

S&R is in fact a very powerful tool because price will always choose a direction (“path”)
where it finds the lowest barrier (“resistance”). Let me use examples to explain.
Trend versus S&R
Here is a calculation how traders can judge the likelihood of price bouncing or breaking
S&R:
● If the downtrend is strong(er) and the support is weak: price will probably break
below the support and show a bearish breakout.
● If the support is strong(er) and the downtrend is weak: price will probably bounce
at support and show a bullish bounce.

The opposite is also true for resistance:

● If the uptrend is strong(er) and the resistance is weak: price will probably break
above the resistance and show a bullish breakout.
● If the resistance is strong(er) and the uptrend is weak: price will probably bounce
at resistance and show a bearish bounce.

S&R Role in Market Structure Triangle

Conclusion: the “battle” between S&R and trend / momentum is an important equation that
determines the “path of least resistance”.

Support and resistance levels are therefore also called:

● “bounce or break zones / spots” or
● “decision zones”.

As you can see above, there are 4 options available:

● Bullish breakout.
 ● Bullish bounce.
● Bearish breakout.
● Bearish bounce.

How Can Traders Measure Break or Bounce Chance?

This is perhaps the most difficult question... but we do use a rough formula for making this
decision. As explained in the previous paragraph, the trend and S&R are the first two key
ingredients whether price will break or bounce. Patterns offer a 3rd angle to analyze the
market structure.

1) Measuring Support & Resistance Strength

Let’s review key factors to consider when analyzing the strength of S&R. The following
aspects make S&R levels stronger:
● Multiple S&R levels at or near the same zone, which is called “point of confluence”.
● Multiple tools and indicators at or near the same zone.
● The more confluence, the stronger the zone becomes.
● S&R visible on multiple time frames.
● Key level(s) on higher time frames, which is called “decision zone”.
● S&R level on 1 time frame above your entry chart.

Of course, the opposite makes S&R weaker: less confluence, lack of key levels, and lower
time frame S&R are not as important and indicate weakness.

2) Measuring Trend Strength

The 2nd aspect of the equation is trend and momentum. This is even more difficult to
judge then S&R but here are some guidelines for trend strength:
● Established trends and trend channels increase its strength.
● Strong momentum candlesticks increase its strength.

The presence of a strong(er) trend or momentum increases the chance of a break.

3) Impact of Price Patterns

Price patterns also play a role in measuring the chance of a break or bounce:
● Divergence patterns make a bounce more likely.
● Reversal chart patterns make a bounce more likely.
● Continuation chart patterns make a breakout more likely.

4) Number of Approaches
The last factor in analyzing breaks or bounce is how often a S&R has been challenged. Here
is how the logic works when S&R and the trend are roughly equal:
 ● First approach of the trend reaching S&R has a higher chance of a bounce than a
break.
● Second approach of the trend reaching S&R has a 50%-50% chance of a bounce or
breakout.
● Third approach of the trend reaching S&R has a higher chance of a breakout than
bounce.

Examples from the Above

The four steps above are not a simple math formula, unfortunately. But with time and
experience, it does become easier to recognize what is more likely.

Let me show you a concrete example. Let’s say a 1 hour strong bearish momentum is
approaching a key 1.10 decision zone (purple lines) which also offers multiple points of
confluence on the 4 hour and daily chart for the very first time. What is more likely?

Answer: a bearish bounce, because the multiple S&R of the higher time frame is expected
to be strong than a momentum push on a lower time frame like a 1 hour chart, plus it’s the
first approach.

One more example. Let’s say a 4 hour uptrend is approaching a 1.15 resistance round level
for the 3rd time but otherwise there is not much resistance. What is more likely?

Answer: a bullish breakout.

Summary of the Above
Not every situation will be clear. But these 4 aspects will help every trader make a better
judgement about the strength and weakness of S&R and whether price will break, bounce
or reverse.

What is the Target of the Bounce or Break?

How far can the breakout or bounce last is the final question we want to address. Our
answer will depend on whether the price is trending, ranging, or reversing.

Trend or strong trend:

● Good to trade bounces at Fibonacci levels.
● Good for trading breakouts with the trend after trend line, MA or fractal break.
● Bad for reversal trades, best to avoid.
● Use the Fibonacci or Wizz tool to determine how far price can last.
● Use wave patterns to distinguish wave 1, 3, or 5 and adjust targets.

Weak trend with divergence:

● Good to trade reversal bounces after candlestick patterns.
● Aim for 21 ema close.

1st reversal swing has occurred after divergence:

● Good to trade reversal bounces at Fibonacci of first correction swing.
● Aim for -27.2% or -61.8% Fibonacci targets after 1st counter-trend price swing.
● Aim for 144 ema close.

Range or sideways movement:

● Good to trade reversal bounces.
● Aim for mid point as target 1.
● Aim for previous top or bottom as target 2.
● Candlestick patterns are good for entries.

What are the Best Time Frames for S&R?

The best combination for analyzing the market structure is using a higher, middle and
lower time frame. They all play a different role in my approach:

● The higher time frames, like the daily chart, are used to find key support and
resistance levels, which could stop the trend or momentum from continuing.
● The middle times frames, like a 4 hour chart, are used for spotting retracements
within a trend or a top or bottom in a range.
 ● The lower time frames, like a 1 hour chart, are used for entries and trading
breakouts and bounce.

The best method is to apply three time frames for analyzing the chart. Three levels of zoom
provide optimal information while not overcrowding and overloading our analysis.

Keep in mind that S&R levels on a 1 minute chart have no expected effect on a weekly
chart. You should preferably use the S&R level on the same time frame, higher time frame,
for one time frame lower. Very max, two time frames lower.

For example, a daily support trend line could be used on a daily and 4 hour chart, but
would not be that good for a 1 hour chart and is unusable on a 15 minute chart.

Summary Support and Resistance

Support and resistance (S&R) levels are important decision zones for the market because
they offer key bounce or break zones.

S&R is also an important part of analysing the charts together with trends. In this chapter
we discussed several parts:
● What is support and resistance?
● Why are support and resistance levels important?
● What is the benefit of support and resistance when trading?
● How to find support and resistance levels?
● How to find support and resistance levels in day trading?
● How to draw support and resistance?
● What tools and indicators indicate support and resistance?
● What are the best support and resistance levels?
● How can traders trade at support and resistance?
● How precise are support and resistance levels?
● Support and resistance plays vital role in market structure triangle
● How can traders measure break or bounce chance?
● What is the target of the bounce or break?
● What are the best time frames for support and resistance?

Now that you know how to analyse trend and sport and resistance, it is time for the next
step called patterns which completes the “triangle of analysis”. These 3 aspects (S&R, Trend
/ Momentum and Patterns) are key for understanding each price chart in a deep but simple
way.
Chapter 5: Patterns and Triangle of Analysis
Price patterns are the third piece of the puzzle that we use for analysing the charts, besides
support and resistance (S&R) and momentum (trend).

Together, all three methods form the triangle of analysis:

1) Support and resistance.

2) Trend and momentum.
3) Price patterns.

We are able to study the price chart by analysing the triangle of analysis. This allows us to
assess the probabilities of future price movements such as their direction (up, down,
sideways) and their potential space (from what level to what level).

In essence, we study the price movements of the past to explain future price movements in
the near future. The price path follows a principle called the path of least resistance, which
is impacted by supply and demand.

● If there is more supply than demand, the price will move down.
● If there is more demand than supply, the price will move up.

Based on that, price chooses the path of least resistance whether that is up, down, or
sideways. But rather than studying all of the hundreds or even thousands of factors that
impact supply and demand (fundamental analysis), we choose to study the outcome (price)
as it gives us:
 a. Some (or enough) information about the potential future price movements
(technical and wave analysis) and
b. Offers us a method to assess when traders have the best probabilities of earning
profits on their trade ideas in the long-term.

The main advantage of studying price and the path of least resistance is that it is quicker
and simpler to digest the information and find trading opportunities.

As traders, we are not looking for a trading method that provides a long-term edge by
creating wins that outweigh losses.

One single trade setup will never be a guaranteed win and as a trader you never want to
focus on whether the next trade is a win or not.

The main focus must always be whether your win percentage and size of the win are larger
than the loss percentage and size of the loss:

(win % x average size of win) - (loss % x average size of loss) = profit or loss expectancy.

Plus you always want to see the results over a lengthy series of trades (like 100-1,000
trades) in the long-term.

In fact, you need at least a minimum of 40-50 trade setups before you can calculate
whether your trades offer a long-term edge or not.

Most traders focus on win percentage only plus they analyse just a couple of trades. Now
you know that this information is not sufficient to make any concrete judgment.

Path of Least Resistance Explained

The price chart shows the historical path of least resistance up to now. As you now know,
the “shortcut” for analysing price’s next step or movement is technical and wave analysis.

Traders use this analysis to make a judgment about the future movement of price and the
future path of least resistance.

Another way of understanding price and the path of least resistance is by comparing it to a
stream of water like a river running down the hill. The water will find its path to a larger
river, a lake, or sea by choosing its path of least resistance around bigger rocks and setting
aside smaller rocks. Price does not make a left, right or straight motion of course but
otherwise it is comparable to a river as price moves up, down, or sideways.

Or, let us take a look at an example such as the weather. Many people believe that
meteorologists are bad at predicting the weather but studies show that nowadays the
weather can actually be predicted with great accuracy (see Superforecasting: the Art and
Science of Prediction” by Philip E. Tetlock and Dan Gardner.)

Although the weather forecasting is not seen as a field of study with high levels of accuracy,
it is in fact surprisingly correct. When the weather team indicates that there is a 30%
chance of rain, then three out of ten times it will rain and seven times it will not (when you
analyse 10 situations with a 30% chance of rain).

There is just one limit and one exception (see Superforecasting: the Art and Science of
Prediction” by Philip E. Tetlock and Dan Gardner.):

1) The time limitation: the accuracy is valid for up to seven days in advance. After day
seven the ability to forecast correctly diminishes quickly and people are usually
better off with the average climate data. This is one of the reasons why ECS uses a
time pattern rule of 5-6 days.

2) The exception: accuracy levels drop when rain chances decrease to an expected 0 to
5-10%. Why? Meteorologists tend to overstate the chance of rain taking place
because they do not want viewers to think that rain is impossible. They overestimate
the rain chance slightly to help the viewers, who often have problems with grasping
probabilities.

Although probability is an important aspect in life when taking all kinds of decisions,
humans unfortunately tend to be weak when trying to understand probability.

A 10% chance of rain does not mean that there is no chance of rain. It just means that out
of 10 days, it will rain only once (one day). But in the mind of most people, a 10% chance of
rain is equal to 0%. For most people, there is probably not much difference when the
weatherman says that there is a 5% or a 30% chance, in both cases they expect that it
shouldn’t rain.

Also, humans tend to attach too high probability to an event with low probability but high
impact. They might be scared of something very unlikely happening like a meteorite hitting
them, although the chance is smaller than 1 in a million. Whereas they are not scared of a
rainy day, even if that chance is substantially higher at 5-20%.

Probability is important for understanding price charts and the path of least resistance. The
path of least resistance is not fixed in stone but rather something flexible.

Now it’s time to explain how technical and wave analysis can be used to understand,
analyse, and trade the price path of least resistance. The first concept that we need to
explain is “flow versus resistance”.
Flow versus Resistance
The strength of the resistance versus the strength of the flow will determine the path of
least resistance for rivers and price.

This means that traders can assess each situation on the chart and then determine the
probability that price will continue higher, lower or sideways by analysing the flow and
resistance.

What is flow and resistance for price charts? Let’s explain:

● Strength of the flow:

○ River: flow is the strength of the water current.
○ Trading: flow is the strength of price action such as candlesticks.

● Strength of resistance:
○ River: how massive and large is the object blocking the flow.
○ Trading: how strong is a key support or resistance level on the price chart.
The decisive factor is whether the flow or the resistance is stronger. This will determine
whether price will move with the trend or reverse and whether it will move up, down or
sideways.

Let’s again examine a river (or creek) to simplify the concept:

● Tt points with resistance, the water will move around or away from the object.
● When the power of the water flow picks up, it will be easier for the water stream to
push aside stronger points of resistance.

The most important factor is compare flow versus resistance:

● If the flow of the water is slow, then a rock could be strong and big enough to not
get knocked aside and water could change its path to the left or right.
● If the flow of the water is strong (its mass and or speed), then a rock might be too
weak to stand on its spot and it could be pushed aside. In this case, the path of the
water did not change (or hardly changed) as the rock was moved.

The same principle that is used for a river (flow versus rocks) can be used for price. With
price charts, the flow and resistance can be understood by analysing these two aspects:

1) Flow: the strength or indecision of the bars or candlesticks.

2) Resistance: the strength or weakness of the support or resistance levels on the
chart.

Like a river, the interaction between flow and resistance determines the path of least
resistance for the object, which is a river or price:

● Strong(er) price action breaks through weak(er) support or resistance levels.

● Weak(er) price action fails to break through strong(er) support or resistance level.
Let us take a look at a practical example - see the image above. Let’s examine it - starting
from left to right (the points below correspond to and match the same points mentioned in
the image):

1. Price was in an uptrend as price was moving away from the moving averages.
2. Price broke below the support of the 21 ema zone and the support trend line
(dotted blue line) which started bearish momentum (red arrow).
3. The breakout was a key factor for the start of the downtrend.
4. The strong bearish candlesticks broke through any of the support areas that were
there.
5. The bearish momentum weakened and eventually price made a retracement above
the 21 ema zone and back to the 144 ema long-term moving average.
6. The 144 ema was a bearish bouncing spot because the trend was down as the
alignment of the MA’s showed.
7. The break below support created a new bearish breakout and channel.
8. There is divergence between the price bottoms and the bottoms of the oscillators
(purple line), which could indicate that momentum is becoming weaker. Also a
support level at 1.13 could stop the price from moving lower. A bullish breakout
(thick green arrow) above the channel would confirm the reversal.
9. A break below the support and bottom could still indicate that the downtrend will
make one more lower low (thick orange arrow).

The above logic might seem complex to you at first but we explain the entire approach step
by step in this book using our own personal methodologies. The most important aspect to
understand is that:
 ● Stronger price flow will beat weaker support or resistance.
● Weaker price flow will lose versus stronger support or resistance.

As long as the flow is strong, momentum is likely to last unless a massive confluence of
support or resistance is nearby. As long as the flow is weak, support or resistance is likely
to stop price unless a significant breakout occurs.

Price patterns also play an important role in this equation as they provide information
about the psychology of the price chart. They can provide extra information on top of what
we already know from trends and S&R.

Although trend, momentum, support and resistance already offer a lot of useful
information to traders, patterns give us an extra layer of analysis that give us clues whether
the trend or S&R will win the battle.

Price Patterns
There are many forms of price patterns that appear on a price chart. As part of the chapter
on trend and momentum, we already spoke about candlestick patterns and chart patterns
and how they communicate information to traders.

But there are many more price patterns available. Here is a list of the patterns we use:

● Chart patterns.
● Candlestick patterns.
● Wave patterns.
● Divergence patterns.
● Time patterns.
● Fibonacci patterns.

Other patterns exist but to stay focused, we will only expand on the above mentioned
patterns.

Wave Patterns
Wave patterns are often based on the Elliott Wave Theory or Principle, which was
discovered by Ralph Nelson Elliott in the 1930s for the stock market.

Elliott Wave Theory attempts to identify recurring price movements within financial
markets and to classify them into a set of meaningful patterns, which can become a reliable
tool for future price predictions.
The underlying principle is that price-action unfolds via an endless alternation between
trending and corrective cycles, while producing this effect on any relative timescale
(fractality).

Elliott Wave (EW) price patterns are divided into motive waves (i.e. price movements that
initiate progress in one direction and therefore create trend) and corrective waves (i.e.
price movements that are reactionary in relation to the previous trend-setting move).
Corrective waves essentially attempt to revert or undo the movement that was initiated by
the preceding motive wave.

EW is nothing more or less than analysing the character of the recent price swings and
estimating the probability of the current and next swing. EW uses rules and guidelines to
improve estimates and reduce the number of options for that estimate.

The Elliott Wave theory might sound logical in theory but for most traders it does remain a
bit of a mystery. Although many traders and analysts are sceptical of the benefits that wave
analysis offers, wave analysis is nothing more or less than analysing price swings from the
past and analysing what the current and next price swing is likely to be.

There is good news. Once you know how to spot the correct price swing, know its direction
(bullish or bearish), and know its behavior (impulsive or corrective), then you are well on
your way to becoming a wave analyst. Analysing swings is like putting together a puzzle and
you are using the pieces from the past to understand what piece might fit next.

Wave analysis labels those price swings with numbers and letters, which adds a “story” to
the chart. But before traders can add labels and determine the next swing, they need to
correctly define what is a price swing (wave), which we have already discussed in chapter 3.

Although wave analysis might sound or seem complicated, its complexity is massively
reduced when using a wave trend indicator to understand price swings. But keep in mind
that knowing how to do wave analysis is not necessary if you trade my ecs.SWAT method
because we trade the waves without labelling them and you can do the same. Of course, if
you like waves and the information it provides, then using the full wave patterns and
analysis is possible too. This really depends from trader to trader and what works and
helps for their specific trading style.

This paragraph will not fully address wave patterns from A to Z as it would require a book
on its own. For now its key to note that the basic wave patterns unfold over 8 waves:

● 5 with the trend. The 5 trending waves are labelled 1-2-3-4-5.

○ Waves 1-3-5 are impulsive and with the trend movement.
○ Wave 2-4 are corrective and counter trend movement.
● 3 counter trend. The 3 corrective waves are labelled A-B-C.
 ○ Waves A and C are impulsive and counter trend movements.
○ Wave B is corrective and with the trend movement.

From R.N. Elliott's essay, "The Basis of the Wave Principle", October 1940.

The market repeats the same wave patterns on all time frames, higher and lower ones. This
means that 5 wave patterns could be possible within wave 1, 3, and 5, as well as within
wave A and C (impulse waves) whereas 3 wave ABC patterns are visible in wave 2, 4 and B.
The image above shows how the initial 8 wave patterns is broken down into 34 waves
(5+3+5+3+5+5+3+5) on a lower degree and 123 waves (21+13+21+13+21+21+13+21) on a
degree below that. The patterns are fractal in nature, which means that the same patterns
are visible on all time scales.

Each wave offers interesting information about the current price swing and the potential
next price swing(s):
● If we see a wave 1 unfold, then we are expecting a wave 2 correction. An ABC
correction could help confirm that analysis for instance.
 ● If we see a wave 3 unfold, then we are expecting price to push into one direction
with strong impulsive price action.

Each wave offers its own character and detail.

Five wave pattern (dominant trend) Three wave pattern (corrective

trend)

Wave 1: Wave one is rarely obvious at its inception. Wave A: Corrections are typically
When the first wave of a new bull market begins, the harder to identify than impulse moves.
fundamental news is almost universally negative. In wave A of a bear market, the
The previous trend is still strongly in force. fundamental news is usually still
Fundamental analysts continue to revise their positive. Most analysts see the drop as
earnings estimates lower; the economy probably a correction in a still-active bull market.
does not look strong. Sentiment surveys are Some technical indicators that
decidedly bearish, put options are in vogue, and accompany wave A include increased
implied volatility in the options market is high. volume, rising implied volatility in the
Volume might increase a bit as prices rise, but not by options markets and possibly a turn
enough to alert many technical analysts. higher in open interest in related
futures markets.

Wave 2: Wave two corrects wave one, but can never Wave B: Prices reverse higher, which
extend beyond the starting point of wave one. many see as a resumption of the now
Typically, the news is still bad. As prices retest the long-gone bull market. Those familiar
prior low, bearish sentiment quickly builds, and "the with classical technical analysis may see
crowd" haughtily reminds all that the bear market is the peak as the right shoulder of a
still deeply ensconced. Still, some positive signs head and shoulders reversal pattern.
appear for those who are looking: volume should be The volume during wave B should be
lower during wave two than during wave one, prices lower than in wave A. By this point,
usually do not retrace more than 61.8% (see fundamentals are probably no longer
Fibonacci section below) of the wave one gains, and improving, but they most likely have
prices should fall in a three wave pattern. not yet turned negative.

Wave 3: Wave three is usually the largest and most Wave C: Prices move impulsively lower
powerful wave in a trend (although some research in five waves. Volume picks up, and by
suggests that in commodity markets, wave five is the the third leg of wave C, almost
largest). The news is now positive and fundamental everyone realizes that a bear market is
analysts start to raise earnings estimates. Prices rise firmly entrenched. Wave C is typically at
quickly, corrections are short-lived and shallow. least as large as wave A and often
Anyone looking to "get in on a pullback" will likely extends to 1.618 times wave A or
miss the boat. As wave three starts, the news is beyond.
probably still bearish, and most market players
remain negative; but by wave three's midpoint, "the
crowd" will often join the new bullish trend. Wave
three often extends wave one by a ratio of 1.618:1.

Wave 4: Wave four is typically clearly corrective.

Prices may meander sideways for an extended
period, and wave four typically retraces less than
38.2% of wave three (see Fibonacci relationships
below). Volume is well below that of wave three. This
is a good place to buy a pull back if you understand
the potential ahead for wave 5. Still, fourth waves
are often frustrating because of their lack of
progress in the larger trend.

Wave 5: Wave five is the final leg in the direction of

the dominant trend. The news is almost universally
positive and everyone is bullish. Unfortunately, this
is when many average investors finally buy in, right
before the top. Volume is often lower in wave five
than in wave three, and many momentum indicators
start to show divergences (prices reach a new high
but the indicators do not reach a new peak). At the
end of a major bull market, bears may very well be
ridiculed (recall how forecasts for a top in the stock
market during 2000 were received).

Source: from Wikipedia page on Elliott Wave Principle.

What are the limitations of wave analysis? There are quite a few wave pattern permutations
that can appear. Without a very thorough and detailed look at the micro-structure, it is easy
to mislabel price patterns in an overly simplistic manner.

It requires a lot of experience to be able to discern subtle differences within wave patterns
that can make a big difference in the overall analysis. Corrective patterns are especially
tricky to label accurately because they can be much more complex than impulsive patterns.
Another limitation is that wave pattern analysis can only ever suggest a likelihood of what is
to come next, but there is always the possibility of an alternative scenario playing out as
well.

It is therefore very important to develop an experience-based knowledge that allows the

analyst to discern between times when price-action is offering a strong bias for a particular
future scenario, and times when the probabilities are too balanced, such that it is
impossible to make sound trading decisions based upon one or the other scenario. The key
lies in waiting for price action to offer enough confirmation for a certain scenario to
become more likely and only make trading decisions when such a bias exists.

EW Rules and Guidelines

This part provides an idealized drawing for each EW pattern, including a visualization of the
most important internal wave size relationships. This section was published as a separate
guide at Elite CurrenSea. One of our SWAT traders, Hubert Miranda, compiled the guide for
himself and the ECS community and he did wonderful work. The images highlight the most
common wave retracement and extension targets in red, followed by the next most
common targets in orange, followed by the least common targets in grey.

Wave Degrees
Elliott Waves are labeled in different degrees that are nested within each other due to the
fractal nature of price movements. Please refer to your Elliott Wave drawing software for
the appropriate names and symbols used for each officially defined degree. Alternatively,
you may simply label different degrees with different-colored labels on your chart.

Alternation (“expect a difference in the next expression of a similar pattern”):

EW patterns have the tendency to create alteration within them. This is reflective of
nature’s general propensity towards dynamic balance. Following is a list of the main
occurrences of alternation:

Alternation of corrective waves:

● If wave 2 is sharp (i.e. zigzag or extended zigzag) and deep (i.e. deep in the sense of
how much it retraces the preceding wave 1), then wave 4 will most likely going to be
sideways (flat, combination, or triangle) and shallow relative to wave 3. The same
applies in reverse but is less common. This is because triangles (which only appear
during wave 4 inside a motive wave) are considered to be alternating to all other
corrective patterns. That means even if wave 2 is a shallow sideways correction, a
triangle can still appear in wave 4, but it is less likely.
 ● Alternation also occurs in terms of wave complexity. If a potential bigger complex
correction starts out simple at first, then expect complexity to increase during the
following parts of the correction (i.e. simple-complex-most complex). The reverse
can also apply (i.e. most complex-complex-simple) but it is more rare.

Alternation of motive waves:

● If wave 1 is short, then wave 3 is likely to be extended, and wave 5 likely to be short
again. If wave 1 is extended, then wave 3 and 5 are most likely not extended. If
neither wave 1 nor wave 3 is extended, then wave 5 probably will be extended. If
wave 3 is extremely long and overstretched, wave is 5 more in danger of being
truncated.

Balanced Proportions (“The Right Look”):

It is important that waves within a 5-wave or 3-wave sequence show reasonably balanced
proportions to each other… not just in terms of size/magnitude (which can generally be
verified by Fibonacci retracement and extension ratios), but also in terms of time
duration. This balancing can occur either via alteration and/or via equality.

Consider the following as an example for ‘balance through alternation’: an impulse is

showing a classic deep and short-lived wave 2, plus a shallow but time-lengthy wave 4. The
time-lengthiness of wave 4 is in balance with the depth of wave 2, while the shallowness of
wave 4 is in balance with the short-lived nature of wave 2, thereby creating balance
through alternation.

The same need for balance applies for any motive waves within a 5-wave sequence (i.e. 1,3,
and 5). The exception however will be the potentially extended wave within the sequence.
It can/will be much larger in terms of magnitude and time than the other four waves, but
the sub-waves (inside the extended wave) must show a balance to each other. The
extended wave will also express relatedness to the other waves of the sequence by the
angle of the overall price movement (that’s why impulsive motive waves travel quite neatly
within parallel channel lines most of the time, even if one of the waves is extended).

Consider the following as an example for ‘balance through equality AND alternation’.
Wave 1 and 5 of an impulse sequence are equal in size and duration (equality), while wave
3 is extended (alternation to waves 1 and 5).

Alarm bells should be going off when a potential wave 4 is starting to grow out of
proportion in terms of size and duration relative to the other waves of the same degree.

It is dangerous to disregard the factor of balanced proportions during wave counting.

Disproportionate and misshapen patterns should be seriously questioned.
The ‘right look’ may not be evident at all degrees of trend simultaneously, so it is best to
focus on the degrees that are the clearest.

Now let’s move on to discuss more specific rules and guidelines for the impulsive motive
wave.

MotiveWave: IMPULSE

Note: The percentages in the above for Fibonacci extension targets are drawn from the start of
the wave, but the ratios are based on the size of the preceding motivewave (i.e. targets of 3 are
relative to the size of wave 1, targets of wave 5 are relative to the size of wave 3.
Rules:
● An impulse consists of 5 internal waves.
● Wave 1 and 5 always have to be impulses or diagonals.
● Wave 3 always has to be an impulse by itself (i.e. can’t be a diagonal).
● Wave 3 must never be the shortest (in terms of percentage gain/loss) within the
sequence.
● Wave 2 is always a corrective pattern and must not retrace more than 100% of wave
1.
● Wave 2 can be any corrective pattern except a triangle (but it can be a complex
combination (wxy or wxyz) that ends with a triangle).
● Wave 4 must not enter the price territory of wave 1.
● Wave 4 must always be a corrective pattern (any).

Guidelines:
● Waves 2 and 4 tend to create alternation between each other (as outlined in the
introduction of this guide)
● Wave 2 usually retraces to deeper levels of wave 1 than wave 4 does relative to wave
3
● Wave 2 develops more commonly as a simple corrective pattern (i.e. zigzag or
double/triple zigzag)
● Wave 4 develops more commonly as a complex corrective pattern (i.e. triangle,
double/triple threes, flat)
 ● In almost all impulses, one of the action waves (1,3, or 5) becomes extended, and it
is most commonly wave 3
● Extended waves can contain several further extensions within them
● Wave 5 can fail to go beyond wave 3 (truncation) but it is not very common. It
usually happens when wave 3 has been exceptionally long and overstretched.
Truncation often results in significant reversals.
● Wave 5 is most likely not going to form a diagonal if wave 3 is not extended
● An impulse is not over until all sub degrees are finished (e.g. 5 of 5 of 5). The wave
count takes precedence over channel lines and Fibonacci targets
● Wave 3 almost always exhibits the greatest volume. If volume during the 5th wave is
as high as the 3rd, expect an extended 5th wave.

Fibonacci Retracement and Extension Guidelines:

● If wave 1 is extended, then the size of wave 3 through to the end of wave 5 is often
61.8% – 78.6% relative to the size of wave 1.
● If wave 1 is extended, then wave 2 and 4 are very likely to be shallow (i.e. 23.6% –
38.2%).
● If wave 1 is extended, then wave 2 will often end at the level of sub-wave 4 of 1 (i.e.
the internal wave 4 of wave 1).
● If wave 2 retraces more than 78.6% or 88.6% Fibs of wave 1, the idea that it really is
a wave 2 becomes more doubtful (possible A-B?).
● If wave 3 is extended, then wave 1 and 5 are often nearly equal in magnitude and
duration. If equality is lacking, a 61.8% relationship is next most likely.
● If wave 3 is extended, then wave 4 often ends at the level of sub-wave 4 of 3 and is
quite shallow (retraces 23.6% – 38.2% of wave 3).
● If wave 3 is extended and very vertical, it will likely overshoot the trend channel that
can be drawn when placing the anchor points at the extremities of wave 1, 2 and 4.
However the channel is still very valid for gauging the end of wave 5 (see image).
● If wave 4 retraces more than 50% of wave 3, it is quite often not a wave 4.
● Wave 5 is likely to become extended if wave 1 and 3 are equal in size.
● If wave 5 is extended, then it often finishes at the 161.8% extension relative to the
magnitude of wave 1 through to 3 (see image).
● If wave 5 is extended, then the ensuing correction is often sharp and swift and ends
near the extreme of sub-wave 2 of the extension. This does not apply when the
market is ending a 5th wave simultaneously at more than one degree.
MotiveWave: DIAGONAL

Note: The percentages in the above for Fibonacci extension targets are drawn from the start of
the wave, but the ratios are based on the size of the preceding motive wave (i.e. targets of 3 are
relative to the size of wave 1, targets of wave 5 are relative to the size of wave 3.

Note: The percentages in the above for Fibonacci extension targets are drawn from the start of
the wave, but the ratios are based on the size of the preceding motive wave (i.e. targets of 3 are
relative to the size of wave 1, targets of wave 5 are relative to the size of wave 3.
Rules:
● All diagonals consist of 5 waves.
● Diagonals can be ‘leading’ or ‘ending’ diagonals, depending on whether they form at
the start or end of a trend. Diagonals therefore can only form in the positions of
wave 1 (leading) or 5 (ending) of an impulse, or the positions of wave A (leading) or C
(ending) of a zigzag.
● Within an ending diagonal, all 5 waves must be zigzags (simple-, double-, and
triple-zigzags are all valid).
● Within a leading diagonal, at least waves 2 and 4 must be zigzags (simple-, double-,
and triple-zigzags are all valid). Waves 1, 3 and 5 can be impulses or zig zags. (If 1, 3,
and 5 are impulses, be aware that it could easily be a 1-2, 1-2, 1-2 sequence instead of a
diagonal).
● Wave 2 must not retrace more than 100% of wave 1.
● Wave 4 must overlap with wave 1(please note that opinions differ over this rule. There
are some Elliott Wave researchers who believe that ending and leading diagonals can be
valid without wave 4 needing to move into territory of wave 1, although they still consider
it unusual).
● Wave 4 never moves beyond the end of wave 2.
● Leading and expanding diagonals must not have a truncated 5th wave.
● Contracting diagonals always have a shorter wave 3 than wave 1 (in terms of
percentage gain/loss).
● Contracting diagonals always have a shorter wave 5 than wave 3 (in terms of
percentage gain/loss).
● Contracting diagonals always have a shorter wave 4 than wave 2 (in terms of
percentage gain/loss).
● Expanding diagonals always have a longer wave 3 than wave 1 (in terms of
percentage gain/loss).
● Expanding diagonals always have a longer wave 5 than wave 3 (in terms of
percentage gain/loss).
● Expanding diagonals always have a longer wave 4 than wave 2 (in terms of
percentage gain/loss).

Guidelines:
● Contracting diagonals form within two converging trend lines (contracting wedge).
● Contracting diagonals can overshoot its trend line during wave 5 (called throw-over)
and still be valid as long as wave 5 remains smaller than wave 3.
● Contracting ending diagonals can also undershoot its trend line during wave 5
(truncation).
● Contracting ending diagonals should always show a corresponding decrease in
momentum as they progress towards their culmination. Many small candles that
take a lot of time to gain further ground is a good sign that an ending diagonal is
indeed occurring. Conversely, strong big candles within a potential diagonal
 formation should be a warning sign that you are probably witnessing a 1-2, 1-2, 1-2
extension of the trend, and therefore not an ending diagonal.
● Expanding diagonals form within two diverging trend lines (expanding wedge). They
are more rare than contracting diagonals.
● Wave 2 and 4 of any diagonal very often retrace their wave 1 and 3 much deeper
when compared to wave 2 and 4 of impulses.
● The internal zigzags of any diagonal can sometimes subdivide into more complex
double or triple zigzags.
● Any diagonal can begin to be confirmed with higher certainty once wave 4 is close to
being complete.
● Diagonals are more rare in general (although they do occur quite frequently within
sub-waves of very small wave degrees that are visible on timescales of M15 and
lower).
● If wave 1 is a leading diagonal, wave 3 is usually extended.
● A place to watch out for potential expanding leading diagonals is at the start of the
market decline (due to the opposing forces that are in play during this transitional
period). Diagonals occur because transitory forces of trend changes act against each
other.
● Ending diagonals are followed by a strong reversal most of the time.

Fibonacci Retracement and Extension Guidelines:

Refer to image for key retracements and extension targets.

Corrective Wave: ZIGZAG

Note: The percentages in the above for Fibonacci extension targets are drawn from the start of
the wave, but the ratios are based on the size of the preceding wave of the same direction (i.e.
targets of C are relative to the size of wave A, targets of wave Y are relative to the size of wave W,
targets of wave Z are relative to the size of wave Y.

Rules:
● Zigzags consist of 3 waves (A, B and C).
● Wave A must be an impulse or leading diagonal.
● Wave C must be an impulse or ending diagonal.
● Only one diagonal is allowed (A or C) per zigzag, i.e. it must have at least one
impulse (A or C).
● Wave B can be any corrective pattern (zigzag, flat, triangle, complex combination).
● Wave B must not retrace Wave A by more than 100%.

Guidelines:
● Wave C should normally always go beyond A. Wave C can in principle be truncated
(i.e. not go beyond wave A) but it is extremely rare.
● Zigzags can become extended into double or triple zigzags, in which case they are
labeled wxy (double zigzag) and wxyz (triple zigzag). W, Y, and Z will each subdivide
into their own ABC zigzag, while the X wave/s can be any corrective pattern (they
take on the same role as B waves in a simple zigzag). Extended zigzags usually form
when a simple zigzag appears too small in terms of time and magnitude in order to
be proportional to the swing, which it is correcting.
● Zigzags can take many shapes and sizes. One of the features that can help
distinguish an A-B-C zigzag from a potential 1-2-3 impulse is that wave A and B will
be much more overlapping in general and A waves tend to finish quicker than wave
1 in terms of time and magnitude. Zigzags should often show a very gently sloping
channel, whereas 1-2-3 are typically much more steep.

Fibonacci Retracement and Extension Guidelines:

● Waves A and C of a correction tend towards equality (same size 100%). The next
most common ratios are C = 161.8% x A or C = 61.8% x A.
● Wave B usually retraces between 38% – 79% of wave A.
● If wave B is a triangle, there is a higher chance that wave C may only reach the
61.8% extension target.
● If wave B is a running triangle, it will typically only retrace 10 – 40% of wave A.
● If wave B is any other sideways correction, it will typically 38% – 50% of wave A.
● If wave B is a zigzag, it will typically retrace 50% – 79% of wave A.
Corrective Wave: FLAT

Rules:
● All flats consist of 3 waves (ABC).
● Wave A and B must subdivide into any corrective pattern, but Wave A cannot be a
triangle.
● Wave C must be a motive wave (i.e impulse or diagonal).
● Wave B must retrace wave A by at least 90%.

Guidelines:
● The structure is called an ‘Expanding” Flat if Wave B retraces between 105% – 138%
of wave A, and Wave C ends anywhere beyond the end of wave A. Expanding Flats
occur most commonly.
● The structure is called a ‘Regular‘ Flat, if wave B retraces between 90 %- 105% of
wave A, and the size of wave C is 100% – 105% of wave A. Regular Flats are more
rare.
● The structure is called a ‘Running’ Flat if Wave B ends beyond the start of wave A,
but wave C fails to reach beyond the end of wave A. Running Flats are very rare
and alternative wave counts should therefore always be considered before labeling
anything as a running flat, especially on larger scales.
● Whenever an impulse (trend) ends in what looks like a 3-wave swing and then
reverse sharply, be mindful that it could be an expanding flat and that the old trend
direction may resume suddenly.
Fibonacci Retracement and Extension Guidelines:
● Refer to image for main retracement and extension targets.
● Wave C is usually 100% – 161.8% x Wave A in size, but it is possible that it becomes
as big as 261.8% on rare occasions. Sometimes the target for wave C can also be
gauged by using the start of Wave A as the base for the 161.8% extension target
(instead of using the start of wave C as the base). This method creates a slightly
different price level and broadens the target area a little

Corrective Wave: TRIANGLE

Note: The internal zigzag structure is only shown in the Contracting Triangle example in order to
avoid cluttering the drawing with too many lines. Please be aware that all waves within all
triangles consist of corrective wave patterns, even if they are not shown in the image.

Rules:
● A triangle consists of 5 corrective waves (ABCDE)
● A triangle can only appear in the position of wave 4 of an impulse, wave B/X of
zigzags and flats , wave Y of double three sideways corrections, or wave Z of triple
three sideways corrections.
● At least 4 of the 5 waves subdivide into zigzags.
● A triangle never has more than one complex wave. The complex wave within a
triangle can only be a double/triple zig-zag or a triangle itself.
● In contracting & barrier triangles, Wave C does not move beyond wave A, wave D
does not move beyond wave B, and wave E does not move beyond wave C. This
results in two converging trend lines forming as the triangle progresses. The main
 difference between a barrier triangle is that it creates a virtually horizontal trend
line between points B and D.
● In an expanding triangle, Waves B, C, D, and E must retrace at least 100% of the
previous wave, but no more than 150%. This results in two diverging trend lines
forming as the triangle progresses.

Guidelines:
● In a contracting triangle, wave B can end beyond the start of wave A (about 60% of
the time). The structure is then called a ‘Running’ Contracting Triangle (see image)
● Wave E will quite likely undershoot or overshoot the triangle trend line. This is
normal.
● Expanding triangles and barrier triangles are much more rare than contracting
triangles.
● Often, one of the waves becomes complex. It tends to be wave C or D that turns into
a complex zigzag (double/triple). Sometimes wave C, D, or E turns into a barrier or
contracting triangle by itself. If the final wave E turns into a triangle, the whole
structure appears to extend into 9 waves, which become ever more narrow. The
triangle then gets labeled as A-B-C-D-E-F-G-H-I
● During contracting and barrier triangles, momentum and volume decreases
● There is usually a (wave 5) post-triangle thrust after wave E is finished, which will
roughly be the same size as the width of the trend lines at the start of the triangle.
● The (wave 5) post-triangle thrust in commodity prices is usually the longest wave of
the entire trend.

Fibonacci Retracement and Extension Guidelines:

● In a contracting or barrier triangle many waves have a 61.8% – 78.6% relationship to
the previous wave or alternating wave
● In running triangles, wave B should retrace wave A no more than 161.8%
● In an expanding triangle, wave C is usually 161.8% of wave A , wave D is 161.8% of
wave B, and wave E is 161.8% of wave C
● See image for more details

Corrective Wave: COMPLEX COMBINATIONS

(Please note that complex ZigZag combinations are covered under the Zigzag section earlier on.
The following section only deals with complex sideways combinations)

Rules:
● A complex sideways combination consists of three or five corrective patterns, which
alternate in their orientation, thereby creating a complex sideways motion. The
central, dividing corrective patterns (X waves) are always orientated in the direction
 of the previously established trend. A ‘Double Three’ combination is therefore
essentially made up of 3 corrective patterns (W-X-Y) in alternating directions, and a
‘Triple Three’ combination consists of 5 corrective patterns (W-X-Y-X-Z) in alternating
directions.
● A double-three can have the following combination of corrections:
○ zig-zag (W), any corrective wave (X) and flat (Y)
○ zig-zag (W), any corrective wave(X) and triangle (Y)
○ flat (W) any corrective wave (X), and triangle (Y)
○ flat (W), any corrective wave (X), and flat (Y)
○ flat (W), any corrective wave (X), and zig-zag (Y)
● Double Threes are only allowed to have a maximum of one zigzag and one triangle
in the W and Y positions. But wave X can be any corrective pattern in addition
(including double or triple three combinations of a smaller degree!).
● A Triple Three works in the same manner as a Double Three, and it also only allows
one zigzag and one triangle in the W, Y, and Z positions. X waves in a Triple Three
can be any corrective patterns in addition (including double or triple three
combinations of a smaller degree!)
● Triangles are only allowed to form in the final wave of the combination sequence
(i.e. in a Double-Three during wave Y, or in a Triple Three during wave Z).
● IMPORTANT NOTE: Opinions differ amongst Elliott Wave researchers over whether
or not waves W, Y, and Z are also allowed to be complex combinations within
themselves (e.g. a smaller wxy within W, and so on). The original research presented
that W, Y and Z each need to be able to be broken down into a simple corrective
pattern (i.e. zigzag, flat, or triangle) at the next smaller degree, and only X-waves
could in principle sprout smaller combinations inside themselves. However, some
modern analysts are proposing that market behaviour is more complex these days
and are validating potentially labelling smaller complex corrections inside W, Y and Z
as well. Personally, Hubert so far has not found any use by further complicating the
potential of wave W, Y and Z. On the contrary, I have found that it can lead to
‘over-labelling’ of corrections and cause misjudgements in regards to the start of trend
continuation or correction targets. If you are starting out with Elliott Waves, Hubert would
recommend to stay with the original rules that W, Y and Z should be able to be broken
down into simple corrections patterns.

Guidelines:
● Triple Threes are very rare compared to Double Threes
● Even though X waves could in theory also be a triangle, in addition to a triangle in
the final wave of a combination, this has never occurred and most likely never will,
simply due to the underlying market dynamics. Therefore the final Y or Z will almost
certainly never be another triangle, if an X-wave was already a triangle.
● Expanding triangles are extremely rare within a complex combination and have
probably never been witnessed (as far as is known).
Fibonacci Retracement and Extension Guidelines:
● Sideways combinations are by their nature range bound. Generally, all waves
retrace each other around 78% – 138%, creating either a virtually horizontal
movement, or a channel that is very gently sloping against the previous trend
direction.

Divergence Patterns
Divergence indicates that the trend is weakening, which in turn makes a retracement or a
reversal more likely. Basically, divergence is a warning sign that the trend is running out of
steam.

Divergence patterns occur when price confirms a higher high or lower low but an oscillator,
like the ecsMACD, does not confirm the same higher high or lower low. Instead the
ecs.MACD shows a lower high or a higher low. Here is a summary:

● When divergence appears during an uptrend: price is making a higher high but the
oscillator is showing a lower high. A bearish retracement or reversal becomes more
likely.

● When divergence appears during a downtrend: price is making a lower low but the
oscillator is showing a higher low. A bullish retracement or reversal becomes more
likely.
Keep in mind that the divergence pattern does not necessarily have an immediate impact
on price. In fact, the trend can keep pushing even with the presence of divergence. Always
consider divergence as just one of the factors that can forecast retracement or reversal, not
as the only one.

It is also important to keep in mind that multiple divergence is stronger than a single
divergence. Multiple divergence occurs when two or more divergence patterns appear on
the same time frame and/or on different time frames.

Divergence on higher time frames will have more impact on the price movement than
divergence on lower time frames. For instance, a divergence on the daily chart will be of
more importance than a divergence on a 5 minute chart. That said, keep in mind that
divergence on higher time frames, like weekly or monthly charts, will take longer in time
before that pattern is actually unfolded in real live price movement. This is especially true
when trading below the daily chart and using higher time frame divergence patterns.

Divergence can be “proper” and “bad”, here is the difference:

● Proper divergence (left example in the image below): this is when two tops or two
bottoms are separated by a strong dip which is measurable the 2 ecs.MACD lines or
AO bars reaching the zero line or middle point of the indicator.

● Bad divergence (right example in the image below): this is when two tops or two
bottoms are NOT separated by a dip and the bars are continuously moving into one
direction.

Now it’s time to explain the difference between regular or normal divergence and hidden
divergence. Hidden divergence is when the oscillator makes a higher high or lower low but
price does not confirm the same pattern. Hidden divergence indicates a pullback or
retracement within the current trend and that a trend continuation is likely. Hidden
divergence shows the ability to be bullish or bearish, as with regular divergence.

The image below shows how price made a higher low but the oscillator in fact does show a
lower low. This indicates that the uptrend is still strong as price was unable to break for a
lower low despite the presence of bearish momentum.
Time Patterns
Traders and analysts tend to focus heavily on price movement and support and resistance
levels without taking into account the factor of time. The chart, however, offers two
dimensions: price and time.

While price is plotted on the vertical line, time is plotted on the horizontal line. In a high
leveraged market like the Forex market, entering a trade setup at the right price is really
just half the story. Entering a trade or expecting certain analysis at the right time is equally
important.

Without proper timing, your well intended analysis and great trade setup could leave you
penny less. This paragraph will elaborate on why time factor is essential to enhance
anybody’s understanding of the price chart and the Forex market specifically.

Timing of impulse
Impulsive price action is characterized by candle closes near the high or low, relatively large
candles, and continuous higher highs (HH) and lower lows (LL), as mentioned in chapter 3.
But impulsive price action is also determined by a time element. An immediate HH or LL
confirms the momentum but what happens if one candle fails to confirm a HH or LL? What
happens if 2 to 6 candles fail? When is the momentum considered to be finished?

In most cases if 2 to 6 candles fail to break for a higher high or a lower low, then this does
not indicate a trend change but rather a small pause of the ongoing impulse. As the above
image shows, price action usually makes a smaller retracement before continuing with the
trend.

● The purple boxes indicate the moments where price fails to confirm an immediate
lower low.
● The orange arrows however show that price often continues within those two to six
candles.

However, if more than 6 candles fail to break for a higher high or lower low, then this could
indicate that momentum is fading and that a larger retracement has a higher chance of
starting.

Simply said if 5 to 6 candles fail to break, then the current impulsive price swing is most
likely finished and a corrective price swing is probably starting.

Time patterns help traders with two critical aspects:

● Knowing whether the current price swing is impulsive or corrective.

○ 3 candles showing higher highs or lower lows out of 6 candles indicates the
start of momentum.
○ A new higher high or lower low confirms the momentum continuation.
● Knowing when to expect and where to find the end of a price swing.
○ A failure to break within 5-6 candles for a higher high or lower low indicates
the end of the impulsive price swing and the start of corrective price swing.
○ Counting candles or swat.FRACTAL:
■ Traders can simply count how many candles have failed to confirm a
HH or LL.
 ● How do you count candles? The first candle that fails to post a
new HH or LL is counted as a candle. Traders are looking for
the 6th candle that fails.
■ Use the swat.FRACTAL indicator:
● Green diamonds turn into light green diamonds.
● Red diamonds turn into pink diamonds.

As you can see, not only candlesticks provide key information about the impulse, but time
patterns too. Via time patterns we are able to estimate the end of an impulsive price swing,
which is very useful information because it allows traders to:

1. Find a potentially better entry. The image below shows how the price moved down
strongly (impulse indicated by first arrow). Then price made a bullish correction with
2 impulsive parts (green arrows). The 2nd push higher ran out of steam as the 6th
candle failed to confirm a new high, which was then followed by a significant drop
back to the previous bottom.

2. Find a potentially better exit. Price was unable to break below the previous bottom
and a bounce occurred. Again 6 candles failed to break below the previous bottom,
which indicated a larger bullish correction where price went sideways before a
larger downtrend continuation occurred.
 3. Manage their trades with more information. The image shows a classical break of a
bear flag and decent continuation lower but then price reverts back up with strong
bullish candles and fails to confirm a new low after 6 candles. This is the moment
when traders want to be careful as price could enter a corrective phase. It does not
mean that the trend is necessarily over but a pullback, retracement or even reversal
could take place. After the 6th candle price has indeed shown another +/- 15
corrective candles that made a slight bullish angle.

Once again, the time pattern gives us useful information about when the impulse is
expected to be running out of steam. The end of an impulsive price swing does not
necessarily mean that the trend is finished. Price could simply make a correction, like a
pullback or retracement within that trend, and then show a trend continuation. However,
the end of the impulsive price action does signal indecision and increases the chance of
sideways or reversal price movement. It means that one side (bulls or bears) had control
but lost it and it remains a question mark whether they will regain it.

You might be wondering, why do we use 5 to 6 candles? At first I only used the 5 candles as
the rule but from experience I noticed that the 6th candle provides a decent breakout too
in certain situations. The number 5 is based on the Fibonacci sequence and fits within the 7
day rule used in weather forecasting (chapter 3). Both the numbers 5 and 6 work well and I
use the following rule to decide whether to use a 5 or 6 candle count:

● During bullish impulsive price action:

○ If the 5th candle is bullish as well, then I prefer to wait for the 6th candle to
close.
○ If the 5th candle is bearish, then often the bullish momentum is finished.

● During bearish impulsive price action:

○ If the 5th candle is bearish too, then I prefer to wait for the 6th candle to
close.
○ If the 5th candle is bullish, then often the bearish momentum is finished.

The 6th candle is usually the one that needs to break the high or low to confirm that the
impulsive price swing is still active. I would only make an exception to this rule if the 6th
candle has a very strong (large) candle that is in the same direction as the current impulse
and price is close to breaking the high or low as well.
Timing of Correction
The correction patterns also tend to align themselves with time patterns. From our
experience, we tend to see price continue successfully if price breaks the correction on
candle number 13 or higher. The most false breakouts, also called fakeouts, occur between
candle number 5-6 and 13.

Another key factor is to keep an eye on the type of price action is visible between candle
number 5-6 and 13:

● Corrective price action most likely confirms the fact that price is building a chart
pattern which in turn makes a continuation of the previous impulsive price action
more likely.

● Impulsive price action most likely confirms the fact that price is building a deeper
retracement or reversal, which in turn makes a continuation of the previous
impulsive price action unlikely.
Any breakout that occurs between candle 13 and 34 is often sturdy and trustworthy. Of
course, this is just a rule of thumb and exceptions are always available.

Breakouts that occur between candle number 34 and 55 are question marks and depend
from case to case. Breakouts that occur above candle number 55 tend to be weaker. Why?

Because in this scenario, the price is already building a larger correction on a higher time
frame. Traders could think about monitoring one time frame higher after candle number
34 and especially after candle number 55.

Here is a 1 hour chart where price breaks on candle number 49. Price makes a false break
and first retraces before moving up higher.

Rather than trading a breakout on the same time frame, we prefer to zoom out and
monitor the breakout or reversal on the higher time frame.
The higher time frame (see image below of 4H chart) does neatly capture the right
breakout moment.

If 5-6 candles fail to break on the higher time frame, then the same situation could occur
where a larger correction or reversal could take place but now on one time frame higher.

Fibonacci Patterns
Fibonacci is a great tool for analysing the charts, for spotting support and resistance, for
establishing entries and exits, and for filtering out bad setups.
Using the Fibonacci tool, however, is challenging. To master the art and science of trading
the Fibonacci levels, traders must build up and acquire sufficient experience.

Experience comes with practice and time BUT we hope that this book will be a small
“short-cut” for those that are starting, struggling or looking to improve. Another short-cut is
using a well established approach such as the ecs.SWAT method.

The Fibonacci levels (or simply called “Fibs”) are calculated based on the Fibonacci
sequence numbers. Lets first explain how the sequence levels are used to calculate the Fib
levels but this is not a key part for using the Fib tool. Traders can use the Fib tool without
understanding the math mentioned below so feel free this skip or skim this next paragraph
if you want.

Fibonacci Sequence Levels

The Fibonacci sequence numbers are: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610,
987, 1597, and so on. This line series is created simply by always adding the first two
numbers together and then taking the last two numbers for the next number:
● 0 + 1 = 1 → 1 +1 = 2
● 1+2=3→2+3=5
● 3 + 5 = 8 → 5 + 8 = 13
● The method stays the same for higher numbers as well:
89+144 = 233, and then 144 + 233 = 377, etc.

You might be wondering, why are these Fibonacci sequence numbers important? There are
a couple of reasons that answer this question:

1. The Fibonacci sequence numbers are in fact very well respected levels on the charts
(see ecs.WIZZ in chapter 7).
2. The Fibonacci sequence levels are used for calculating Fibonacci retracements and
Fibonacci targets, which are key levels on the charts.

The Fibonacci retracement levels are calculated by dividing a smaller Fibonacci sequence
number by a larger Fibonacci sequence number. A result lower than 1 is visible: 144/233 =
0.618. Here are a few other examples:
● 8/13 = 0.618 (smaller number is divided by bigger number next to it)
● 34/89 = 0.382 (smaller number is divided by bigger number two next to it)

The Fibonacci target levels are calculated by dividing a larger Fibonacci sequence number
by a smaller Fibonacci sequence number. When dividing a bigger Fibonacci sequence
number by a smaller number, then a result higher than 1 is visible: 233/144 = 1.618. Here
are a few examples:
● 34/21 = 1.618 (bigger number is divided by the smaller number next to it)
 ● 89/34 = 2.618 (bigger number is divided by the smaller numbers two next to it)

Simply said, Fibonacci retracements are levels below 1 whereas Fibonacci targets are levels
above 1 (we use minus Fibonacci targets but we will explain later on in this paragraph).
Many ratios can be calculated by dividing the Fibonacci sequence numbers in various ways:
● If we divide 13 by 21 for example, we get 0.619.
● While 21 divided by 13 = 1.615.
● If we divide 8 by 21 we get .381.
● Conversely, 21 divided by 8 is 2.625.

The higher the numbers, the closer the ratios will reflect the standard ratios of 0.618 and
0.382.
● 144 divided by 233 is 0.61802.
● 144 divided 377 is 0.38196.

One interesting aspect is that it doesn’t matter where we start. We can take any two
numbers, like 5 and 100. Soon we’re dealing with the same series – we are getting the same
ratios: 5, 100, 105, 205, 310, 515, 825, 1340, 2165. 1340 divided by 2165 = 0.6189 2165
divided by 1340 = 1.616.

Fibonacci Retracement
As mentioned above, Fibonacci retracement levels are ratios which are based on the
Fibonacci sequence numbers and have values between 0 and 1 (such as 0.618). In many
cases we also use percentages to describe the ratio, for instance 61.8%. There are 3 main
Fibonacci retracement levels:
1. The 0.618 level or 61.8%.
2. The 0.382 level or 38.2%.
3. The 0.236 level or 23.6%.

The 0.50 level or 50% is also used as a Fib number but it is not based on Fibonacci
sequence numbers and therefore not a real Fib level. Despite that, it is still added to the
chart because of its value as the halfway mark and its importance for market psychology.

There are more Fibonacci retracement levels than the 4 mentioned above, although some
of these levels are calculated differently:
● 786 or 78.6% – square root of 0.618.
● 886 or 88.6% – square root of 0.786.
There are a few other Fibonacci levels that I personally do NOT use but that are
occasionally applied by other traders such as:
● 146 or 14.6%
● 764 or 76.4%

The Fibonacci retracement levels can be used for:

1. Entries
2. Bounces and reversal
3. Filtering out setups
The Fibonacci tool can be added to the chart to quickly place the Fibonacci retracement
levels on the chart. Generally there are two different ways of placing a Fibonacci tool on the
chart. We prefer the method which drags the tool from left to right (1st image), but there
are some who prefer the opposite (from right to left - see 2nd image).

How do you get the price levels to appear next to the Fibonacci retracement levels? In the
MetaTrader 4 (MT4) you need to click on the start or end point of the Fibonacci tool, then
click on “Fibo properties” and then go to Fibo levels. Then add in the description behind the
numbers a “space, percentage sign, and then a USD sign”.
Let us discuss in more depth the value when price reaches one of the Fibonacci
retracement levels, this means that price has retraced back to a ‘discounted’ level.

Let us use this example: EUR/USD moves down from a top at 1.1474 to a bottom at 1.1183.
Price then starts to retrace higher so we place the Fibonacci tool from top to bottom (also
called a swing). Retracement levels are support & bounce spots in a trend so price can use
1 of the Fib levels to continue with the downtrend again. The market uses Fibonacci
retracements levels because it provides a ‘discount’ within a trend.

The Fibonacci retracements are also called Fib tool and Fib retracement OR plainly Fibs,
Fibo or Fibo tool. All of these abbreviations simply refer to Fibonacci and are used to save
time and provide variation.
Last but not least, the 61.8 ratio is extra important and called the Golden Phi, which is also
called the Golden Ratio. Kepler called it “one of the jewels of geometry“, Pacioli named it
the “divine proportion“, and finally Greeks used the letter “phi“. The Phi is a crucial element
in Forex Trading. Two quantities are in the golden ratio if: the ratio of the sum of the
quantities to the larger quantity is equal to the ratio of the larger quantity to the smaller
one. In math this means ((A+B)/A) = PHI. The PHI is equal to 0.618. That is why the 61.8 or
61.8% Fib retracement level is so important in Forex trading.

Why Fib discounts work and when not

The Fibonacci retracement levels are a great method for measuring the market psychology.
The Fibs provide lots of value and work very well because of the market psychology: traders
know that a trend can continue after a pullback to a Fibonacci retracement level and hence
the levels are often well respected in the market.

The traders and the markets gladly accept the discount (within the trend) and use these
levels for buying lower and selling higher. There are 3 important criteria when using Fibs
otherwise the tool might work that well:

1. Prerequisite: the presence of a trend. There must be a trend and a decent change of
trend continuation otherwise the Fibonacci retracement levels will not be used and
will have no meaningful impact on price movement.
2. The Fibonacci retracement tool must be drawn correctly otherwise the levels will not
be respected by the market.
3. Even if the Fibonacci retracement level is drawn correctly, not each and every
Fibonacci retracement level will be respected but on average they will work 2 out of
3 times.
Shallow vs Deep Retracement Fibs
It is important to know the concept of shallow versus deep Fibs. Shallow indicates that
price has not retraced very far on the Fibonacci ladder, whereas with deep Fibonacci levels
price has retraced a lot further.
● The 23.6% and 38.2% are shallow Fib levels.
● The 50% and 61.8% are intermediate or medium Fib levels.
● The 78.6% and 88.6% Fib levels are known as deep Fib levels.

Here is a full overview:

● TOP/BOTTOM: 0% or 0.000.
● SHALLOW: 23.6% or 0.236.
● SHALLOW: 38.2% or 0.382.
● MEDIUM: 50% or 0.500.
● MEDIUM: 61.8% or 0.618.
● DEEP: 78.6% or 0.786.
● DEEP: 88.6% or 0.886.
● TOP/BOTTOM: 100% or 1.000.

Fibonacci Targets
Fibonacci targets are levels which are based on the Fibonacci sequence numbers too and
have values above 1.000 or below 0.000 depending on how you draw the tool.

Fibonacci targets are projected spots on the chart where traders can exit for a profit;
whereas Fibonacci retracement levels are entry spots that are potential bounce spots for
trend continuation.

I myself add the Fibonacci targets to my Fibonacci retracement tool. This saves me time
because I only need to use 1 tool for both entries and exits.

Other traders separate targets and retracements. They use the Fibonacci extension tool for
calculating targets and the retracement tool for pullbacks.
The main targets are always the -0.272 and the -0.618 Fibonacci levels. Be aware that these
levels are unique because the market respects these levels a lot. What I mean is that price
will often continue to these targets and then switch gears and reverse only after hitting
these levels.

1. The -0.272 target is the main one for deep Fibonacci retracements like 78.6% and
88.6%. But the other Fibonacci retracement levels could stop at this target for a
while before marching further to the next target. The -0.272 target is calculated by
taking the square root of the -0.618.

2. The -0.618 target is the main one for other Fibonacci retracements like 23.6%,
38.2%, 50% and 61.8% targets. The target is based on the golden ratio. In many
cases the -0.618 is the best exit spot UNLESS a bigger trend continuation is
expected.

3. When a trend boom could occur, then price can accelerate towards higher targets as
well. Here is the full list that I use:
a. -1.000 Target
b. -1.272 Target
c. -1.618 Target
d. -2.000 Target
e. -2.618 Target
f. -4.236 Target
g. +138.2 Retracement level (break into opposite direction)
h. +161.8 Retracement level (break into opposite direction)
I added the 2 levels above the 1.000 level, which is the invalidation level of the Fibonacci
retracement, just in case the price breaks my Fibonacci tool boundaries. In these cases
price has actually broken below (uptrend) or above (downtrend) the key support or
resistance level of the Fibonacci tool. Obviously we don’t expect Fib bottoms or tops to be
broken otherwise the Fibonacci tool should be drawn differently. But sometimes it does
occur and then having these levels on the charts helps.

Problems with Fibonacci

Choosing the correct price swing for placing the Fibonacci is one of the main problems with
using the Fib tool. Fibonacci is a very valuable method and tool but traders must place the
tool on the swing that makes the most sense for current market conditions. This will mostly
be a discretionary choice, which is one of the main problems with Fibs. Traders will always
face the risk of using an incorrect price swing for placing their Fibonacci tool.

If price breaks the top or bottom in the opposite direction of the expected price movement,
then price has invalidated the chosen price swing. It could be that the trader:

1. Used a too small price swing.

2. Failed to see a ranging price environment.

 3. Wrongly anticipated a reversal.

4. Counted on a failed trend continuation.

There are two primary ways how to solve the problems with drawing Fibs on the chart:

1. Focus on trend and momentum.

2. Using the logic price swings for placing the Fibonacci tool.

Traders can avoid using the Fibonacci tool at the wrong moments if they focus on using the
Fib tool when the market is trending and/or impulsive. They do not work well in
consolidations, corrections, ranges and sideways moves, because the Fib levels are mostly
ignored and price is more responsive to different levels such as tops and bottoms. If the
currency pair, however, is indeed trending OR it is showing momentum then the tool is a
great asset.

In trending or impulsive markets the Fib levels indicate precise levels where there is a high
chance of the market turning back in the direction of the trend. It is good to realise that
price respects different Fibonacci levels depending on the market circumstances:

● Deep pullback (61.8-88.6%): price tends to make a deep pullback when a trend is not
yet clearly established. In those cases price can make multiple ups and downs which
severely test the bottom (uptrend) or top (downtrend) but without breaking those
levels (which would invalidate the trend).

● Shallow pullback (23.6-50%): once a trend has clearly established itself then a
shallow pullback such as the 23.6%, 38.2% and 50% half way mark are generally
levels, which are very typical before the trend continues.

Traders can also improve their Fib drawing skills if they place the Fibonacci tool on a
completed price swing of the time frame you are analysing. Using the same price swings
technique (chapter 3) will be equally valuable for Fibs.

I use the AO or ecs.MACD in various ways for determining how to place the Fib tool on the
chart. You can use it for:
1. Direction of the Fibonacci tool.
2. Understanding which swing to place the Fib on.
For bullish placement of the Fib: strong oscillator bars (AO) lines (ecs.MACD) above the
middle point indicate bullish momentum and thus the Fib tool is best used for entering
longs upon a corrective bearish retracement. Here I place the Fib from bottom to top and
look for a correction back to the Fib levels.

For bearish placement of the Fib: strong oscillator bars below the middle point indicate
bearish momentum and thus the Fib tool is best used for entering shorts upon a corrective
bullish retracement. Here I place the Fib from top to bottom and look for a correction back
to the Fib levels.
When price is in a range: weak oscillator bars around the middle point indicate no direction
and thus using Fibs in the first place becomes less desirable.

The oscillators are also a powerful concept in determining the best swing for placing the Fib
tool. Many traders use the Fib tool too frequently and too quickly. The oscillator keeps
traders focused on using the best swing for their Fib purposes. I place the Fibonacci tool on
the top and bottom that matches the start and end point of the oscillator. The start and
end are indicated by the decline and rise of the oscillator and when the oscillator has
reached a peak plus return to the zero line.

In the below example I place the Fib from top to bottom as the oscillator made a strong
decline. Once the oscillator starts retracing I can look for a pullback to the Fibonacci level in
search of a continuation down lower in line with the bearish momentum.

It is important to realize that the correction is officially only completed when the oscillator
bars have gone back to the middle line (after a strong push to 1 side). In that case the
moment when oscillator bars cross and re-cross back represent 1 swing high and swing
low. Only then is the swing fully completed. Of course 1 swing could be broken down into
several swings on a lower time frame. Here is a pullback where price has made a very quick
retracement.
Traders can also place Fibs on a candlestick or candlestick pattern.

Placing a Fibonacci tool on the candle is very simple:

1. Check for direction:
a. If the previous candles were bearish, place the Fib on the nearest candle high
to candle low.
b. If the previous candles were bullish, place the Fib on the nearest candle low
to candle high.
2. I personally do not consider a candle retraced if price does not pull back to at least
the 23.6% of the candle but I typically wait for a retracement to 38.2% or 50% Fib of
the candle before entering.
3. In some cases the stop loss can be placed below the candle low or above the candle
high. This is especially true when using a daily or weekly time frame.

The technique is simple and capitalizes on the natural low and high tides of the Forex
market. Of course proper analysis has to be completed before applying the concept to the
charts as the method indicates how a trader can enter, not whether the entry is actually
desired.

The idea can certainly be combined on multiple time frames. For instance:
1. A strong weekly bullish candle could get a 50% retracement which could signal a
potential for long.
2. A trader then zooms into a 4 hour chart and sees a bullish candle at the 50% Fib.
3. The trader takes an entry order at the Fib of the 4 hour candle (either via pending or
market depending on where the price is).
Fibonacci for Entries
Traders can use the Fibonacci retracement levels for potential entries.

Pending orders can be placed directly at the Fib levels or traders can wait for confirmation
triggers at the desired Fiib levels before actually entering.

Personally I am waiting for the price to reach my desired Fibonacci level but I am not
entering when the price reaches the Fib. Instead I am waiting for the price to react (in my
anticipated direction) to the Fibonacci level before taking an entry.

The best reaction is a candlestick price action confirmation such as for instance engulfing
twins at the expected Fib level. Some traders are opposed to waiting for a confirmation as
the entry price tends to be worse in comparison with the confirmation, which is true but
there are two distinct advantages of waiting.

1. Fibonacci levels on a higher time frame are often the most respected but also the
most difficult to trade from a practical point of view.
a. Or in other words, the market highly respects the levels but the space
between the bottom and the 50 Fib could be enormous on the 4 hour chart
and practically impossible for many traders to trade (due to risk
management rules and small account sizes).
b. Waiting for a price reaction enables a trader to use a tighter stop loss for this
setup as the recent candle high or low plus a buffer could be employed.

2. The 2nd advantage is connected to the fact that the probability of a setup
succeeding varies per trade when placing the Fib tool on the charts. If I have too
 much doubt whether the market will respect the Fib level, then waiting for a
reaction solves that issue.
a. This is especially important for traders who have less experience when
placing Fibs on the charts. This is an important method to improve one’s Fib
trading when you are just starting out with Fibs.

All in all, the difference between a trigger and an entry could seem quite small. However, it
is worth sacrificing a few pips and getting a slightly worse entry if the probability of the Fib
working out is low or average OR if you are relatively new to Fib trading.

Personally I am using Fibs as a trigger anytime when reviewing daily chart or higher as in
those cases I am not willing to commit to a Fib trade via a pending order. Then the stops
are quite large and trades take too long to develop, which means that the capital is stuck
and blocking potential new setups. When analyzing a 4 hour chart or lower, traders can use
Fibs as either a trigger or as an entry depending on the probability of each setup.

Stop Loss with Fibs

Many traders seek out a tight stop loss in order to increase their lot size (with the same
risk). That idea could, however, be hazardous for your account. Why?
1. The markets love moving up and down, loves volatility and loves retesting price
zones.
2. The ‘noise of the market’ implies that all stop losses are to some degree vulnerable
to being triggered before price makes a sustainable one directional movement.
3. An (over) tight stop loss will have more issues due to this market volatility. The chart
above shows how choppy price action can be hazardous for tight stop losses… but
there is a solution: the invalidation spot.
The best stop loss placement is “simple”: place it at a spot where your analysis is
invalidated if price pushes beyond that point. There are 2 benefits:
1. You exit the trade at a loss ONLY if the analysis proves incorrect.
2. You are not psychologically annoyed with the loss because you placed it at a sport
where your analysis was in fact not on the mark.

Many traders do not place a stop loss at an invalidation point. They see their stop loss get
hit but their analysis can easily turn out to be right.

Do you recognize the annoyance that your analysis was correct but your trade ends up for
a loss? Only to see the market turn around into your expected direction after you get taken
out?

This process leads to revenge trading, over risking, and other nasty and costly bad habits.
Using the invalidation level creates a peace of mind: a stop loss only triggers if the market
is turning into a different direction.

Finding the invalidation level with the Fibonacci tool is straightforward: the stop loss should
go below the 100 mark if trading on a lower time frame. When a trader places their
Fibonacci tool from left to right, they will have the 100 mark either at the bottom (when
Fibbing an uptrend) or at the top (when Fibbing a downtrend).

The bottom or top of the Fibonacci level is where the trade and analysis is invalidated
because Fib traders will only place the Fib tool on an appropriate / sturdy swing. Now you
understand why placing the Fib on the correct swing or leg of price movement is so
crucial… the Fib tool not only indicates entries and targets but also the correct stop loss
level. Make sure to use the correct swing and hence the correct Fib. Personally I tend to
place the stop loss a few pips away from the bottom or top. On a 1-hour chart this could be
5-10 pips whereas a 4-hour chart might be 10-20 pips. I like to provide more leeway for my
trades, just in case price retests the bottom or top.

There are some valid reasons to use a tighter stop loss. If you see a (strong) candlestick
reaction at the Fibonacci level, then using a stop loss below the candle low or above the
candle high could be a valid approach. Stop losses just beyond a strong Fibonacci level can
work out fine and offer better reward to risk ratios. The key element is to have sufficient
confluence on the charts at that particular level.

Confluence with Fibs

By finding Fibonacci confluence, traders advance their accuracy, improve their confidence
in setups, and speed up the learning curve. Let me explain.
1. Accuracy: there is a higher probability that price will react to a level when there are
multiple tools indicating its importance.
2. Confidence: the improved odds of a trader’s success in turn helps traders keep their
confidence high. This in turns allows them to implement the trading plan (rules) as
planned.
3. Learning: traders can learn more and quicker when correctly implementing their
trading plan. They also develop a better discipline, which is critical for achieving
trading success.

Traders can locate Fibonacci confluence by either using multiple Fibonacci tools or by
mixing Fibonacci with other tools and indicators. The Fibonacci tools can provide
confluence on the same time frame (2 or more Fibs on 1 time frame) AND also on multiple
time frames (Fibs on 2+ time frames).

Multiple Fibonacci levels:

1. Fibonacci retracement and a Fibonacci target: this is when a retracement and target
line up at the same price. This occurs when there is a trend and the correction
occurs in 3 legs/swings. The 3rd leg of the correction takes price back to the target
and the retracement.

2. Multiple retracement levels: this occurs when placing the Fib tool on 2 or more
swings of the same time frame or using Fib levels on multiple time frames.
3. Multiple targets levels: this occurs when placing the Fib tool on 2 or more swings of
the same time frame or using Fib levels on multiple time frames.
Fibonacci levels with other tools and indicators:
1. Fibonacci with candlesticks: using price action at Fib levels. In this case traders wait
for a candlestick pattern to occur at the Fibonacci level instead of anticipating a price
reaction at the Fib. The candle pattern confirms the response of the market at the
Fib.

2. Fibonacci with support and resistance (green): the more reasons or confluence at 1
level, the stronger this level will typically behave and the more likely that price will
bounce at the support or resistance. Let’s say that, besides a Fib retracement level,
the price is also at a trend line and daily bottom. These 3 factors create a strong
zone, which has a higher chance of impacting the market compared to ONLY having
the Fib level.

3. Fibonacci and moving averages: these two tools work well together because Fibs are
most effective in a trending environment. Fibonacci levels tend to be respected in a
trend but can be ignored in a range. First of all, using a moving average helps
determine if there is a trend. Second of all, moving averages also act as a support
and resistance in a trend, which means that a moving average adds confluence to a
Fib level.

Using various Fibonacci levels on multiple time frames (MTF) is a strong concept for trading
because it allows traders to locate and examine multiple Fib levels in the same price zone.
For instance, a trader who is analyzing the 60 minute chart could find a 61.8% Fibonacci
particularly interesting for a bounce and trend continuation. More confluence is achieved
on multiple time frames if on a 15 minute chart that zones matches with a 78.6% Fibonacci
level.
This principle is valid for both retracement fibs and target fibs, or any combination of them.
In fact, there could be multiple Fib retracement levels and Fib targets aligning themselves
from multiple time frames.

CONCLUSION: finding various support and resistance Fibonacci levels on multiple time
frames is a great method of assessing how strong or weak a price zone will be and helps us
traders assess the odds of a bounce at the Fibs or a break of the Fibs occurring.

Waves with Fibs

Whether you love waves, hate waves, or use the theory at your discretion, fact is that the
Fibonacci tool offers a high level of synergy with the Elliott Wave Theory. The two go hand
in hand and really reinforce each other very neatly. Obviously you can use the Fibs as well
without waves when applying it on candle or a natural swing and it could work perfectly
fine. But if a trader does use the Fib tool with at least some notion of the waves in mind,
the effectiveness of the Fib will also increase in the long-run after gaining sufficient
experience.

The concept is that Fib levels will have a higher chance of being respected depending on
the most likely wave count at the time. Wave counts are never 100% sure, but that is the
nature of the market and especially the Forex market. Not a single trade is ever a
guaranteed winner (or loser). It is better to see wave counting as a probability rating. Fibs
work wonderfully when price is trending so logically they do very well in waves 1, 3 and 5,
which are the impulsive waves. Here is a summary of what occurs on average most often:

Wave 1 retracement: deep Fibs such as 61.8%-78.6%-88.6% Fibs are often the bouncing
spots. A wave 1 swing will find a retracement by wave 2 which often is deep and retraces
back to the 61.8%, 78.6% or 88.6% Fibonacci levels. The deeper Fibs offer a great benefit as
the reward to risk ratio can be high especially when a strong wave 3 develops after it.

Wave 1 target: 50%-88.6% opposite Fib. The first wave often is limited by the swing in the
opposite direction. When I place a Fib on that opposite swing I usually look for a movement
to the 78.6% or 88.6% Fibs as a typical target.
Wave 3 target: 161.8% Fib and higher of wave 1 (-1.618% target). The wave 3 should
accelerate at least to the 161.8% Fibonacci level of wave 1, otherwise if it falls short of that
target then the wave 3 is most likely a wave C. Waves 3 can extend further as well, even up
to 200%, 261.8% and 423.6% if the price is really impulsive.

Wave 3-4 retracement: 23.6%, 38.2% (max 50%) Fibs. A wave 3 will typically be the strongest
and longest wave. The wave 4 correction of the wave 3 is often shallow. It’s a consolidation
zone that is flat, sideways and long in time.
Wave 5 target: 61.8% target of wave 3 (-0.272 & -0.618 target). A wave 5 will often be equal
to wave 1 or go to a ‘smaller’ target like the -0.272 and -0.618.

The Fibonacci levels can also work well in certain speedy corrections and momentum.

A wave A usually moves back to the 38.2-50% Fibonacci level of the price swing of the
current trend.

The wave B retracement will see price move with the trend again but then find the opposite
S&R at these Fib levels: 38.2%, 50%, 61.8%. A wave B will often retrace to a medium Fib
before making 1 more corrective leg as part of wave C. The ABC zigzag correction is
impulsive and corrects quickly.

Wave C target: -0.272 & -0.618 target. When trading the wave C I place the Fibonacci tool on
the wave A and aim for the -0.272 or -61.8 targets. Whether I choose the shallower one or
the deeper target, depends on other market factors like chart confluence. Sometimes I aim
for the deeper target but take a market exit at an earlier moment if the price action is
showing signs of struggle.
Wave WXY target: various Fibs, better to use support & resistance. The WXY corrections are
zones with higher volatility which retest and sometimes break support and resistance
zones. Fib levels work best in trending environments so be cautious when using Fib levels
in corrective zones. In contracting triangles however price does often respect the deeper
Fibs like 61.8%, 78.6% and 88.6% Fibs. But a WXY flat correction price is not stopping at the
Fib levels and it will often challenge the top and bottom. In fact in some cases such an
expanding wedge or a “running flat” price is expected to break the top or bottom and can
go as far as the 138.2 level.
Remember, making the most accurate wave prediction on the planet is not the goal. Just
like with trading it is more useful to judge the probability of a wave count and deem
whether using Fibs in combination with the wave count is a winning proposition.

Deeper Reading of the Market Structure

As discussed before, the interplay between support and resistance (S&R) and momentum
creates a path of price. Price chooses a path where it finds the least resistance, hence
creating a path of least resistance.

Supply and demand leaves a trail on the chart (past price). Traders can analyse that trail
(price movement) and use it as a road map to understand what the next price movement
could be. Analysing past price (past path of least resistance) helps traders estimate and
forecast what the next step or two could be. Based on that, traders can then assess
whether there are any interesting potential trade setups within that expected path.

The financial markets in general and the Forex market in specific are in a continuous tug of
war between sellers and buyers (supply and demand). This creates price waves that are
visible on almost all charts.

The waves are either impulsive or corrective in their character, which is in many ways like
the heartbeat of the market. The charts beat with a regular movement of impulse and
correction although the exact sequence and length of each impulse and correction will
vary per chart and time period.
 1) By analysing candlesticks, we understand the current price action and whether
buyers, sellers or neither is in control.

2) By analysing groups of candles, we are actually analysing price swings, which helps
us understand whether price is bullish or bearish and whether its corrective or
impulsive.

3) By analysing multiple price swings, we can understand whether price is trending or

ranging and also can comprehend wave patterns and price patterns, which helps us
understand both the market structure and the balance between buyers and sellers.

4) By analysing supply and demand via wave patterns, price patterns, and trend versus
range, the future path of least resistance can be determined.

The chart is a road map and analysing price swings is a critical piece of understanding the
market structure properly and fluently. It is like learning a language.

Of course, using a dictionary might help you overcome immediate hurdles, but the more
fluent you speak, the easier it is to communicate with the environment around you.
Charting, analysing technical analysis and trading itself also become easier (in the
long-term) when you understand how to listen to the markets.

Remember the saying: the markets speak and traders listen. Traders should always follow the
rhythm of the market rather than trying to outsmart or outguess the market, or look for
any invisible short cuts.

You can compare trading to dancing where the market leads and traders should follow the
market’s lead. As a dancer, we are looking for clues about the market’s next step and
analysing charts as a road map will help determine the expected price path of least
resistance.

Analysing price swings and understanding whether price is impulsive or corrective helps
traders understand the road map, path of least resistance, and overall market structure.

Eventually impulsive price action will run out of steam, simply because nothing can move in
one direction forever. The impulsive price action can however last for longer than you
expect but the energy will eventually die down and candles will either become corrective
and slow down in their movement or reverse into the opposite direction.
At first, momentum is stronger than gravity but eventually momentum weakness and
gravity becomes stronger, thereby pulling price into a correction, which is either in the
opposite direction (reversal) or sideways direction (consolidation).

At every point on the chart, price has a choice to continue with the current price swing or
complete the old one and start a new price swing. Traders are looking to understand these
4 aspects:
1) What is the direction and character of the current price swing?
2) Where and when will the current swing end?
3) What will be the direction and character of the next price swing?
4) What will be the direction and character of the price swing after the next?

The questions 1 to 4 can be reviewed on multiple time frames, although eventually this
might become confusing. The best is to start low and gradually add more time frames
when you have gained sufficient experience.

There are three factors that play a key role in determining whether a price swing will
continue or end: it’s all about the speed of price in relation to the force of gravity and
encountered resistance. In a way, it’s like a formula:

Energy versus Gravity plus Resistance:

● Energy > (gravity + resistance) = impulse
● Energy = (gravity + resistance) = indecision
● Energy < (gravity + resistance) = correction or reversal
Energy = presence of impulse and the pace of price. Impulsive price is quick whereas
corrective price is slow moving.
Gravity = the chance of price being pulled back to its average.
Resistance = the ability of a strong support or resistance level to stop price.

It’s like a tug of war between gravity and energy (speed) with support or resistance which
helps determine the limits. Imagine a scenario where you throw a tennis ball in the air. At
the start, the tennis ball is moving fast and pulling away from earth and floor. Eventually
the speed of the tennis ball decreases and eventually the gravity of the earth will pull it
back down to earth. The presence of resistance could alter the path even sooner. Once the
tennis ball hits the ceiling, it will bounce off of it and fall down earlier. But if a tennis ball
would hit a soft structure like paper, then its speed will probably be sufficient to break
through the paper ‘resistance’.

Now imagine that price is in the same role as the tennis ball. Let’s walk through that:
1) The tennis ball is thrown in the air: price is moving impulsively.
2) The tennis ball is pulling away from earth and floor: price is moving away from the
moving averages.
3) Eventually the speed of the tennis ball decreases and eventually the gravity of the
earth will pull it back down to earth: price is moving back towards short-term and
long-term moving averages.
4) The tennis ball hits a hard(er) ceiling: price hits the support or resistance level and
bounces or reverses from this zone.
5) The tennis ball hits a soft(er) ceiling: price hits the support or resistance level and
breaks through this zone.

Traders must analyse energy, gravity, and resistance to understand in what stage (see
points 1 to 5 above) price is currently in. This art takes practice and experience.

Traders must compare energy with gravity and resistance and judge the expected road
map based on that. Here are the key aspects to keep in mind.

Energy is determined and can be analysed by these factors:

● The character of the candlesticks in the swing:

○ Is price moving impulsively?
○ Is price moving correctively?
○ Was the previous price swing an impulse or correction?

● Chart patterns:
○ Presence of continuation chart patterns on lower time frames.
 ○ Presence of continuation chart patterns on the same time frame, which
indicates that the previous impulsive swing is still a dominant factor.

● Time patterns:
○ Impulsive price action is usually quick.
○ Corrective price action is often slow and lengthy.
○ Failure to confirm the trend with a higher high (during uptrend) or lower low
(during downtrend) within 5-6 candles indicates a higher chance that a
corrective zone will start (see more about time patterns in chapter 5).

● The relationship of price versus moving averages:

○ Price versus 21 ema versus 144 ema indicates trend.

■ Price above 21 ema above 144 ema = uptrend.
■ Price below 21 ema below 144 ema = downtrend.

○ Price action that is moving away from the 21 ema zone is impulsive. When
price is not hitting the space between the 21 ema high or low (zone), then the
price is moving quickly.
■ If there are multiple candles (+/- 5 or more) not hitting the 21 ema
zone, then the swing is considered to be an impulse.
■ If there are 20+ candles not hitting the 21 ema zone, then the swing is
considered to be an impulsive wave 3.

○ The angle of the HMA indicates the direction whereas the presence of the
HMA outside of the 21 ema zone indicates impulse.

○ The ecs Fractal indicator versus the 21 ema zone:

■ Uptrend:
● Support fractals around the 21 ema zone.
● Resistance fractals above the 21 ema high.
■ Downtrend:
● Resistance fractals around the 21 ema zone.
● Support fractals below the 21 ema low.

Gravity is determined and can be analysed by these factors:

● Price is unable to pull away from the 21 ema zone. This indicates corrective price
action, which often indicates that energy is weak and gravity could be stronger.

● Divergence pattern. Price is able to make a higher higher or lower low but the
oscillator, like the Awesome Oscillator, fails to confirm the new high or low. The
 oscillator shows a lower high (not higher high) or a higher low (not a lower low).

● Chart patterns. Reversal chart patterns such as rising wedge, falling wedge, head
and shoulders, double top or bottom and triple top or bottom indicate that price is
likely to move back to the long-term moving averages.

Resistance is determined and can be analysed by these factors:

● Attempts to break a support or resistance (S&R) zone:

○ The first attempt that price makes to break a S&R zone is always the most
difficult and least likely to succeed.
○ The second attempt is 50-50% on average whether price breaks or bounces
at S&R.
○ The third attempt or more usually favours the breakout rather then a bounce
or reversal because price has already tested the S&R zone twice before and
price has now made a significant reversal because price is again testing the
S&R zone. Eventually price tends to make a break.

● Strength of a support or resistance zone:

○ Confluence of support and resistance makes a price level or zone stronger
and hence makes it more difficult to break and more likely for price to
bounce.
○ Less confluence makes it weaker and easier to break and less likely to
bounce.

Price movement is showing the path of least resistance. The path is decided by 2 main
factors: energy and resistance. Or in other words, there is a continuous battle between
momentum (energy) and support and resistance (S&R). Sometimes momentum is stronger
than S&R. In other cases momentum is weaker than S&R.

● If momentum wins, then the price will either continue its path with perhaps only a
small interruption. The faster price is moving without showing divergence, the
stronger the momentum will act.
● If S&R wins, then the price will stop at S&R and revert into the other direction or go
sideways. Generally speaking, the more confluence a support or resistance level
has, the stronger the zone will behave.

It is, however, important to realise that the “formula” (S&R vs momentum) is an estimate
based on your own analysis, experience and interpretation. Just keep in mind that it is not
an actual formula - although it could be an interesting idea to pursue (if you are a
programmer and want to build something like that with us, feel free to reach out to us).

So now you know how we can benefit from looking at a chart:

 1) We analyse support and resistance.
2) We analyse momentum.
3) We estimate the expected path of least resistance.
4) We monitor our estimate and learn how to improve future estimates.

The estimated path of least resistance is always a probability, which brings us back to what
we mentioned at the start of the chapter. There we mentioned that “probability is
important for understanding price charts and the path of least resistance”. The path of
least resistance is not fixed in stone but rather something more flexible”.

What we mean is that there is never a guarantee that the price will follow the path of least
resistance as traders expect. The ability to understand the charts in a deeper way via the
concepts of flow versus resistance does not mean that traders can forecast the future with
100% accuracy. Analysing and trading will always remain a question of probability.

Simply said, the path of least resistance, price movements and trade setups are always a
probability, which varies from case to case and depends on the structure of the chart.
Some price movements are very probable while others are indecisive. What we mean is
that in some situations the chart is clearly bearish or bullish whereas in other situations the
direction remains unclear.

The path of least resistance is not fixed. The probability of price moving up or down can
also change when more information becomes available. Each new candle provides new
information that could improve or reduce the probability that price will follow your
expected path of least resistance.

Generally speaking, humans tend to be weak when assessing probabilities. Rare

occurrences tend to be overestimated whereas a small probability edge tends to be
underestimated.

For instance, it is not rare that people that are scared of being hit by lightning, even though
the number of hits and fatalities by lightning has been dropping strongly in past centuries
(Enlightenment Now The Case for Reason, Science, Humanism and Progress by Steven
Pinker 2018 Allen Lane / Penguin Books). In fact, lightning could create more fear than for
instance smoking cigarettes, which in fact has a much higher probability of causing
problems for the health but in a more hidden and subtle way.

Another example is the underestimation of a rainy day. If the weather forecast service
predicts a 30% chance of rain today, then that that actually means that 3 out of 10 days will
see some level of precipitation. Many people interpret the 30% chance as a low probability.
They think that the event is unlikely to occur just because the forecast is less than 50%.
Humans tend to underestimate the usual rainy day and to overestimate how often
lightning strikes.
The traits of a super forecaster can help traders become more realistic in their assessment
of probabilities. Here are the key criteria:

● Research a fair “base rate”: how often is something likely to occur?

● Monitor changes: should the probability be adjusted or not?
● Reaction: don’t underestimate potential changes but also try to avoid under
reacting.

For more information about forecasting, I recommend reading the book “Superforecasting
The Art and Science of Prediction” by Philip E. Tetlock and Dan Gardner by Crown
Publishers 2015.

New information eventually changes the probability of your initial analysis and your
expected path of least resistance and/or trade setups could become:

● More probable (confirmation).

● Less or zero probable (invalidation).
● Remain the same.

Let’s provide an example. The EUR/USD was showing potential for a bearish reversal (left
red box) as price broke below the 21 ema. The break below the 144 ema confirmed the
reversal rather than just a retracement. Eventually price however managed to break above
the 21 ema (left blue box) which makes a bullish retracement more likely. That is a moment
where performing some trade management could make sense as the odds have changed.

The next red box indicates a bearish continuation after retracement to and bounce at the
144 ema. Traders who stayed in the trade are seeing the odds again in their favour. Those
that are excited can enter again. The green box indicates a decision zone but price fails to
break above the 21 ema and shows a wick instead. The next blue box however indicates
again a break above the 21 ema and a potential retracement. Once again the odds have
changed and the trend is running out of steam.
New information is not only useful prior to the entry but also for trade management
decisions if your trade management allows it.

This is why active trade management (changing your exit point) has more potential than a
passive trade management style (not allowed to change your planned exit) because it
allows us to change the parameters of our trade after the entry.

Active management allows us to use new information on the chart to make a more
informed decision about exiting at the right price and timing. More on trade management
in chapter 7.
Chapter 6: Making a Coherent Analysis
Congratulations, you have now completed the triangle of analysis, which in our eyes helps
both enrich and simplify your analysis at the same time. The last three chapters have
discussed all of its components in full depth but separated and in isolation of other factors.

Of course, in real life all aspects are analysed in one coherent analysis. Now it’s time to
connect the dots and use all of the concepts in one fluent analysis from A to Z.

This chapter translates the theory from the triangle of analysis into practical
implementation on the chart. It should help explain how we analyse the price charts of
financial instruments when applying the triangle of analysis perspective.

We will show multiple case studies so you see theory in action and translated into practice.
Case study 1 shows a top-down approach which starts with the monthly chart whereas
case study 2 focused on the 4 hour chart trading and case study 3 on the 15 minute chart.
These case studies will focus more on analysis and mention some trading ideas as an extra
whereas more intense trading methods will be discussed in the SWAT method and triangle
of entries chapters.

Case study 1
Depending on your trading style, you might want to figure out what is the long-term
direction of the currency pair. Keep in mind that this is not necessarily needed for traders
that take entries on a 4 hour chart or lower but for the first example we will provide a full
top-down approach which starts with the monthly chart. For the first case study we choose
the EUR/USD during July 2018.
The EUR/USD long-term outlook offers both a bullish and a bearish version when looking at
the monthly chart (see image above and below for both variations). In many cases, I only
add the wave analysis that seems most probable but it is always fine to keep a few
variations in mind - especially if the outlook is unclear. In most cases, I will have a favourite
wave outlook but sometimes two or three wave scenarios could be all equally likely.

Although the two wave outlooks differ in the long run, the interesting aspect is that they
both indicate the same direction in the near future: downside is expected in both cases
because price is either starting a new red wave C (see image above) or price is building a
bearish retracement in blue wave B (see image below).
Now let’s take a look at the weekly chart (below). What wave patterns do you see?

The clearest wave pattern is the 5 bullish waves up (image below). After 5 waves, traders
should at least expect an ABC correction but if the 5 bullish waves end a wave C, then a
new downtrend is possible too.

Once again, in both cases, we are expecting the wave patterns to be bearish. The character
of how price moves lower will reveal some tips on whether price is building a bearish ABC
or a full 5 wave downtrend. Lets now analyse the bearish price action on a daily chart.
The daily chart (image above) showed very strong bearish momentum because price was:

1. Showing typical impulsive behavior (most candles bearish, closes near the low,
continuous lower lows).
2. Pulling away from the 21 ema zone for 28 candles (see SWAT method chapter for
more info on its importance). This is classical impulsive price action.

What wave pattern matches this particular bearish impulse?

In this case, the bearish momentum is probably a wave 3 and not a wave C because of its
large push lower. Here is an overview:

1. Fibonacci target: a wave C typically aims at the -27.2%, -61.8%, -100% targets
whereas a key characteristic of the wave 3 is that price moves at the very least to the
-161.8% target. As you can see in the image below, price made it to the -161.8%
Fibonacci target so a wave 3 is very likely.
2. Internal waves: there is also a clear 5 wave pattern (green) in the bearish wave 3
(blue).
3. Corrective wave: the current price action is looking choppy and corrective, which is
typical for a wave 4 pattern.
Doing wave analysis is a more complicated technique so traders who prefer to do analysis
without wave patterns can simply focus on the fact that:

1) A downtrend is visible: the short-term MAs are below the long-term MA.
2) The bullish correction is going sideways, which is indicating a retracement in the
downtrend and a typical continuation chart pattern.
3) The ecs.MACD is indicating a retracement as well.
4) Price is respecting the 38.2% Fibonacci retracement level, which is indicating a
shallow correction - see image below.
5) Lack of divergence patterns indicate that the trend is not running out of steam.
6) Lack of bullish reversal chart patterns indicate that the trend is not running out of
steam.
So, what do we expect next?

Wave traders: the wave patterns clearly suggest that price will make one more bearish
push lower for a potential wave 5 after the wave 4 is completed. An alternative scenario is
that price could be expanding the bearish wave 3 but the ecs.MACD has almost fully
retraced back to the middle point of the oscillator, so a wave 4-5 outlook is the most likely
and favourite scenario.

Non-wave traders: a downtrend continuation is likely since divergence or reversal chart

patterns are lacking and price is building a bullish pullback towards the 21 ema zone with
the MA’s aligned to the downside (21 ema zone below the 144 ema). So far price has also
respected the 21 ema zone as a zone of resistance.

Now it’s time to analyse the bullish correction. When will it end, when will the downtrend
continue, and when can we trade it?

On the daily chart traders can clearly see a bullish correction with 3 clear price swings and
waves.
Typical corrective patterns for a wave 4 are flags and triangle chart patterns. The daily chart
is looking more like a triangle than a flag pattern due to the lack of a higher high and the
presence of a double bottom. Flag patterns on the other hand do have a slight angle, albeit
a shallow one. Therefore, traders can conclude that price is likely to be in a contracting
triangle chart pattern.

A triangle pattern usually consists of 5 price swings: ABCDE. So far price seems to have
made three ABC swings and price could now be in the fourth wave, which is wave D.

For chart pattern traders the same information is valid too and they would analyse
triangles in the same way.
For non-wave traders, the message is simple: traders will be looking for a confirmation that
the correction is over:
1. Price will either bounce again at the resistance confluence of 38.2% Fibonacci level
and the 144 ema.
2. Price will make a bearish breakout below the correction for a trend continuation.

Traders can either stop here at the daily chart if you are looking for a swing or position
trade setup or zoom into lower time frames if they want to estimate the corrective chart
pattern in more detail. Daily chart traders could be looking for:

1. A strong bearish daily breakout candlestick below the 21 ema low, support trend
line, and support Fractal.
2. A bearish daily rejection candlestick at the 38.2% Fibonacci retracement level.
3. The second next bearish breakout: the next attempt could be a wave D and hence
could bounce at support. The next breakout after that should work better.
However, 1 and 4 hour traders will not stop here and continue their analysis on 4H. Let’s
take a look.

The moving averages are choppy and moving sideways on the 4 hour chart. Price has
bounced (blue box image above) at the 61.8% Fibonacci retracement level, which could
indicate the end of the wave D… but the wave D is quite short in comparison with the
waves A, B, and C. The waves are not expected to be equal in size but there is usually some
similarity when looking at the length of each swing in the triangle.

Therefore it could be that the price is building three internal swings within wave D and
expanding the correction rather than completing a wave E at the moment. In both cases,
looking for short setups makes sense but traders should be aware that the downside
potential might be limited to the 78.6% Fibonacci retracement level which is where the
extended wave D scenario could find support.

Based on this analysis, traders could look for bearish candlesticks patterns as long as the
price does not break the top of wave C. Traders could aim for the 78.6% Fibonacci target or
wait for a bullish reaction at the 78.6% Fib.

Here is how the chart looks like four days later:

You can see that traders who entered a short setup based on the bearish engulfing twin
candlestick pattern (red box) and exited at the bullish candlestick reaction (blue box) to the
78.6% Fib could have earned 90 pips profit (1.1696 to 1.1606) with a 67 pip stop loss
(placing it above the pattern at 1.1763) for a reward to risk ratio of 1.34:1 (90:67 pips).
From an analytical point of view, the bullish bounce is indicating that the wave D was
probably not finished at the 61.8% Fib. Price has now probably finished the wave D and is
moving up as part of the wave E. We can now place the Fibonacci tool on the bearish swing
(see image below) and look for bearish reversals and breakouts once the wave E is
completed for a full downtrend continuation.

Waves E can be more irregular than other waves. Waves A, B, C, and D typically respect
deeper Fib levels whereas Waves E can stop at any spot. Waves E can also vary in length
more than other waves.

Two aspects are certain though:

1. Price may not break above the top of the wave C (where 100% Fib is placed)
otherwise the wave outlook is invalidated.
2. A bearish break below the bottom of wave D would confirm the end of the triangle
pattern.
The daily chart did not yet offer any short setup for swing or position traders. The breakout
candle below the Fractal, 21 ema, and trend line was a doji candlestick pattern, which
indicates indecision. The bears lost control as price tried to make a bearish breakout. This
candle was not good enough for an entry (see chapter on decision zones and entries).

Back to the 4 hour chart. We are looking for a bearish reversal or breakout to trade the
wave E of the wave 4 of the contracting triangle chart pattern. So far the price has only
been going up and never managed to break below the 21 ema zone. Price has now reached
the 78.6% Fibonacci retracement level, which could be an excellent spot to look for a
bearish bounce. Why?
One advantage is small risk when considering the fact that the invalidation zone is at the
wave C top. But the potential reward could be large if traders can hold on to a potential
wave 5 trade. The bearish candlestick that appears on the very right of the chart below
could be enough for more aggressive reversal traders.

The image below shows how price swiftly moved away from the 78.6% Fibonacci
retracement zone with good bearish momentum (red arrow) once a bearish candle indeed
closed at that FIb level.

But price failed to break below the 21 zone and went flat (sideways) instead (purple box). A
bearish breakout below 21 ema could be a good confirmation that price has completed the
wave E at the recent high and that price is ready for a downtrend continuation.

The main question is: will price break soon or will there be a larger bullish correction within
wave E? And if price does break, does it break with sufficient bearish momentum? The idea
is that if the impulse is not strong enough, then the end of wave 4 might not be ready yet.

As the image below shows, price broke above the 21 ema zone instead and rechallenged
the 78.6% Fibonacci retracement and resistance zone where yet another bearish bounce
occurred. Two bearish candles clearly confirmed the bounce and reversal and could have
provided potential entries for new short setups. The price is now again retesting the 21
ema zone and support trend line and a bearish break below this zone is now even more
likely to complete the wave E of the triangle pattern.
The disadvantage of the image above is that the swat.FRACTALS have turned from red to
green, which is indicating more indecision. The MAs are also flat and hence a breakout is
vulnerable to a retracement. A trader could take the breakout setup but needs to place the
SL at a safe spot, which is above the top and 78.6% Fibonacci level (image below).
Alternatively, traders can wait for the pullback after the breakout before trading it.

As the image shows (above), finally price manages to break below the 21 ema zone. The
breakout candle has some wick at the bottom of the candle, which accounts for 30% of the
total candle. The 30% mark is right on the edge of being an OK or weak breakout. It could
be enough to consider for a short setup but remains a discretionary call where a trader’s
risk appetite comes into play. Another factor could be how much a trader likes this
particular setup. The alternative approach is to wait for a potential pullback OR flag pattern.
Especially a flag pattern indicates a corrective sideways price movement where the bears
keep control.

After the breakout price did continue lower for a few candles but eventually started an
impulsive move up again which eventually broke above the 21 ema. A bear flag chart
pattern certainly did not materialize. The bullish impulse however was again rejected by
the same resistance zone (orange box below) and price is again approaching the 21 ema
zone (see image below). Sometimes traders need to be patient before a trade setup
develops as anticipated and this is a classical example where the market is testing the
nerves and patience of a trader. But the good news is that the triple top is likely to confirm
the end of the wave E.
The wave E seems to be quite a lengthy wave by now and it is becoming more likely that a
bearish breakout will actually lead to the end of that wave E and the start of the wave 5 and
the downtrend. The advantage of a bearish breakout now is that the swat.FRACTALS are
again dark red (see the most recent low - the green Fractal is not relevant as we are not
looking for an uptrend).

The next chart (below) shows that price has broken again below the 21 ema zone. This is
the second breakout, which on average offers substantially better odds of success than the
first break. The stop loss could either be at the previous top (conservative) or even at the
most recent Fractal (aggressive) if traders trust that the breakout will start a downtrend.
Traders who are waiting for a daily candle to confirm the breakout are not disappointed
when they see breakout candle (red arrow below) push and break below the 21 ema zone,
the support trend line, and support Fractal. Here the stop loss (orange boxes) could be
above the candle high (due to the strong breakout candle) or above the entire top.

The breakout trade is now indeed well on its way (image below) as price shows strong
bearish momentum (blue arrow below). Price fell very quickly, which is exactly what we
have been anticipating and waiting for. Any trades taken at the reversal zone of the Fibs or
upon the breakout of the MAs is now doing very well. Considering the fact that price is
showing strong momentum, it could be wise to keep the trade open and just move the stop
loss to break-even. That helps remove the risk but allows traders to aim for larger profits.
Let’s now continue our analysis.

Price is moving away from the 21 ema with rapid speed and about 20 candles do not hit the
21 ema zone. Eventually price makes a retracement to the 21 ema zone but due to the
strong bearish momentum, the 21 ema zone is expected to act as a resistance zone for a
bearish bounce and downtrend continuation. Traders could look for continuation trade
setups once price breaks below the support lines, swat.FRACTAL, and 21 ema zone (blue
box below).
From a wave perspective it seems likely that price has completed a wave 3 (purple image
below) and the price is now building a bullish pullback within wave 4 (purple image below).

Other technicals remain very bearish too:

1. The moving averages are bearishly aligned with the 21 ema zone below the 144
ema.
2. There is also an increasing space between the 21 and 144 ema indicating strong
bearish impulse.
3. Price has not managed to fully break away from the 21 ema, where bullish candles
are fully above the 21 ema zone (not hitting the MAs at all).
4. The ecs.MACD has retraced back to the middle point after a strong push to the
downside.
5. Lack of divergence between the recent bottoms indicate that the downtrend
remains strong.
Furthermore, the price seems to be making a bearish bounce at the 50% Fibonacci
retracement level (rex box below) which is a typical resistance zone for a wave 4 (image
below).

The next candle indeed provides a strong breakout candle (red arrow in the image below)
and a bearish continuation after this bullish pullback is now likely. This is the confirmation
that the pullback has ended and that price is back on its way down.

Traders could add an additional trade at the close of the breakout candle with stop losses
at the orange line. Traders can also move the trail stop loss of their first setups to the
recent highs just before the breakout to lock-in some profits on the first setups.
So far the trend has been strong, the pullback has been shallow, and the continuation
breakout looks good. The next question is: how far can price push lower?

When using the ecs.WIZZ levels (see image below), traders can see that price first fell
towards the third Wizz level where price made a bullish bounce. The bearish breakout now
has plenty of space as price moves away from the 144 ema. Traders should expect
impulsive price and larger price movements away from the 144 ema.

This wide open space is exactly the moment where SWAT traders are expecting impulsive
price action towards the higher Wizz levels (red numbers), like Wizz level 4 and 5 (red
arrows).
The main question now is: will price extend the downtrend towards the 6th Wizz level or
has it completed 5 bearish waves and is the downtrend finished?

Traders can in any case close part of their open setups at Wizz level 5 to lock-in some good
profits. Here are the pips made when trading the candlestick bounces or breakouts and
closing at Wizz 5:
1. The bearish bounce could offer up to 420 pips profit.
2. The first bearish breakout could offer up to 350 pips profit.
3. The second bearish breakout could offer up to 250 pips profit.
Traders can either fully close or partially close at Wizz 5. This decision depends on whether
you think that price can continue lower or whether the trend has ended.

How do you know? The main aspects to keep in mind are the presence of divergence
patterns, the response of price at the 21 ema zone, the development of continuation or
reversal chart patterns, and the character of price (impulse or corrective).

On the daily chart, there is clear potential for a divergence pattern to emerge as the break
of the low could be a wave 5 (see image below).

Furthermore, price also came very close to reaching the -27.2% Fibonacci target (blue box
in the image below) when placing the Fib tool on the wave 3.
Furthermore when analysing the 4 hour chart (see image below), price also moved up
towards the 21 ema with quite a good bullish momentum, which could indicate a wave 1
reversal (blue). The bullish breakout above the 21 ema makes it even more likely that the
trend is either ending (and a bullish reversal is taking place) or price is building a larger
retracement towards the 144 ema close.

If traders kept part of their short setups open for larger targets, then this would be the
moment to exit the remainder and the entire setup. Using the resistance Fractals just
above the 21 ema is an excellent spot for a trail stop loss. Alternatively, trades can wait for
a candlestick to close above the Fractal before closing the short setup.
A trail stop loss above the Fractal would give this profit to the short setups:
1. The bearish bounce could offer up to 310 pips profit.
2. The first bearish breakout could offer up to 240 pips profit.
3. The second bearish breakout could offer up to 140 pips profit.

Price not only broke above the 21 ema but also moved above the 144 ema after briefly
making a small pullback at the 144 ema close. Price also pulled away from the 21 ema zone
for more than 15 candles, which indicates bullish momentum and a likely wave 3 to the
upside.

Also, if we add a Fibonacci retracement tool on the wave 1 (see image below) then we can
see that price easily made it beyond the -161.8% Fibonacci target, thereby confirming a
likely bullish wave 3. The downtrend seems to be over and a new upside more likely. The
first warning sign was the failure of price to break below the 5th Wizz level, then the strong
bullish bounce at the 5th Wizz level and impulsive move up towards the 21 ema zone, and
eventually the breakout above the 21 ema zone.
The bullish 5 waves could indicate a larger Wave A of a bullish ABC within a bearish ABC or
123 (see image below).

This type of analysis requires quite a lot of work. And the margin of error is of course larger
too. This is exactly why we developed the SWAT method so we could simplify our decision
making process (see next chapter).

The SWAT method helps in many ways, which we will not discuss here but the main
advantage is the fact that SWAT is semi-automated.
One of the main aspects is the swat.CANDLES. The red candles indicate the moments
where price is attempting to break to the downside (red candles in image below).

Of course, traders should still understand the bullish breakout and blue swat.CANDLES are
not interesting to trade due to the bearish patterns. The first three breakouts did pretty
well and moved 45-80 pips away from the first red candle that closed. But the best
breakout was of course attempt number 4, 5 and 6. Those red candles saw the price
tumble lower and lower after they closed.

The ecs.SWAT software also showed the same for the daily chart. The red swat.CANDLE
with the purple box is the best breakout candle as price is also pushing below the support
Fractals and 21 ema zone (blue box).
Case study 2
Now it’s time for an example where we focus on 4 hour and 1 hour charts. Let’s analyse the
GBP/USD back in February 2019. Even though you might be entering the markets using the
4 and 1 hour charts, it is still a good practice to review the daily chart for spotting key
support and resistance levels and spotting larger price or divergence patterns as well.
The GBP/USD was in a strong downtrend but as price has remained below the 21 ema and
the 21 ema remained below the 144 ema for a long period of time (see image above). From
a wave perspective, there are two main scenarios:

1. Price has either completed 5 bearish waves (red) at the recent low.
2. Or price has completed 5 waves (purple) in wave 3 (orange).

The first scenario indicates a bullish reversal and a potential bullish wave 1 whereas the
second outlook indicates that the current upside is just a stronger pullback within the
downtrend and a potential (uncompleted) wave 4.

Besides the wave patterns, there are a couple of reasons why price might be ready for a
larger bullish retracement or reversal:

1. Price broke above two resistance trend lines (orange in image above).
2. There is a double divergence pattern visible between the recent bottoms (see purple
lines in image below).
3. The strong bullish impulse (blue arrow in the image below) managed to break above
the 144 ema close, which could confirm a larger bullish correction such as a wave A
of a larger ABC (green) zigzag pattern.

If we are expecting wave A (of an ABC in wave 4) or wave 1 (of a new reversal and uptrend),
then in both these cases we can place a Fibonacci tool on the bullish price swing labelled as
wave A (green). A wave B will typically bounce and reverse at the 38.2%, 50%, or 61.8%
Fibonacci support level for a continuation higher whereas a wave 2 usually bounces at the
50%, 61.8%, 78.6%, or 88.6%. In both wave A-B or wave 1-2 scenarios we are expecting
price to make a bearish correction and a bullish continuation. Then depending on how
price moves up, we can conclude which of the bullish scenarios (wave C or wave 3) is more
likely.

Aggressive reversal traders could think about pending orders at those Fib levels if they
really like the odds and potential of a bounce but usually we prefer waiting for bullish
candlestick patterns to confirm it. This could be daily or 4 hour candlesticks in this case.
Another confirmation could be the break above the 21 ema high of this daily chart but in
this case study, we want to focus on trading opportunities on lower time frames so let’s
zoom into the 4 hour chart.

The first thing we notice on the 4 hour chart is the relatively strong bullish price action (blue
5 waves) compared to the choppy bearish correction (wave B green). Since the end of wave
A (green), price has been below the 21 ema zone for quite a while but the price is still in
between the 38.2-50% Fibonacci levels. This is the bearish correction that we expect from
the daily chart.

Traders could try to trade a bullish bounce back up for instance after bullish price action
patterns at the Fibs or a breakout above the 21 ema zone. Such a breakout could confirm
the end of the bearish swing and the start of a new bullish swing as part of that wave C or
wave 3.
As the image above shows, price eventually went a bit lower and reached the 50%
Fibonacci retracement level before bouncing back up again. The bullish candlestick pattern
(green arrow) was a confirmation of a bounce up. The bullish reaction, however, does not
guarantee that the price will actually fully break upwards. The 21 ema zone is still a
potential resistance area and more cautious traders are still waiting for a confirmation of a
bullish breakout and avoid trading in this zone and any bearish setups. Also, the 21 ema
has crossed below the 144 ema so the bearish correction might take longer and be deeper
because of that. A bullish breakout above the 144 ema and the resistance line (red) of the
downtrend channel indicates the end of the bearish corrective swing and the potential start
of a bullish and impulsive price swing.

The next image shows the main advantage of being more cautious. Price tried to break
above the 21 ema zone but ultimately failed due to the large wick on top (red arrow) and
the failure to close above the 21 ema high. Price pushed lower and seems to be on its way
to the 61.8% Fibonacci but then bounced in between the 50-61.8% Fib. What happened?
Fibs work very well but in some cases price can miss levels. Also, it could be that this
bearish correction is a wave 4 rather than a wave B and we need to remain flexible as
traders about what to expect. In any case, just a bit after the bounce up, price shows a
strong bullish candle (green arrow), which looks like a proper breakout candle.
Traders who are looking for confirmation could use this candle for entry, because price also
managed to break above the 21 ema high. It was also the 6th candle that did not break the
low, which is indicating a time pattern, the possibility that the bearish swing is completed
and the potential for a bullish swing.

Here is an overview of the trade setup details:

● An entry can be done on the close of the candlestick (with green arrow).
● Stop loss below the candle low or below the support Fractal, or below the 2nd
Fractal back.
● There are several options for targets:
○ Keeping it open and waiting for more price information before deciding
because the trade is with the trend and could break the previous top.
○ Aiming for half of the position at a nearby target (blue box) and leaving the
other part open for more information.
○ Exiting the entire trade at first target and perhaps adding a new position
after that.
● Another option could be to use a trail stop loss below the 21 ema for instance for
part of the trade.
Price was very close to the 144 ema which is a key decision zone and traders who do not
trust this breakout still have other options to consider before entering:
● Waiting for a bounce at the new Fibonacci retracement levels.
● Break above Fractal which is above the 21 ema zone.
● Pullback after breakout.
● Bounce back at the 21 ema zone which is now support.

Price eventually made only a very shallow retracement by already bouncing at the 23.6%
Fibonacci level and the top of the 21 ema zone (see image below). That is one of the
disadvantages when not taking the original bounce or breakout, price sometimes picks up
speed and the trade could be missed.

The good news is that traders have the option of trading the break above the previous
swat.FRACTAL (blue box). The resistance spot is key because it's a swat.FRACTAL just above
the 144 ema, which means that a bullish breakout is confirming a likely reversal (back to
uptrend).
Considering the fact that the breakout candle is strong with a candle close near the high
and a decent sized candle too, traders could think about a stop loss at the candle low.
Other options of course are also the Fractal or the second Fractal back. Aggressive traders
could have potentially three positions open if they trade the bounce, first breakout, and
second breakout. Now it’s time to wait and see how the trades develop and if price
patterns emerge. Based on that new decisions could be made such as:
● Potential for more trading opportunities.
● Adding targets to current setups.
● Moving trail stop losses to current setups.

The continuation candle is massive (blue box of image above) and shows a lot of strength:
 ● The candle length is one of the, if not the, biggest candle on the chart.
● The candle close is also near the candle high, which indicates that bulls are strongly
in control.

Traders who have open trade setups could use the candle low as a natural barrier for
moving the stop loss. Such a strong candle usually does not get broken and is a good spot
to either reduce risk, move to break-even or lock in profit.

For traders looking to add setups, they could think about a trade at the candle close with a
stop loss at the same spot (candle low of breakout candle - blue box) or traders can wait for
a pullback or chart pattern before looking for new setups.

On the 1 chart (see image above) we can try to understand the character of the bullish
price action and its wave patterns. The last push up (purple arrow) showed the largest
momentum when analysing the ecs.MACD, which means that price has probably made a
wave 3. In any case, it seems unlikely that price completed a wave 5 due to the strong
momentum and lack of any divergence patterns between the recent tops.

For the moment a bearish correction towards the 21 ema zone could take place and will
probably be a wave 4. Alternatively, the price could also keep pushing away from the 21
ema for the moment. In both cases, the 21 ema is expected to eventually act as a support
and a bouncing spot. The same is valid for the 144 ema close if price retraces to that level.
Let’s put a Fibonacci tool on the expected wave 3 (blue) and keep an eye on the
retracement levels for potential bounces and continuations. Price eventually did start to
make a pullback (see image below) and a bullish bounce occurs at 23.6% Fibonacci
retracement level near the round level of 1.30.
● The bullish engulfing candlestick pattern broke above the 21 ema high and is
indicating a potential continuation, which could be a potential setup.
● Also the second break above the 21 ema could be a reason for trading (red box).
● If price were to break below the 21 ema, then the next support zone is the 38.2%
Fib.
● The stop loss (orange boxes below) could be below the 38.2%, the 50% Fib, or below
the 21 ema, depending how aggressive or conservative you want to be as a trader.
Price indeed bounced at the shallow 23.6% Fibonacci retracement level (see image above )
and broke above the 21 ema high just a bit later (see image below). There was no deeper
pullback and price was on its way up, until a clear rejection candlestick appeared (red
arrow). The bearish pinbar had a large wick on top, with a clear close near the low, a close
below the previous candle close, and showed the potential for a divergence pattern. If we
re-analyse the wave patterns, then we might conclude that we missed an internal 5 wave
pattern in the most recent push up (blue 5 waves). It could be that a larger wave 4 (green)
will take place after price has completed a wave 3 (green). Traders who entered at the
23.6% Fib are best off with exiting and waiting. Traders who entered on the 4 hour chart
can still use the same candle low as a trail stop loss level.

It’s now time to wait for a clear corrective pattern that goes back to the 21 ema or even the
144 ema. If price does break above the pinbar (red wick), then traders could consider
trading a bullish breakout if a bull flag chart pattern occurs after the breakout.

Let’s now take a look at the 4 hour chart and see what information is available there.
The bearish candlestick is a worrying sign for bulls and price is likely to make a retracement
sideways or back to the 21 ema zone. The good news is that the impulse is certainly still
bullish (bullish candles remain dominant) and the 21 ema has crossed above the 144 ema
in the meantime, which is now confirming a full trend. It is now confirmed that the bearish
corrective swing has been completed and the price is in a full uptrend and bullish price
swing.

Let’s go back to the 1 hour chart (see image below). We are not interested in the second
bullish bounce at the 21 ema (green box) because of the bearish candlestick on the 4 hour
chart. Therefore we are expecting price to make a longer sideways correction or even move
to the 144 ema close on the 1 hour chart. The divergence pattern on the 1 hour would also
support a move back to the 144 ema. Price is now testing the resistance and there is a
potential for a reversal chart pattern called a head and shoulders. If price breaks above the
resistance (green arrows), then the reversal pattern is invalidated and a bull flag and
uptrend continuation would become more likely. Otherwise a bearish bounce and break
below the neck (support) line (blue) of the reversal pattern could send price down to the
144 ema.
Price did indeed bounce at the head and shoulders level (see image below) and price went
back into and eventually below the 21 ema zone. The bearish breakout is 2nd break below
the 21 ema (after the top there was a first break) and thus a larger bearish correction is
becoming more likely. After that, the price makes a bear flag chart pattern (blue lines) after
some bearish impulse (first red arrow). The break below the flag sees price move lower
(2nd red arrow) and move down to the 144 ema close and 38.2% Fibonacci level (blue box).
This confluence of support was done using a bullish bounce back up (blue arrow) and price
then broke above the 21 ema zone for a bullish continuation after retracement.

Traders could have traded several trade ideas here:

1. The bearish break of the bear flag towards the 38.2% Fib and 144 ema.
2. A support level of 38.2% and 144 ema.
3. A bullish reaction and bounce at the 38.2% Fib and 144 ema.
4. The bullish breakout above the 21 ema zone.

Traders also have the option of trading these future ideas:

1. The breakout above the Fractal at the 21 ema (after blue arrow).
2. 6th candle that fails to break the most recent low.
3. A Fibonacci level when placing the Fib on the blue arrow.
4. The second breakout above the 21 ema zone.
5. A break of any future bull flag or triangle pattern.
6. Any bullish candlestick pattern on the 4 hour chart.
The 4 hour is shown below. We can see the bullish bounce (blue box) at the 38.2%
Fibonacci retracement level and 21 ema zone and a strong bullish breakout candle
towering above the 21 ema zone. Also, the ecs.MACD has turned from thick red to thin red,
which is indicating the end of the bearish correction and the start of a potential upside.

Therefore, this 4 hour candle could also be a reason for taking a (new) long setup with a
stop loss below the support Fractal or below the candle.

Any open trade setups from the past could use the same stop loss as a trail stop loss to
lock in more profit.
Now it is time to think about targets (see image below). The chart shows three different
types of targeting:

1. The Fibonacci tool on the first swing (green wave A), which is drawn between the
two blue boxes.
2. The Fibonacci tool on the most recent swing (blue wave 3), which is drawn between
the two purple boxes.
3. The ecs.WIZZ tool, which is added automatically around the 144 ema close and
offers targets above the 144 ema in this case.

The potential profit depends on how aggressive or conservative we want to be plus on our
expectations of the uptrend. For the moment, price could either be in a wave C or wave 3
but considering the long-term downtrend on the daily chart and the fact that it remains
unclear whether price is in a larger reversal, it could be safer to assume that price is in a
wave C. Closer targets are therefore more recommended. The minimum target we expect
with a bullish wave C, however, is a break of the previous top so a logical spot to aim for
could be the confluence (orange box) of the -61.8% Fibonacci target and the blue dotted
line, which is the 5th Wizz level from the purple one (indicated by the green box). The other
Wizz levels are old ones and the indicator automatically changes the Wizz levels if price is
closer or at the 144 ema.

Back to the 1 hour chart (see image below). Price stayed above the 21 ema by going
sideways, which is a bearish corrective pattern and indicates that the bulls are likely to
push the price up after the break above resistance (red line). The bullish engulfing twin
pattern (blue box) after bouncing at the 21 ema zone is likely the clue for a restart of the
uptrend. That same candle also has strong momentum as indicated by the thick blue bar
on the ecs.MACD. It is also the second break above the 21 ema, which is often a more
reliable breakout opportunity then the first breakout.

Price indeed moves higher from that moment and clearly breaks above the 21 ema and
resistance Fractals (red line) for a move higher. There is a small bull flag chart pattern (blue
lines), which is relatively quickly broken by a candle (green arrow) before moving up to the
first target which is the -27.2% Fibonacci target. This target is only expected to be a pausing
moment for a larger push up and is aiming for another target at the -61.8% Fib level.

After that (image below), price made a bearish bounce at the -27.2% Fibonacci target, but it
was short lived as price quickly bounced back up again after hitting the 21 ema zone. The
21 ema zone tends to become stronger as a support or resistance zone once price is
showing momentum. The angle of the 21 ema is clearly up and the space between the 21
ema and the 144 ema is increasing at accelerating pace. Price then came close to hitting the
-61.8% Fibonacci target but missed it by a bit and seems to be retracing back to the 21 ema.

From a wave perspective, the price seems to have completed a potential wave 3 and the
pullback could be a wave 4 (green). One more upside towards the -61.8% Fibonacci level is
likely, and perhaps even beyond that.

Traders who are in any setups from the very beginning or after the breakout (wave 1 green
and/or purple) could be adding a take profit at the -61.8% Fibonacci target and/or using a
trail stop loss below the bottom of wave 4 (purple) or below the 21 ema low.
Price indeed broke above the resistance trend line (red line in image below) after bouncing
(green arrow) at the 21 ema zone. The push up (blue arrow) made it to the main and final
-61.8% Fibonacci target (blue box) where all potential setups could be closed.

For aggressive traders there is always the chance to move the trail stop loss and aim for a
higher level as well.

In the end though price indeed did not move much above the main target area (see image
below). A bearish candlestick (red arrow) indicated exhaustion of the bullish impulse and
started a long move downwards. The first bouncing spot was the 21 ema zone but the
second break below the 21 are (orange arrow) indicated at the very least a push lower to
the 144 ema zone (which is in wave terms often an ABC or 123 if there is a reversal).
Eventually price made it to the 144 ema (blue box) but there are signs of a larger correction
or reversal as price breaks below that as well (dark red arrow).

This wraps our second case study on the GBP/USD but before we move on to the next
chapter, which discusses SWAT methods in more detail, we will show how the charts looked
like with the SWAT indicators.

On the 4 hour chart the opportunities arrived with the two blue candles. The first one
(green arrow) was a good one because our analysis indicated that a larger bullish
continuation was likely. The second one (blue arrow) was another opportunity as price
showed a new blue candle and blue arrow. The ecs.MACD also confirmed the retracement
and continuation (see purple arrow). Trail stop loss options were the Fractals, 21 ema, and
Fractals at 21 ema (orange/red boxes) if the targets were not used.
On the 1 hour chart (see image below), there were even more opportunities for trading this
move up. The first trade setup (blue box) was still counter-trend on the 4 hour chart and
also the 1 hour chart. But the other trade setups already had the moving averages aligned
with the 21 ema zone above the 144 ema. The best trade setups are indicated by the green
boxes as price confirmed a new blue candle. The red box was a setup which we indicated
as a risky breakout due to the head and shoulders reversal pattern. The purple box was a
potential scale-in but only had a blue arrow and not a new blue candle plus the price was
already quite close to the target as well.
Chapter 7: SWAT Method and Moving Averages
The ecs.SWAT method uses all three parts of the triangle of analysis, which includes
support and resistance, trend and momentum, and price patterns.

What makes ecs.SWAT special is its ability to make deep chart analysis based on price
patterns, chart patterns, and wave patterns, but in a quick and simple way.

The learning curve for successfully analysing and trading the markets based on wave
patterns and chart patterns is lengthy and requires lots of experience. The Elliott Wave (EW)
Theory can be simultaneously fascinating and frustrating and not many traders have the
patience for developing the skill set properly. Primarily because it takes years if not a
decade or more to become a successful EW trader.

The wave and chart patterns provide a rich and deep way of understanding the financial
markets but taking trading decisions based on wave theory or chart patterns comes with
challenges. Beginning traders who trade based on EW are surely to stumble hard.

The process often goes like this: they learn a few EW rules, make quick conclusions about
the wave structure of a chart, take a trade, and are then surprised it doesn’t work. It would
be similar to a student of medicine who walks into an operation room after 1 day of
classes. Failure is likely, success a rarity.

Although learning the EW in specific or pattern trading in general from a theoretical and
practical is slow process, there is good news: my ecs.SWAT approach bridges that gap
and speeds up the process.

The ecs.SWAT is named Simple Wave Analysis and Trading for a reason.

My method tries to shorten that learning curve by emphasizing the practical side of
analysing the markets rather than clinging on to impractical theory. The approach is not
only simplifying the wave patterns but is based on moving averages, Fibonacci, Fractals,
price swings, price/chart patterns, and time patterns to help simplify the information from
the chart.

So the emphasis on wave patterns is therefore a bit misleading. It is actually a more

inclusive method that focuses on the entire market structure, rather than only waves. The
EW Theory and the wave patterns are just one component of the SWAT approach because
we also emphasize the entire triangle of analysis, fractal nature of the market, and deeper
market patterns.
Conclusion: SWAT is much more than waves, it is deep market understanding done in a
simple and quick way.

What is SWAT?
But SWAT is more than a method and deep market understanding. It is a software package
with proprietary indicators as well.

● Method: proprietary way of analyzing the charts and finding trade setups
● Software: proprietary indicator package based on MA's, Fibs, and Fractals for MT4
● Strategies: proprietary entries and exits based on wave strategies, discretionary
strategies, and rules based strategies

We will start explaining the method in this chapter whereas the software and strategies
side will be explained in the next chapter. But before we start, let me tell you that there are
a sea of opportunities with SWAT that I would not be able to explore on my own even if I
spent the rest of life only researching and expanding SWAT. How I use SWAT is just really
but one way. There are so many more undiscovered and hidden opportunities with SWAT
and I am sure that some of our SWAT fans will find them.

Although we explain deeper theoretical parts as well (chapter 12 Deeper Market Thoughts),
our core focus is on translating theory in practical trading decisions and advice. We do add
theory so readers understand where our ideas are coming from and how they have been
used to underpin the logic of our trading approach.

We decided, however, to show the SWAT methods, software, and strategies first and
then discuss the theory later. The reason is that not all traders are interested in the
theoretical part underpinning behind the methods. Also, the content could otherwise be
considered too slow and lengthy for readers, which is why we decided to focus on the
SWAT method, software and systems first.

The SWAT 2.0 course (https://elitecurrensea.com/forex-cfd/swat/) explains this 600 page

eguide via videos. It has 74 videos and 22+ hours of recordings. Traders that prefer a more
visual approach could certainly consider the course, starting at 473 euro one time fee for
life-time access (no upgrades or extra fees later on). There are 2 parts: education (13 hours)
and SWAT part (9 hours).

Here is an overview of the entire SWAT 2.0:

● 74 videos
● 22+ hours recording
● Education (13h) and SWAT part (9h)
● 6 PDFs with summary
● Checklist and cheat sheet
 ● 15+ SWAT indicators
● 10 SWAT templates
● 3 approaches
● 10 strategies
● 5 entry options

The 3 approaches are as follows:

1. Rules based method
2. Wave method
3. Discretionary method

The methods have trading systems, there are 10 in total:

1. Rules based method
a. SWAT Basic
b. SWAT Classic
c. SWAT MACD
d. SWAT Pro
2. Wave method
a. Trend 1
b. Trend 2
c. Trend 3
d. Reversal 1
e. Reversal 2
3. Discretionary method

There are 5 different types of entries:

1. swat.CANDLE
2. swat.ARROW
3. HMA
4. swat.MACD
5. Fractals

Become a SWAT member here: https://elitecurrensea.com/forex-cfd/swat/.

In this 600 page eguide we will explain a decent amount of the SWAT course, but not
everything. SWAT Basic Classic are partly explained, but not SWAT Pro for instance.

To explain the SWAT method, we must first review the SWAT software (all of the key tools
and indicators) that is used. After that we will explain some of the SWAT systems - both
discretionary approaches and rules based strategies.

First of all, the main indicators of the ecs.SWAT method are:

 ● Moving averages (MAs)
● Fibonacci
● Wizz (Fib sequence levels)
● Fractals
● swat.CANDLES
● swat.ARROWS
● Oscillators
● Price action
● CS dots
● And many more

This chapter is fully focused one on the first one of the list: moving averages (MAs), which is
a critical tool for understanding the market structure of a chart and the psychology of price.

This chapter is a bit lengthy because it covers all of the ways that MAs are relevant. The
good news is that traders do not need to know it before trading the SWAT method (see the
next chapter). That said, understanding the logic behind MAs however gives more insight of
the approach.

Using moving averages for market structure

The moving averages are of immense importance for understanding the context of the
chart. Ironically, many beginning traders do use MAs but in a wrong and oversimplified
way. For instance, they look for MA crossover entries which in the long-term usually fail.
The MA’s provide a wealth of information about the price chart but in a different context
and certainly not for crossover entries.

So what are the benefits of the MAs?

With MA’s as a tool, traders can understand both wave and chart patterns of the market
without actually counting or knowing the Elliott Wave Theory or chart pattern names. Why?

Because the waves that price makes respond in similar and repetitive ways to the moving
averages. Here is how it works:

By understanding how a) price moves in relationship to MAs, b) how MAs move in

relationship to other MAs, and c) the angle of the MAs, traders can capitalize on the wave
patterns and wave movements without knowing or identifying the waves.

This means analysing MAs is a short-cut for understanding the market structure,
wave patterns and chart patterns.
You might be wondering then how does price move versus the MAs. Basically, price is
always in a constant flux of moving away and back to the MA’s (similar to the tide of the
sea), which is valid for all financial markets and time frames. The position of price and the
MA’s is the key.

By analysing price and the MAs, traders can understand the chart dynamics in various ways
and help determine:

1) Whether the market is trending or ranging

2) The direction of the trend
3) When price is moving impulsively
4) When price is moving correctively
5) When the MAs are expected to act as a support or resistance
6) When price is likely to continue with the trend
7) When price could make a reversal

Let’s now explain the MA behavior in more detail.

MA Process Explained
The previous paragraph explained how the relationship of price and MAs is critical for
understanding the charts. In this section we will split the market behavior into 5 distinct
phases such as trend, shallow pullback, deep retracement, trend overextension and
reversals, and range.

The process of how price moves versus the MAs and the MAs move versus other MAs
during each of the 5 phases works like this:

1) Market is in a trend (see image below for the spot of each letter).
a) For a downtrend, price is below or at the 21 ema zone, which is below the
144 ema close.
b) For an uptrend, price is above or at the 21 ema zone, which is above the 144
ema close.
c) For a trend, price and the MAs need to be aligned. Here are also other key
characteristics:
i) Price is pulling away from the MAs
ii) Short-term MA (pink) is pulled away from the medium-term MAs
(orange)
iii) Medium-term MAs are pulled away from long-term MA (purple)
iv) Medium term MAs have an angle (not flat)
v) Medium-term MAs are not hitting long-term MAs
vi) Increasing space between medium-term MAs and long-term MAs
 vii) Price in or moving away from medium-term MAs

2) Market makes a shallow pullback in trend (see image below for the spot of each
letter):
a) Price moves back to medium-term MAs
b) Price bounces at medium-term MAs for trend continuation
c) Space between medium-term and long-term MAs still visible

3) Market makes a deep retracement in trend (see image below for the spot of each
letter):
a) Price moves back to long-term MA
 b) Price bounces at long-term MA for trend continuation
c) Medium-term MAs have opposite angle but long-term is still trending
d) Space between medium-term and long-term MAs becomes smaller

4) Market is overstretched and overextended in trend and ready to reverse (see image
below for the spot of each letter):
a) Price is unable to break away from the short and medium-term MAs in the
same direction as the trend
b) Price breaks medium-term MAs in opposite direction
 Once the price continues to push, a larger reversal might be taking place (see image
below for the spot of each letter):
a) A break of long-term MAs in opposite direction
b) Medium-term MAs cross long-term MAs in opposite direction

c) Divergence and an over extended push away from the MAs (see image
below)

5) Market is in a range (see image below):

a) Angle of most MA’s is flat
b) Price is moving in or close to medium-term MAs
 c) Medium-term and long-term MAs are close or on top of each other

Market is in a correction (see image above):

d) Medium-term MAs are flat
e) Price is in or hitting the medium-term MAs

Do you agree that the MAs provide a lot of valuable information in a quick and simple way?
Doesn’t this approach make the charts look simple?

In my view, it’s a clear yes. Look at the wealth of information that you can retrieve from any
and every chart just by adding a few MA’s. It always baffles me and I have been using them
for 10+ years now.

Simply said, moving averages are a shortcut in understanding the charts quickly:

1. The MAs quickly show a trader the context of the charts

2. The MAs are automatically updated with each and every candle

But there are even more advantages of using MAs, let’s discuss.

Benefits of MAs
Besides understanding trend, range, and retracement, the MAs also help explain
momentum, support and resistance, and gravity:
A. Momentum: short-term MAs indicate momentum or lack of it (see image below for
the spot of each letter):

a. Price vs short-term MAs: when price (candle high or low) is not hitting the
short-term MA, price is in a momentum and showing impulsive price action
b. Price vs medium-term MAs: when price (candle high or low) is not hitting the
medium-term MA, price is in an even stronger impulsive price action

c. Number of candles vs medium-term MAs:

i. 5-10 or more candlesticks that are not hitting the medium-term MAs
indicates a decent impulse
ii. 15 candles shows strong impulse
iii. and 20 candles is very strong impulse
d. Angle of short-term MA: it is aligned with the momentum and a steep angle
of MA often indicates strong momentum
e. Short-term MA vs medium-term MAs: the short-term MA is aligned with the
medium-term and not hitting that zone, which indicates strong momentum
too
B. Support and resistance (S&R): MAs are bounce or break spots. MAs are usually
bounce spots when:

a. Very strong momentum is present. Both short-term and medium-term MAs

often work as S&R when price is showing strong impulse
b. The short-term and medium-term MAs have an angle and are not flat and
not going sideways. Especially medium-term MAs are often bounce zones
when MAs have a steeper angle
c. Price reaches the long-term MA, which is the last bouncing spot within the
current trend direction
 The MAs can also be breakout spots. This happens when:

a. Price is breaking with the medium-term MAs when price is continuing with
the trend.
d. Price is breaking the long-term MA as an indication of a reversal

C. Gravity: when the price is moving sideways in a correction or range, MAs will then
have a pull effect on price and drag price back to the MAs. This often creates a false
breakout and extends the sideways price action.

a. Price tends to snap back upon a breakout away from the medium-term MAs
and move back to the MAs.
b. The long-term MA tends to be in the middle of the range

Which MA Numbers?
Before we continue with this chapter, it is time to address which moving averages are the
best. I am sure that most readers already have this question in mind.

First of all, from my experience and from what I have read, most MAs work well. Whether
you choose sma or ema or a different type of MA, it ultimately should not matter much.
The difference between a 20 ema or a 20 sma is ultimately small and the understanding of
the charts will roughly be the same.

Secondly, although the difference is small, we do have a clear preference for the MAs we
like to work with. We prefer using the ema, which stands for exponential moving average
and places more weight on the most recent candles (contrary to the SMA that counts all
candles as equal).

More importantly perhaps, we also prefer using Fibonacci sequence levels, such as 21, 34,
89, and 144 rather than round levels such as 20, 40, 50, 100, and 200. The reason is actually
simple: we love using Fibonacci in our trading. Fibs are an integral part of our entire trading
approach.

Here is our advice for the 4 different categories of time intervals:

1. Short-term MAs: from 3 to 20 ema

2. Medium-term MAs: from 21 to 55 ema

3. Long-term MAs: from 89 to 233 ema

4. Very long-term MAs: from 377 to 610 ema

Our personal choices are as follows:

1. Short-term: 20 hma or 5 or 8 ema close

2. Medium-term: 21 ema high and low or 34 ema high and low

3. Long-term: 144 ema close

4. Very long-term: 610 ema close

As you might have noticed, we mostly work with ema close with the exception of the 21
ema which uses high and low. The ema close is calculated based on the candle closes
where the ema high is calculated with candle highs and ema low with candle lows.
The effect of using an ema high and low is that a band of support and resistance is created.
Emas are not necessarily respected to the exact price movement and the emas generally
indicate a rough zone of price. The ema band provides us with a wider zone of S&R, which
has more value than just a single level.

Let’s continue by explaining how MAs can help traders trade the waves without knowing
the waves.

Using MAs Without Waves (for Non-Wave Traders)

Whether you decide to a) only focus on price swings or b) analyse and label waves or c)
apply full scale wave forecasting is up to you. Wave forecasting is certainly not for
everyone. But as mentioned before, traders can benefit from waves and the market
structure just by focusing on the MAs, such the relationship of MAs versus MAs, the angle
of MAs, the fractal vs MAs, and price vs MAs.

Once again, analysing the MAs is like a short-cut for understanding the market structure
and the psychology behind price. This is a short guide for non-wave traders:

Uptrend:
1. Trend: price above medium-term MA and medium-term MA above long-term MA.
2. Pullback: price near to medium-term MA and medium-term MA above long-term
MA.
3. Retracement: price near to long-term MA and medium-term MA above long-term
MA.
4. Reversal: price breaking long-term MA and medium-term MA crossing long-term
MA.
 5. Range: price in medium-term MA and/or medium-term MA hitting long-term MA.

Downtrend:
1. Trend: price below medium-term MA and medium-term MA below long-term MA.
2. Pullback: price near to medium-term MA and medium-term MA below long-term
MA.
3. Retracement: price near to long-term MA and medium-term MA below long-term
MA.
4. Reversal: price breaking long-term MA and medium-term MA crossing long-term
MA.
5. Range: price in medium-term MA and/or medium-term MA hitting long-term MA.
Moving averages can also be used to understand the charts in more depth. Let’s review
other relevant factors.

Other MA factors
Let’s review all of the key moving average factors one by one.

Factor 1: space between 21 ema and 144 ema.

The space between the MAs will provide information about the trend or lack of it. Here is
how:

1. No space: price is in a range and not trending. Price will have difficulties with
breaking away from the range. This means that price will often respect S&R levels of
the range and that there risk of false breakouts is higher.

No space: price could also be reversing and moving into a new trend. If the 21 ema
zone crosses over the 144 ema relatively quickly, then the price is probably just
changing the trend direction. If the 21 ema zone however starts to go sideways
around the 144 ema close, then a range might be taking place instead.

2. Small space: price might be starting a new trend (21 above 144 is uptrend and vice
versa). This is when breakout trades could be interesting and a new momentum
could start soon.
 3. Increasing space: price is showing strong or increasing momentum. Minor pullbacks
on lower time frames are often good continuation trade setups.

4. Big space but the space is flat or slightly decreasing: price is building a correction.
Patience is needed to wait for price to finish its consolidation and correction before
continuing with the trend again.

5. Contracting space: price is building a larger and deeper retracement or is ready for a
full reversal into the opposite direction. Price is moving back from the 21 ema to
long term 144 ema.

Factor 2: the number of candles not hitting or touching the 21 ema.

This was already mentioned in the momentum section earlier in this paragraph. Once
strong momentum is visible on a pair and time frame, price will often move away from the
price average in a quick and impulsive fashion.
How does the SWAT method estimate this? Simply by counting candlesticks. Momentum is
valid when a series of candles, neither the candle high or low, do not hit the 21 ema zone
(21 ema high and low). Here is the rule of thumb we use for this (as mentioned earlier):
i. 5-10 or more candlesticks that are not hitting the medium-term MAs
indicates a decent impulse
ii. 15 candles shows strong impulse
iii. and 20 candles is very strong impulse

When price retraces back to the 21 emas, price will in that case often use the 21 ema zone
as a bounce and retracement spot for a continuation of the previous momentum.

The ecs.SWAT method simplifies this concept for the MetaTrader4 (MT4) platform by using
custom made proprietary SWAT indicators, which automatically warn me when the
conditions of momentum have been triggered. This means that as soon as 10 and 15
candles move away from the 21 ema zone, the SWAT impulse indicator will add a diamond
to the chart.

The diamond indicates momentum and confirms the move away from the 21 ema zone.
Here is how it works:

1. The first pink diamond: it confirms the moment when price (the candlestick) has not
hit the 21 ema zone for 10 candles in a row. This a first confirmation that impulsive
price action is taking place on the current time frame.

2. The second pink diamond: it provides a second confirmation where price has not hit
the 21 ema zone for another 5 candles, which means that 15 candles in a row have
 not hit the 21 ema zone on the current time frame.

3. The first purple diamond: it confirms the moment when price (the candlestick) has
not hit the 21 ema zone for 10 candles in a row. This a first confirmation that
impulsive price action is taking place one time frame higher. Here is how it works:
a. A 5 minute diamond, a purple diamond indicates15 min impulse
b. A 15 min diamond indicates 60 min impulse
c. A 30 min diamond indicates 60 min impulse
d. A 60 min diamond indicates 240 min impulse
e. A 240 min diamond indicates daily impulse
f. A daily diamond indicates weekly impulse
g. A weekly diamond indicates monthly impulse

4. The second purple diamond: it provides a second confirmation where price has not
hit the 21 ema zone for another 5 candles, which means that 15 candles in a row
have not hit the 21 ema zone on one time frame higher - in the same way as point 3.

Factor 3: divergence and 144 ema.

Eventually price will become overextended after it has made a couple of strong pushes
either up or down. Overextension is often confirmed by reversal chart patterns and
(multiple) divergence patterns on one or multiple time frames.

Divergence indicates that price is continuing with the trend but the power of the
momentum is weakening, which in turn indicates that the chances of a reversal are
increasing. Divergence patterns do not play out immediately and can take time before they
fully develop but it’s important to be on guard. The target for the divergence pattern is the
144 ema but price can extend beyond that if a reversal is taking place.

Factor 4: price breaking through 21 ema zone and 144 ema close.
Price action breaking through the moving averages is another factor that plays a major role
in my analysis. First of all, you need to know that the price can break the MAs with or
against the trend. What we mean is this:

1. If price is breaking below the 21 ema zone in an uptrend (21 ema zone above the
144 ema close), then the price is breaking against the trend (see red arrows in image
above)
2. If price is breaking above the 21 ema zone in an uptrend (21 ema zone above the
144 ema close), then the price is breaking with the trend (see blue arrow in the
image below)
3. And of course the same is valid for a downtrend but then in the opposite direction.

With the trend breakouts confirm the continuation of the trend whereas opposite
breakouts against the trend should be considered as a warning signal for a reversal.

A first breakout is always vulnerable because it can turn out to be a false breakout or a
simple retracement. A second breakout (after a pullback often) is usually more reliable. For
the SWAT method, both a first and second break through the 21 ema zone or 144 ema are
potential trade setups which are evaluated based on the strength of the breakout, the
support or resistance levels, and the price patterns in general.

More information will be added on MS breakout later on in this chapter.

Factor 5: 21 and 144 emas crossing.
Ironically, this is often a first strategy that beginners use. But let us be clear, crossovers are
not a good approach for taking entries. That said, this concept is valid and valuable in a
different way and it certainly does communicate a lot of information to traders.

Here are the 2 main consequences when the 21 ema crosses the 144 ema:
1. Price is either starting a period with a larger consolidation.
2. Or price is about to confirm a larger reversal (see purple in image below).
Factor 6: Fractals versus 21 and 144 ema.
The fractal indicator is a great help because it shows and plots key support and resistance
levels automatically on the chart:
1. Fractals in or around the 21 ema zone show that price is potentially using the emas
as a retracement.
2. Fractals not hitting the 21 ema zone indicate impulsiveness
3. Fractals at the 144 ema indicate a key bounce or reversal spot.

In other words, Fractals indicate a key level where price will either continue with the trend
or reverse.

Short-term MA aspects
The short-term MA is also an important factor but is not as often used in our trading. That
said, it is certainly a valuable tool as well. The main factors to consider are:

1. Does the short-term MA stay away from the medium-term MA zone?

If yes, then the market is very impulsive.
2. Does the short-term MA move away from the medium-term MA zone after moving
into the opposite direction?
If yes, the market is showing potential for a breakout.

3. Is the angle of the short-term MA steep?

If yes, the market is showing strong impulse.
Using all MAs as a road map
Later in this book, we will share specific SWAT strategies which are based on proprietary
SWAT tools and indicators but this section will first share how traders can use the MAs as a
road map of price and for trading decisions.

Here is a summary of the key moments for potential trades with and against the trend:

1. Break of 21 ema zone with the trend

2. Bounce at 21 ema zone with the trend
3. Continuation (2nd break) away from 21 ema zone with the trend
4. Break of 21 ema zone counter trend back to 144 ema
5. Bounce at 144 ema with trend
6. Break of 144 ema against trend
7. Impulsive price action can be traded by zooming into lower time frames and taking
price breaks and bounces at same emas
8. Impulsive price action with more than 20 candles not at 21 ema zone
9. Triangles and correction can be traded by zooming out and waiting for breakout
candle
10. Reversal candlesticks can be used to trade back to 21 ema zone (against trend)

Let’s evaluate them one by one.

But keep in mind that the ideas that will be mentioned below are just general ideas
about MA trading. This is to get a better understanding of the charts when using
MAs. More precise SWAT trading approaches will be mentioned later on.
Break of 21 ema with trend
As mentioned earlier in this chapter, if all of the emas are aligned then a breakout with the
trend could indicate a trend continuation. There are two key confirmations: a break away
from the 21 ema zone and a break of the Fractal indicator.

In an uptrend (21 ema zone above 144 ema close), traders are looking for price to break
above the 21 ema high or a break above resistance a Fractal that is above the 21 ema zone.
The image below shows the vital Fractal levels (red) above the 21 ema zone and the
breakouts (purple boxes) when they happen.

For a downtrend (21 ema zone below 144 ema close), traders are looking for a break below
the 21 ema low or a break below a Fractal that is below the 21 ema zone. A push below
those Fractals often indicate a downtrend continuation.
Bounce at 21 ema with trend
Another way of trading within the trend is by looking for a bounce in the 21 ema zone.
There are both advantages and disadvantages of trading a bounce at the 21 ema rather
then waiting for a breakout confirmation. The advantages of a bounce are that traders
enter earlier at a better price level and manage to often get a better reward to risk ratio
(larger space to target as entry is done at a better spot). The disadvantages of a bounce are
that a) the retracement might go deeper than expected and b) price might not be making a
pullback but rather a reversal. With the latter case, a bounce trader might take a loss
whereas a breakout trader never received a setup confirmation and would have avoided
trading it entirely.

Here are some tips with trading bounces:

● Tip 1 is to wait for a Fractal indicator to arrive:
○ Above the 21 ema zone in a downtrend
○ Below the 21 ema zone for an uptrend
● Tip 2 is to wait for the short-term MA to flip back into the trend direction:
○ From up to down for downtrend
○ From down to up for uptrend
● Tip 3 is to see candlestick patterns confirm the bounce:
○ Bearish candles for downtrend
○ Bullish candles for uptrend
Another tip is to avoid trading a bounce when a reversal becomes more likely, which often
occurs when multiple reversal signals appear. Although it is not always possible, try to
trade bounces only when a strong trend continuation seems likely. In the image below you
can see a trend but the market is quite choppy and the bounce and breakout setups do not
work that well. This is something that traders want to try to avoid.

One last tip is to use the ecs.WIZZ tool for finding trend setups. If price is trending, then the
21 ema zone works well as a zone of support and resistance for a bounce. If the price is
corrective, then price breaks through the 21 ema zone more often and the 144 ema close
works better as a bouncing spot.
Usually the 55 pip mark provides a decent indication of whether price is trending or
ranging. As you can see in the image below, price was unable to move more than 55 pips
away (Wizz level 1 or 4 which is indicated by the red dotted line above purple one) from the
144 ema close.

This meant that the MAs were aligned and trending to the upside but price was unable to
break away from the 144 ema so the character of price action was corrective. The image
shows that the base of the 144 was reset each time price hit the 144 ema (purple dotted
lines), which indicates choppiness and correction. The 21 ema zone was used for minor
bounces but ultimately the 144 ema close provided more support in this particular market
environment.

Continuation away from 21 ema zone with trend (2nd breakout)

If price has made a deep retracement then trading the first breakout is (more) risky. where
price has moved to the opposite side of the 21 ema (against the trend). A solution could be
either to wait for a clear break of the Fractal (see breakout of 21 ema part) or trade the 2nd
breakout of the 21 ema. The 2nd breakout often has better odds of success.

In the image below the second purple boxes represent the 2nd breakout.
Break of 21 ema zone counter trend back to 144 ema
Trading against the trend is always riskier but there are moments when the trend is
overextended and a correction or reversal becomes likely. In this case, price will move
towards the 144 ema close (retracement) or even move beyond that (reversal). Divergence
patterns and strong support or resistance often help indicate the pause or end of a trend.

When price is ready for a retracement or reversal, price will first of all break through the 21
ema zone (purple box) which is some type of a wave A. The first attempt to break the 21
ema zone, however, will often not go too far and could bounce around the 21 ema
zone.The image below shows an example of a wave A (purple box) that breaks a little bit
below the 21 ema zone but ultimately price bounces back up.
The upwards move movement is with the trend but corrective if the market is indeed
building a larger bearish ABC. The confirmation of a wave C occurs when the price is able to
break below the 21 ema zone for the 2nd time (red box). Then there is a confirmation of
trend failure to break above the previous high (uptrend) or low (downtrend). The second
break has a better chance of making it to the 144 ema.

Bounce at 144 ema with trend

The 144 ema is a key level for a bounce or breakout, especially if these conditions are
present:
● Visible trend with MAs aligned
● Price is showing good momentum

In that case, price could use the 144 ema for a trend continuation (see purple box below). A
Fractal at the 144 ema followed by change of the HMA angle and/or confirmation via price
action candlesticks could confirm the bounce at the 144 ema.
Break of 144 ema against trend
The 144 ema close is a key level for either a reversal break or continuation bounce. So price
can also use the 144 ema as a reversal spot. Here is how traders can help determine the
reversal breakout (into the opposite side of the 144 ema). :

1. Strong opposite price action that is able to break in the opposite direction of the 144
ema
2. The Fractal at the 144 ema ema
3. The 21 ema zone that is moving into the opposite direction
Impulsive price action
Impulsive price action can be traded by zooming into lower (!) time frames. These breaks
and bounces at the 21 ema zone can be traded as well if price is showing strong
impulsiveness. For instance, if a 4 hour momentum appears then traders can zoom into the
1 hour chart for potential traders at the emas.

The image below shows a 4 hour chart with a start of bullish momentum (3 bull candles in
a row). Traders could then look at lower time frames, such as the 1 hour chart, for potential
trade ideas at the 21 ema zone and 144 ema close.

The below image shows the 1 hour chart after the 4 hour impulse, which is indicated by the
green vertical lines on both charts. The pullback (purple trend lines below), bounce (at 21
ema zone), and the break of the 21 ema zone and Fractals at the 21 ema zone offer
potential trade setups (blue arrows below).
One of the best ways to measure impulsive price action is wait for a pull away from the 21
ema zone. As mentioned before, if 10-15 candles (20 is even better) are able to move away
from the 21 ema zone without hitting it, then this often indicates a huge impulse and price
could continue with that momentum on lower time frames (blue arrow in below image)
and eventually make a correction and continuation on the same time frame (green arrow in
below image).

Triangles and corrections

Triangles and corrections can be traded by waiting for the breakout candle that is able to
push away from the corrective zone. This can be done on the same time frame, or by
zooming out to one time frame higher. In both cases a strong breakout candle is important
whereas a weak breakout candle could indicate a pullback or false breakout. If you see a
triangle on the 1 hour chart (see image below), then waiting for the breakout on the 1 hour
or higher time frame (4 hour) is a good tactic. A strong breakout candle is often a decent
trigger and entry.

The breakout candle can be either seen on the same time frame or one time frame higher.
The above chart shows the triangle on the 1 chart whereas the chart below shows the 4
hour chart. The red box (image below) indicates the key resistance Fractals and the purple
arrow indicates the good breakout candle on a higher time frame. After the clear bullish
breakout candle, price moves higher with strong impulse for a new bull run.
Another method for spotting good breakouts is by zooming in one time frame rather than
zooming out one time frame.With this tactic I am not waiting for a candlestick confirmation
but for a pattern break.

The idea behind zooming in is to avoid false breakouts and situations when price does a
‘close and reverse’ (opposite movement). In these scenarios, price breaks into the direction
of the trend but then, after the breakout, price action quickly moves into the opposite
direction of the trend.

Let’s show an example of how the pattern break after the pattern break works out. The
image below shows that price is building a bearish impulse (red arrow on the left), followed
by a consolidation zone (blue box), and a new bearish breakout (red arrow on the right).
Will this breakout workout?

One way to solve it is to zoom into a lower time frame and look for a smaller chart pattern,
which indicates that the bears remain in control and that the bulls have no serious
opposition to the breakout. A strong push in the opposite direction of the breakout,
however, could indicate a false breakout.
The image above shows that there was a strong upside first (blue arrow), but eventually the
bullish impulse died down and price went sideways for a smaller corrective pattern (blue
box). The bearish breakouts (red arrows) after the sideways pattern worked out well.

Let’s compare the above to a place where a false breakout occurred (see orange arrow in
the image below). The breakout failed to continue and a reversal occurred.

On lower time frames (see image below), you see price going sideways at first (although at
times price can reverse with a strong impulse too) but eventually price breaks above the
resistance of the sideways zone rather than breaking lower. Another false breakout
avoided.
Reversal candlesticks back to 21 ema zone
Reversal candlesticks can be used to trade back to the 21 ema zone (against the trend) but
it is important to see signs of the end of a trend. Strong support and resistance levels are
key for estimating a reversal. Also overextensions and divergence patterns are critical. If
that is present, then reversal candles could indicate the end of the old trend.

That said, keep in mind that trading reversals is often more difficult and tricky plus requires
more experience too. However, if multiple confirmations come together, then price action
reversal signals are elcomed confirmations of the end of the old trend and the start of a
reversal. In that case, the first target of the reversal is the 21 ema zone.
Translating Wave Counts With EMAs (for Wave Traders)
Wave analysis without moving averages can be a head spinning activity and cause a great
deal of confusion. Wave analysis with moving averages makes it more clear. Let’s discuss
why.

Difficulties with Wave Analysis

Many traders get lost when they apply wave analysis because they get overwhelmed by the
number of possibilities. The old criticism (or joke) that I hear is this: you can ask 100 wave
traders for their wave analysis and you will get 100 different variations. Although this might
be a bit exaggerated, it proves the point that wave traders do face a (too) wide range of
options.

Another critique on waves is that:

a. It does poorly pre-fact and explains patterns better after the fact
b. The rules and guidelines are complex
c. A trader needs a lot of experience before they can trade the waves with success

All of those points offer a fair criticism of wave, chart and price patterns. But traders who
have followed my work for longer know that the wave analysis I do is pre-fact, to the point,
and simplified. What’s my trick?

Moving averages.

The MAs provide the chart with an enhanced understanding of the structure and context.
Basing your trades only on wave patterns is very difficult and requires years of experience.
Wave analysts that only use wave analysis can get carried away in their determination to
predict the correct wave pattern for each and every situation. They can overfocus on minor
details.

Using moving averages changes that dynamic and it lowers the bar substantially by making
wave and chart pattern trading accessible for more traders. Keep in mind that moving
averages aren’t perfect either and losses are sure to happen. No strategy can avoid losses
and losing setups is a normal part of trading. Even a string of losses is very normal.

The key thing to keep in mind is that, as a trader, we are looking for spots on the chart
where a long-term edge is expected. If the chart is unclear, then we have the freedom to
skip that chart and time frame and look for better opportunities elsewhere and at a
different time.

My SWAT method advocates a practical approach to waves. Rather than trying to accurately
predict waves and price patterns with classical Elliott Wave and chart pattern rules, SWAT
uses the moving averages to estimate whether there are interesting setups available or
not. Many traders and wave traders in specific do not realise how important the MAs are
for determining the most likely wave count. In our view, the MAs are the best tool for
understanding waves and the market structure because a first quick overview can actually
be as fast as a few seconds up to a 1 minute. This is very short when compared to
traditional wave analysis.

Using MAs for Wave Patterns

Let’s start with price action versus the 21 ema.

If you see that price is not hitting the 21 ema, then this means that price is in a momentum
and you can estimate that price is in an impulsive wave such as a wave 1/3/5 or wave A/C.
We can count the number of candles that have moved away from the 21 ema to get an idea
about the wave count:
1. 5-10 candles away from 21 ema and then return to 21 ema tends to be a wave
1/5/A/C.
2. 15 candles away from 21 tends to indicate wave 1/3/C.
3. 20+ candles away from 21 ema indicate strong momentum and tend to be a wave 3.

Traders can simply count the candles that have moved away from the 21 ema to
understand whether price is in an impulsive wave or not.

Now let’s add the 144 ema into the mix. Do the price movement and 21 ema band or zone
align themselves with the 144 ema?

1. For an uptrend: price is above 21 emas which are above 144 ema.
2. For a downtrend: price below 21 ema which are below 21 ema.

3. For a range: 21 ema is flat, close to or in the 144 ema.

Waves 3, 5, or C
If a full trend alignment is available, then the price is either in some type of wave 3 or 5 (see
image below). It could also be in a wave 3 or wave 5 of wave 1 or in a large wave C
correction. The exact wave count will depend on other time frames and other factors but it
is likely to be a clear impulse.

Waves A, C or 1
If price is moving back to the 144 ema and away from the 21 ema with medium and long
emas in opposite directions of each other, then the price is probably building a
retracement or the start of a reversal. In that case price is either in a wave A, wave C, or
wave 1 (if reversal).

The below image shows how the bullish momentum could either be a bullish ABC (green)
or the start of a larger uptrend via two wave 1-2 (purple/blue) patterns. The price bounce at
the 21 ema after the 21 ema crosses above the 144 ema plus the break above the
resistance trend line (red) indicates a bullish uptrend and likely wave 1-2 plus start of wave
3 (blue) pattern rather than an ABC correction (green).

Once again, knowing the wave patterns is not so key. More important is recognising how
price and MAs repeat similar movements on the chart and how you can identify trading
opportunities based on those price vs MAs patterns.

Waves 2 or 4 in momentum
If price is hitting the 21 ema zone (in, around or close it) and the 21 ema zone is aligned
with the 144 ema close for either uptrend or downtrend, then the price is considered to be
in a pullback.

Let’s summarize the trend again:

● Downtrend: 21 ema zone is below 144 ema close
● Uptrend: 21 ema zone is above 144 ema close
● MAs are aligned to one direction with space in between them

When these 3 points are valid then the price is likely to be building a pullback within the
trend once price retraces back to the 21 ema zone. In that case, the type of correction is
probably a wave 2 or wave 4 retracement of an impulse price movement.
Waves 2 or 4 in trend
If price is hitting the 144 ema zone (in, around or close it), there is space between 21 ema
zone and 144 ema close, and price recently moved away from the 21 ema zone back to the
144 ema close, then the price is in a deeper retracement in the trend. The trend could still
be active because the 21 ema and 144 ema still have aligned, just not price. If price is able
to break away from the 21 ema in the same direction as the MA alignment, then a trend
continuation is likely. In this case, the type of correction is probably a wave 2 or wave 4 of a
higher degree.
When price retraces back to the 21 ema or to the 144 ema, in both cases price could be in a
wave 2 or 4. The difference between a retracement to the 21 ema zone or the 144 ema is
the degree. A pullback to the 21 ema could be a wave 2 or wave 4 of a larger wave 3
whereas a pullback to the 144 ema could be a wave 2 or wave 3 of a larger wave cycle or
degree.

Waves B
What happens when price is moving slowly with the trend again, but after a strong
momentum in the opposite direction? This is typical behaviour for a wave B.

Waves B can be nasty because it looks like the trend is continuing but ultimately price is
building a correction for a larger retracement or reversal. Is there a way to recognize and
avoid wave Bs?

Yes, by monitoring strong impulsive price action into the opposite direction and by keeping
an eye on price versus the 21 emas.

1) Impulse: a wave B is often after an impulsive counter trend move. The blue arrows
in the image below indicate the strong momentum. Price is often also breaking
above the 21 ema zone into the opposite direction. The momentum and the 21 ema
break are warning signs that a larger retracement could be taking place soon.

2) 21 ema: if price is unable to break away from the 21 emas (in the direction of the
trend), then this could indicate a wave B. Take a look at the two purple boxes on the
left in the image below (purple boxes). Price only managed to push below the 21
ema with a wicks. Also, the 21 ema zone also is showing an opposite angle as well.
Both factors are making it likely that a new counter trend swing and a wave will take
place.
The example on the right is a place where the wave B went deeper but ultimately
price failed to break below the bottom.
Waves WXY Complex Corrections
Price can also build a large complex correction with multiple ABC corrections taking place
back to back. Price action is then in a range or sideways correction. In such an
environment, the moving averages will be flat, hitting each other, and price action will be
messy and bouncing around the MAs.

Waves ABCDE Triangle

The same principles as mentioned for complex corrections are valid for the ABCDE
contracting triangle chart pattern. The main difference is that both price and 21 ema zone
could be more impulsive if a large trend is taking place (see image below). Generally
speaking, the 21 ema could move more away from the 144 ema but ultimately the 21 ema
zone will be pulled back to the 144 ema close.

As you can imagine, traders can assess the chart and wave analysis with more precision
and accuracy when using these tools. It’s not a guessing game anymore, but rather a
careful examination of MA’s. The images above show how the moving averages provide
and add context to each chart.
Chapter 8: SWAT Method from A to Z
The moving averages (MAs) provide a wealth of information about the chart and are a
short-cut for understanding the price and wave patterns. The SWAT method is largely
based on the logic of moving averages, Fibonacci, and Fractals.

The first question you might be on your mind is how profitable is it? This can be answered
in multiple ways because SWAT is a method which traders can use for understanding and
analysing the charts, an indicator package for quick entries and understanding the charts,
and 3 different types of strategies, which are wave strategies, discretionary strategies, and
rules based strategies, including Ultima our automated trading systems (see chapter 9).

The results that are mentioned in this book are a reflection of only two different strategies,
which are the trades that I took with ecs.LIVE and the back testing done and live trading
with a wide range of SWAT based strategies. Please check out our myfxbook page for the
current overview of results: https://www.myfxbook.com/members/elitecurrensea. The
results do not show the potential of wave or discretionary strategies, nor the potential of
other yet to be discovered rules based strategies.

Step 1: use swat.CANDLES and tools for easier trade setups

Although the MA logic helps digest and simplify the market structure for all traders, it still
requires some experience to understand when and where to find the best trade setups.

To simplify the trade setups even further, we decided to simplify the process by creating
our own proprietary indicator called the swat.CANDLES.

The swat.CANDLES are based on 3 colors:

1. Blue = bullish
2. Red = bearish
3. Grey = neutral
The SWAT method is looking for swat.CANDLES to confirm an entry.
A new red candle or new blue candle indicate a potential trade - here is how:

● Blue is a potential long setup - buy

● Red is a potential short setup - sell

You can see a few examples in the image below (purple boxes). The first breaks after a
strong retracement are always treated with more caution (orange box).
Once you become a SWAT member, then you will receive access to the SWAT indicators,
which includes the swat.CANDLES. First of all, you need to download and install the file (see
here a YouTube video on how to do it
https://www.youtube.com/watch?v=xqO3B2Vkcow&t=1s ). All SWAT indicators are built for
MT4 (MetaTrader 4) platform only.

To see the swat.CANDLES on the charts, replace the normal candlestick view with line
charts - you need to click on the line charts in MT4 (MetaTrader 4 - don’t use bar or
candlestick view). Traders can use them on all time frames or just on the entry time frames
but once again, keep in mind that the indicator is only available for SWAT members. If you
want to join ecs.SWAT, then check out the page with more information here:
https://www.elitecurrensea.com/wave-analysis-trading-swat/ First register your email
before completing the process of signing up.

There are a couple of things that require extra clarification.

What is meant by a “new” blue or red candle?

This means the first red or blue candle after 1) a grey candle or 2) after the opposite
colored candle (red after blue or blue after red).

Simply said, the new candle indicates a new direction.

When the chart has continuous blue or continuous red candles, then this is considered to
be an ongoing momentum.

Once a series of blue or red candles is broken by a grey candle or the opposite colored
candle, then the momentum has been interrupted after which a “new” candle can again
appear on the chart.

Here is a summary (see image below for examples):

1) A new blue candle is when:

a) A blue candle appears after a red candle

b) A blue candle appears after a grey candle

2) A new red candle is when:

a) A red candle appears after a blue candle

b) A red candle appears after a grey candle
Not all swat.CANDLES are entries
We need to emphasize that not all new red or blue candles justify an immediate entry.
The process is always follows:

1) For discretionary strategies: traders should first do their analysis and judge
whether they like a particular chart and time frame before
searching/waiting/entering a swat.CANDLE.

2) For wave strategies: traders should first do their analysis and judge whether they
like a particular chart and time frame before searching/waiting/entering a
swat.CANDLE.

3) For rules based SWAT strategies: traders need to check all the system filters to see
whether a red or blue candle qualifies. A filter could indicate that the red or blue
candle is not good enough for an entry.

Please keep in mind that for more information about trading SWAT via wave, discretionary,
and rules based strategies, please read step 6 later on in this chapter.

Yes, swat.CANDLES are really cool and make spotting entries much easier and quicker. But
no, I do not enter all new swat.CANDLES.

Let’s examine the image below. How many of the new swat.CANDLES do you think justify
an entry?
Whether I am trading discretionary, waves, or rules based strategies, most of my own
trading is usually focused on with the trend setups (21 ema and 144 ema aligned) where a
new swat.CANDLE appears without divergence patterns. In the image above, you see the
simple version of the SWAT template.

Here I would typically only trade new red candles for short setups as the trend is bearish
(21 ema is below 144 ema) once the candle breaks below the 21 ema zone as well and I
would ignore the blue candles (counter trend) unless there is clear divergence patterns and
a reversal is likely - see image below where the orange arrows indicate setups and entries
that qualify with those sime rules (trend, break of 21 ema, no divergence).
Let's take a look at a few more examples of the basic SWAT template, which has less
indicators and does not yet show the newest SWAT indicators (step 5 of this chapter).

In the image below you see a downtrend simply because the 21 ema zone is below the 144
ema close. Then red swat.CANDLES appear, which offer shorting opportunities (green
arrows). First of all, we should explain that the new blue candles (green arrows) are ignored
because these are reversal trades. Although sometimes reversal trades can be entered
using SWAT strategies and using new swat.CANDLES, we will discuss the specific conditions
in step 6 which reviews strategies.

For now, the easiest and most profitable setups are simply when there is a new red candle
(for downtrend), a break below the 21 ema low (for downtrend), no divergence present.
This is what I call SWAT “basic” and it works very well but not all the time. Of the five new
red candles in the image below (orange arrows), four of them broke the 21 ema low and
qualified as entries. OUt of those four, three of the trades seemed to have worked out very
well whereas the second orange arrow from the left saw a bullish spike and would have
probably ended up as a loss. The success of trade depends of course on stop loss and take
profit, which we discuss in the next steps (step 3 with ecs.WIZZ and step 6 with strategies).

Here are a few more examples of SWAT basic. As you can see in the image below, most of
the blue swat.CANDLES and entries (green arrows) worked out fine besides on the left
where there was one entry at two different spots. Once again, the red candles are reversals
(orange arrows) and are skipped.
Of course, nothing works 100% in trading. The SWAT basic method is vulnerable to range
periods like in the image below. This is why we have created more advanced SWAT
strategies (see step 6) and more SWAT indicators (see step 5), which help avoid entries in
this environment. Certainly not all entries were bad or losses but the loss percentage is
definitely higher when a range takes place.

Even with divergence patterns present, the price can continue to move in the trend
direction if the trend is very strong, which is something that can be understood in more
depth when using ecs.WIZZ (see step 3). Take a look at the GBP/JPY here below and how
easy it is to see those trades with swat.CANDLES.
There is nothing that beats surfing the price waves with SWAT. The chart above is the
GBP/JPY. Let’s take a look at different currencies such as the GBP/USD. It really does not
matter which currency pairs are used as long as it’s one of the major currencies (USD, EUR,
GBP, JPY AUD, NZD, CHF, CAD). The orange arrows show the short setups that qualify
(including break of 21 ema).

One last example before we move on. But we wanted to make sure that all traders see the
benefits of the swat.CANDLES, the 21 ema zone, and the 144 ema close before diving into
other topics.
As you can see below, SWAT basic working as a charm. Again two great entries and both
entries providing two moments to enter (four green arrows in total).

That said, keep reading because we are going to explain how the other SWAT indicators
also help analysing and improving the entries. Plus of course, trading is more then just
entering, it is also equally important how to exit which is what we will discuss in the next
steps.

For those that are wondering how to enter. I basically enter as soon as the swat.CANDLE
closes. But here below you can see that waiting with a pending order above the
swat.FRACTALS (for longs and below for shorts) is also a valid approach.
But once again, we will explain how to use the swat.CANDLES for entries depending on the
3 different approaches (waves, discretion, rules) in step 6.

What time frames?

The swat.CANDLES can be used on ALL time frames. In the examples above I only showed 4
hour charts but it really does not matter whether it is a 5 minute, 15 minute, 30 minute, 1
hour, 4 hour, daily or weekly chart because the swat.CANDLES will work just as effectively.

That said, there are some minor differences:

● 5-15-30 minute charts: intraday price volatility is important. If the price chart is
moving too slow, then breakouts will not work that well as the price runs into
support or resistance.
● 1 and 4 charts: ideal for swing trade setups.
● Daily and weekly charts: not as many setups appear because these time frames are
slower.

When do the swat.CANDLES appear?

This depends on the candle close in relationship with the 34 ema high and low.
1. A candle close above the 34 ema high creates a blue swat.CANDLE.
2. Whereas a candle close below the 31 ema low creates a red swat.CANDLE.
3. A close in between the 34 ema high and low creates a grey swat.CANDLE.

Why the 34 ema zone?

First of all, these levels are also based on the Fibonacci sequence levels.

Second of all, famous traders such as Raghee Horner have been using them and
recommending them. Listening to well known traders and their tactics will never hurt.

Once traders have pinpointed an interesting setup either via their own discretionary
analysis or via a SWAT strategy, then the swat.CANDLES make it easier to find potential
trade ideas that are based on the logic of MAs (and hence on the logic of waves too).
What about the other basic SWAT indicators?
The basic template is the simplest way of analysing the charts. Besides the swat.CANDLES,
it also includes other indicators.

Here is a full list of SWAT basic indicators:

● swat.CANDLES
● swat.ARROWS
● swat.FRACTALS
● 21 ema high and low
● 144 ema close
● ecs.MACD
● Awesome Oscillator
● HMA 20

The MAs have been intensively discussed in the previous chapter, so no point in repeating
that again. Also the swat.CANDLES have been explained in this step 1. Step 2 will discuss
swat.FRACTALS from A to Z. We highly recommend adding ecs.WIZZ to the basic SWAT
template too, which will be explained in step 3. We will not discuss the ecs.MACD and
Awesome Oscillator (AO) here as the ecs.MACD will be mentioned in step 5 (new SWAT
indicators) and the AO is fully reviewed in step 4. That means we only need to explain
swat.ARROWS and the HMA 20 in this step 1.

swat.ARROWS
The swat.ARROWS can also be used in the same way for entries. The Arrow indicator,
however, will offer quicker setups than the swat.CANDLES, which is why it is best used
when the market is very impulsive. In that case, the price is not building a strong enough
retracement and therefore not offering any setup via the swat.CANDLES. That is when the
Arrow could help out (purple boxes).

Personally I do not often use the swat.ARROWS for setups (although it could be used for
that with wave and discretionary strategies) but I personally like to use the indicator as a
confluence and confirmation for trading swat.CANDLES, which will be explained later on
when discussing SWAT rules based strategies in step 6 of this chapter.

That said, the swat.ARROWS can be a good way to enter a trade if the momentum is very
strong and a larger pullback (grey or opposite colored candles) do not appear. Here is one
more example in the image below.
HMA 20
The HMA is a type of moving average. It’s called the Hull Moving Average and was
developed by Alan Hull. It is an extremely fast and smooth type of MA. In the SWAT
method, the HMA 20 is a quick MA that is used for understanding the short-term
momentum. Other MA types that can replace the role of the HMA 20 in some way are the 5
ema and 8 ema for instance.

The HMA is great because it’s an early indication of momentum restarting or ending.
Momentum restarts when the angle of the HMA 20 aligns itself with the trend:

● Downtrend = 21 ema below 144 ema → HMA turning from bullish to bearish =
alignment
● Uptrend = 21 ema above 144 ema → HMA turning from bearish to bullish =
alignment
Momentum (temporarily) ends when the angle of the HMA 20 goes into the opposite
direction of the trend. Here is how it works:

● Downtrend = 21 ema below 144 ema → HMA turning from bearish to bullish =
counter alignment
● Uptrend = 21 ema above 144 ema → HMA turning from bullish to bearish = counter
alignment

The HMA can be used as a filter to avoid setups that are not ready yet. If the HMA is not
aligned, then it could mean that the breakout is not yet ready. Let’s take a look at the image
below. The HMA filtered out the 2nd orange arrow from the left and three short setups
remained, all of them doing well but especially the 2nd and third orange boxes from the
left.

Once again, to gain access to the swat.CANDLES,swat.ARROWS, all of the ecs.SWAT

indicators, templates, and files, and the entire ecs.SWAT course, then you need to become
a SWAT member. Go to https://www.elitecurrensea.com/wave-analysis-trading-swat/. First
register your email before completing the process of signing up.

More information about trading SWAT wave, discretionary, and rules based strategies will
be provided later on in this chapter in step 6. For now, let’s continue with explaining more
SWAT concepts. This time we will focus on swat.FRACTALS.

Step 2: use swat.FRACTALS for deeper patterns

The market is fractal in nature, which means that price patterns repeat in a similar way on
all scales (time frames). The fractal concept basically means that the same patterns repeat
over and over again, regardless of the time scale. We will explain the fractal theory in
chapter 12 but for now it’s important to know that the ideas mentioned in this chapter are
valid for most of the financial markets and instruments (with normal price volatility).

Here is a quick definition, however, before we move on: “fractals are never-ending patterns
that are self-similar across different scales. They are created by repeating a simple process
over and over in an ongoing feedback loop, very often seen in nature such as snowflakes,
shells, flowers, crystals, lightening, food (broccoli).”

The Fractal is also an indicator, which can be used to analyse the chart, which is based on
the fractal concept. The Fractal indicator was created by famous trader Bill Williams, who
originally created it for commodity daily charts. He discovered that Fractals with a value of
2 had the most importance and value because the chart was repeating itself in similar
patterns based on that Fractal count.

It was a major discovery because it meant that the financial markets and charts were also
fractal in their character, similar to other objects in nature.

What is a Fractal Indicator?

The Fractal is an indicator that shows repetitive patterns by spotting critical candle highs or
lows, which represent key support and resistance levels. The critical candles are
determined when the candle high or low is the highest or lowest within a group of candles.

A Fractal value of 2 indicates that a fractal will be placed on a candle high and/or low if a
candle has the following characteristics:

1. Highest high of 2 candles to the left and 2 candles to the right.

2. Lowest low of 2 candles to the left and 2 candles to the right.
3. This means that any candle which has a high or low which is the highest or lowest of
a group of 5 candles (middle candle and 2 to the left and 2 to the right) will be a
candle with a Fractal.

There are really no exceptions to this rule:

1. The sequence of the 2 candles to the right or left are not important. The only aspect
that matters is the middle candle versus the 2 candles to the left or right. Whether
 the 2nd most left/right candle from the middle candle is lower or higher than the 1st
most left/right candle from the middle candle is irrelevant.

2. The same rule is applicable for all time frames.

3. A group of 5 candles is the minimum when using a Fractal indicator value of 2 but
there is no maximum. If a candle high or low has 40 candles to the left and/or right
of it that are lower/higher, then this is equally valid as a Fractal.

4. A candle can have both a fractal at the candle low and candle high.

A Fractal indicator with a value of 3, for instance, will place the Fractal on candles once 3
candles to the right and to the left close lower and/or higher than that middle (Fractal)
candle.

Simple said, the Fractal value simply indicates how many candles to the left and to the right
you need before a Fractal candle appears.

Traders can use different Fractal values if their platform allows them to change the value.
At the time of writing this book, the Fractal value used a fixed value of 2 on the MT4
(MetaTrader 4) platform, but it could be changed on some platforms to any value that a
trader prefers.

What Does the Fractal Indicator Show?

The Fractal indicator can be used for:
 1. Finding support and resistance (S&R) levels.
2. Filtering out setups that are close to a Fractal (S&R).
3. Potential breakout, bounce, and reversal trades.
4. Understanding the position of Fractals versus MAs and price action.

Keep in mind that the Fractal value is not equal to where the Fractal indicator is on the
chart. The Fractal is always placed above the candle high and/or below the candle low for
visual reasons (so traders can see it on the chart). The actual Fractal levels, however, is the
candle high or candle low. So when you see a Fractal on a candle, then the Fractal level is
that candle high and/or low:

● A Fractal above the candle indicates that the Fractal level is the candle high of the
candle with the Fractal.
● A Fractal below the candle indicates that the Fractal level is the candle low of the
candle with the Fractal.
Traders can use Fractal indicators as a support and resistance level. The benefit is that
traders can avoid trading into a Fractal S&R, they can trade reversals at a Fractal, or they
can trade the breakouts away from Fractals. Let’s review each of these scenarios one by
one.

Filtering out setups

Filtering setups is best done on a higher time frame. If you trade on a H1 chart, then using
H4 or daily charts for filtering out setups makes most sense. Generally speaking using
Fractals from higher time frames such as daily, weekly, or monthly for filtering out setups is
best. When a breakout trade setup is too close to such a S&R level, then avoiding the setup
could make sense.
The image above shows how a bullish breakout is best to skip when taking into account
that price is running into resistance Fractals and that the 21 ema zone and 144 ema close
are bearishly aligned.

Reversal setups

Fractals offer S&R and thus they can also be used for potential reversal setups as well. The
image above shows how price breaks above a resistance fractal and 21 ema zone for a
move up towards the 144 ema close.

Breakout setups
Fractals can also be used for breakout setups when price breaks or closes above/below a
Fractal level. This can be done on an entry time frame. So if you trade on the H1 chart,
looking for a breakout on the same time frame is OK.

Breakouts can be traded by either placing a pending order beyond the Fractal or waiting
for a candle close to close above the resistance or below the support level of the Fractal. A
breakout candle is also stronger if price closes near the candle high or candle low (of the
breakout candle).

Fractal Position versus MAs

The Fractal indicator can be used for understanding the market structure in more depth.
We already discussed how you can analyse the charts in more depth by reviewing MAs
versus MAs, price versus MAs, and the angle of MAs.

Fractals versus MAs also provide useful information:

1. The trend is even stronger if the support Fractal is above the 21 ema low in an
uptrend and the resistance Fractal is below the 21 ema high in a downtrend.

2. The market is offering a good breakout spot if the fractal is in or close to the 21 ema
low in uptrend and in or close to the 21 ema high in downtrend.
3. If the Fractal is far away from the 21 ema zone (in the opposite direction of trend),
then this could be a signal that the trend is strong but a retracement is certainly
likely..

4. Fractals at the 144 ema also often indicate key bounce of break spots for trend
continuation or reversal.
swat.FRACTALS and Levels
So far, we explained what the Fractal indicator is and the general use of Fractals on the
chart. Now it’s time to explain how we use the Fractal indicator plus also provide more
explanation about our own custom built proprietary swat.FRACTAL indicator.

In our view the key Fractal level for the Forex market is 5 or 6 (max 7) and not 2. Although
the Fractal value 2 retains value for all financial markets and charts, for the Forex market
specifically we prefer using the Fractal 5 or 6. The Fractal value 2 does (probably) offer the
most value for daily charts in the stock market and stock indices so it depends what
markets you trade.
The swat.FRACTAL is specifically built for the MT4 platform, although traders can use the
logic behind the swat.FRACTAL on all charts. The swat.FRACTAL uses colors and symbols to
quickly transmit information about the structure of the market. The swat.FRACTAL changes
color and symbols depending on its relationship versus the MAs.

Let’s first explain what information the shape of the Fractal indicator indicates.

● Diamonds indicate trend:

○ Above the candle indicates uptrend.
○ Below the candle indicates downtrend.
 ● Circles indicate bouncing spots within the trend:
○ Above the candle indicates downtrend.
○ Below the candle indicates uptrend.

Also the color of the Fractal indicator offers valuable information.

Diamond in uptrend: a green diamond above a candle indicates Fractals away from 21 ema
zone (see image below):
a) Green diamond indicates uptrend.
b) Light green diamond indicates pullback in uptrend (at least 6 candles failed to break
candle high).
c) Blue diamond indicates either a warning or deeper retracement in uptrend.
Diamond in downtrend: a red diamond below a candle indicates Fractals away from 21
ema zone (see image below):
a) Red diamond indicates downtrend.
b) Pink diamond indicates pullback in downtrend (at least 6 candles failed to break
candle low).
c) Orange diamond indicates warning or deeper retracement in downtrend.

Circles in uptrend: an orange circle below the candle indicates a bigger bearish retracement
because these are Fractals that appear in between the 21 ema zone and 144 ema close (see
image below):
a) Light pink: light pullback in uptrend
 b) Red: light pullback in uptrend
c) Orange: deeper pullback in uptrend

Circles in downtrend: a dark blue circle above the candle indicates a bigger bullish
retracement because these are Fractals that appear in between the 21 ema zone and 144
ema close (see image below):
a) Light/dark green: light pullback in downtrend
b) Light/dark blue: deeper pullback in uptrend
Circles around 144 ema: black and grey circles indicate Fractals around the 144 ema close:
○ Black: first Fractal that is at the 144 ema close (first break attempt)
○ Grey: second Fractal that is at the 144 ema close (retest)

Using the swat.FRACTALS

The swat.FRACTALS help traders understand the structure of the chart quickly because the
indicators convey multiple data points:

● Standard Fractal information (mentioned earlier):

○ Support and resistance levels.
○ Filtering out setups.
○ Breakout spots / trades.
○ Bounce and reversal spots / trades.

● Extra ECS information:

○ Trend:
■ Uptrend:
● Green diamond above candles.
Resistance Fractal in/above 21 ema.
Resistance Fractal within momentum (no 6 candles left/right).
● Light pink/red circles below candles.
 ■ Downtrend:
● Red diamond. Fractal in/below 21 ema.
Support Fractal in/below 21 ema.
Support Fractal within momentum (no 6 candles left/right).
● Light green/blue circles above candles.

○ Pullback:
■ In uptrend: light green diamond. 6 candles failed to break high but
Fractal in/above 21 ema.
 ■ In downtrend: pink diamond. 6 candles failed to break low but put
Fractal in/below 21 ema.

○ Retracement:
■ In uptrend: orange circles below candles:
● Support Fractal after correction (more then 6 candles
left/right).
● Support Fractal above 21 ema but below 144 ema.
 ■ In downtrend: dark blue circles above candles:
● Resistance Fractal after correction (more then 6 candles
left/right).
● Resistance Fractal below 21 ema but above 144 ema.
■ Black or grey circle Fractal around 144 ema remains unbroken and is
used as support for bounce.

○ Reversals:
■ In uptrend: price is breaking below the black or grey circle Fractal
support around the 144 ema.
 ■ In downtrend: price is breaking above the black or grey circle Fractal
resistance around the 144 ema.

Step 3: use ecs.WIZZ for finding the space

How do you know when the price will move impulsively or correctively?

Most traders do not have a specific method or approach for this. They get scared by both
impulsive and corrective price movements. They might close their winning setups too soon
because an impulse just started… Or they might close their trade too late after the
correction already has occurred.
The ecs.WIZZ tool solves this for us and explains how traders can:

1. Identify when the price is likely to behave correctively or impulsively.

2. Understand when the market is in range vs trend territory.

3. Locate key targets.

The benefits of the Wizz concept and tool are of immense value to our trading because of
these following reasons:

1. It warns us when the market is ranging and corrective.

2. It explains to us when the market is trending.
3. We know when to exit for small or average wins when price is in a corrective phase.
4. We let winners run when the price is in an impulsive phase.
5. We are warned when trends become overstretched.
6. We can aim for better targets and stop losses.
7. You can also use your own system as a filter, to avoid bad levels for entries.
8. It allows traders to let winners run and cut losses short.

Pretty impressive right? Before we dive into how Wizz manages to do all that, let me explain
that the ecs.WIZZ concept and tool was created by me (Chris Svorcik) and developed and
improved by both my friend Mislav Nikolic and myself. Mislav has helped to improve and
automate the tool.
All of these Wizz benefits are key concepts in trading but very few explain how to
implement this on real charts. Especially letting the winners run and cutting losses short is
often cited as the main goal for traders but most educators fail to explain how this can be
done from a practical point of view. They only loosely refer to the concept without going
into specifics and practical examples how traders can actually follow the advice. Wizz is
ideal for letting winners run but also knowing when to expect choppiness and corrective
price action.

Speed vs gravity with ecs.WIZZ

Before we explain the details of the ecs.WIZZ idea and what the indicator does, we need to
explain the logic of the idea.

The theory behind the concept itself is simple:

● Once the price is able to move away from the average, then the price is more likely
and able to keep moving with more momentum and away from the averages.
● The closer that price and the 21 ema zone is to the 144 ema, then the more difficult
it is for price to move away from the 144 ema, which in fact works as a sort of
gravity.

You can compare the price to a tennis ball for instance. The more speed the ball has, the
further up it can go up before gravity eventually pulls the ball back down to earth. If the ball
has a low speed, then gravity will kick in quicker.
Price is the same as a tennis ball. Speed is equal to momentum and gravity is the same as
the 144 MA. But how do you measure whether price has enough momentum to pull away
from gravity (the 144 ema close)?

This is the key question. And the answer is based on Fibonacci sequence levels and how far
the price can move away from the 144 ema.

The Fib sequence counting from the 144 ema is a concept that we call ecs.WIZZ.

What is ecs.WIZZ?
The ecs.WIZZ concept is based on how far price can reach certain Fibonacci sequence levels
without returning back to the 144 ema close. The Fibonacci sequence levels are measured
in pips, because the Wizz tool is focused on currency pairs and MT4. But the principle can
be applied to any chart and time frame.

So simply said, the ecs.WIZZ tool is based on the Fibonacci sequence levels. Most traders
use Fibonacci levels, ratios, extensions, and targets to some degree. The Wizz tool however
uses the sequence levels themselves, rather than the ratios, for counting price movement.
Here is a simplified version of how the idea works:

● The Fibonacci sequence levels (called Wizz levels) are plotted with the trend
direction away from the 144 ema (with the 144 ema as the starting point).

● Price is close to the 144 ema: high chance of corrective price action.

● Price has traveled some distance from the 144 ema: high chance of impulsive price.

● Price has moved far from the 144 ema: high chance of corrective price action.
Whether price is considered to be close, some distance, or far from the 144 ema fully
depends on the Fibonacci sequence levels. Luckily, it is a simple concept that all traders can
do manually without any external help. Although our ecs.WIZZ tool does help automate the
entire process because it automatically plots the levels from the valid and current 144 ema
close.

ecs.WIZZ levels with different time frames

Which Fibonacci sequence levels are used? This depends on the time frame but these
numbers are used for anything below the daily chart:

● Wizz 0 = the base of the Wizz and is roughly equal to the 144 ema close.
● Wizz 1 = most recent top or bottom is 13 pips away from 144 ema.
● Wizz 2 = most recent top or bottom is 21 pips away from 144 ema.
● Wizz 3 = most recent top or bottom is 34 pips away from 144 ema.
● Wizz 4 = most recent top or bottom is 55 pips away from 144 ema.
● Wizz 5 = most recent top or bottom is 89 pips away from 144 ema.
● Wizz 6 = most recent top or bottom is 144 pips away from 144 ema.
● Wizz 7 = most recent top or bottom is 233 pips away from 144 ema.
● Wizz 8 = most recent top or bottom is 377 pips away from 144 ema.
● Wizz 9 = most recent top or bottom is 610 pips away from 144 ema.

These numbers are used if price breaks away from Wizz level 9 (above Wizz 9 in uptrend
and below Wizz 9 in downtrend) when looking at time frames below the daily chart:

● Wizz 0 = the base of the Wizz and is roughly equal to the 144 ema close.
 ● Wizz 1 = most recent top or bottom is 55 pips away from 144 ema.
● Wizz 2 = most recent top or bottom is 89 pips away from 144 ema.
● Wizz 3 = most recent top or bottom is 144 pips away from 144 ema.
● Wizz 4 = most recent top or bottom is 233 pips away from 144 ema.
● Wizz 5 = most recent top or bottom is 377 pips away from 144 ema.
● Wizz 6 = most recent top or bottom is 610 pips away from 144 ema.
● Wizz 7 = most recent top or bottom is 987 pips away from 144 ema.
● Wizz 8 = most recent top or bottom is 1597 pips away from 144 ema.
● Wizz 9 = most recent top or bottom is 2584 pips away from 144 ema.

Here is an overview of the levels and how they vary per time frame:

Wizz / time frames Below daily Daily Weekly

Wizz 1 13 pips 89 pips 144 pips

Wizz 2 21 pips 144 pips 233 pips

Wizz 3 34 pips 233 pips 377 pips

Wizz 4 55 pips 370 pips 610 pips

Wizz 5 89 pips 610 pips 987 pips

Wizz 6 144 pips 987 pips 1597 pips

Wizz 7 233 pips 1597 pips 2584 pips

Wizz 8 377 pips 2584 pips 4181 pips

Wizz 9 610 pips 4181 pips 6765 pips

Why are the levels different for lower and higher time frames (when compared to the H1
chart)?

Because a smaller price movement has more effect on a 15 minute chart. Price needs to
move less distance on a 15 minute chart before it hits a critical level because price action is
relative. A 34 pip move on a 15 minute chart is a decent price movement but not for a 4
hour chart.

The same principle is valid for the 4 hour and daily charts. A 144 pip movement is critical
for the H1 chart but not for the daily. For higher time frames, price needs to move 233 pips
(daily) and 377 pips (weekly) before there is sufficient speed to escape gravity (the 144
ema).
The more price moves away from the 144 ema, the more likely it will be able to hit larger
Fibonacci sequence levels (Wizz).

So, how can you interpret those Wizz levels?

● Price is expected to move correctively if price is in between Wizz level 0 and 2

(anything between 0 and 21 pips): corrective phase.
 ● Price is in a grey zone (corrective or impulsive) in between Wizz level 2 and 3
(anything between 21 and 34 pips): range or breakout, which depends on impulse.

● Price is expected to move impulsively once price moves beyond Wizz level 3 and 6-7
(between 34 and 144/233 pips): impulsive phase.

● Price is expected to move with the trend but slower once price moves beyond Wizz
level 6/7 and 8 (between 144/233 and 377 pips): trendinging but corrective (depends
on the pair).

● Price is expected to move with the trend but correctively once price moves between
Wizz level 8 and 9 (between 377 and 610 pips): corrective phase and reversal
potential and price is in reversal territory to move back to 144 ema.

● A break beyond Wizz level 9 indicates the need to reset the Wizz levels. In that case,
the new Wizz level 1 starts at 55 pips (not 13 pips) and old Wizz level 9 becomes new
Wizz level 6. The rest of the Wizz logic remains the same, but not with more
spacious Wizz levels until price hits the 144 ema again (reset of Wizz levels).

Most important is that when price is able to break above Wizz level 3, then usually price has
enough speed to move away from the 144 MA (gravity). If it stays within Wizz level 3, then
the speed is usually low and price often retraces back to the 144 ema (due to the
gravitational forces that pull the price back to the mean or average).

Summarized:
1. Wizz 0-2 → Range
2. Wizz 2-3 → Range - Breakout Zone
3. Wizz 3-6/7 → Impulsive Zone
4. Wizz 6/7-8 → Trend But Can be Slower
5. Wizz 8-9 → Corrective and Reversal Warning
6. Wizz 9+ → Potential Super Strong Trend
How to find the wide open chart spaces
So where is the wide open space on the chart? Where could you expect the price to move
fast and quickly to the target(s)?

The key zone (for 1 hour charts) is between Wizz level 3 and 6-8. This is where traders can
expect quick price action, which is why we call it “wide open space”.

When the price is in this area, It is beneficial to keep the trade open and aim for higher
targets or use a loose trail stop loss on average. Why? Simply because there is a high
chance that the price will move far and quickly.

Then again, we are more careful in other price areas or phases where we will aim for closer
targets because the price is either in a corrective mode or is overstretching itself within the
trend. We can't overemphasize the importance of this information for our trading
decisions.
ecs.WIZZ levels with different pairs
The standard levels are valid for pairs such as the EUR/USD, USD/JPY and AUD/USD, but for
fast (volatile) moving pairs, the levels need to be adjusted.

Volatile currency pairs include the GBP/JPY, GBP/AUD, GBP/NZD, and GBP/USD. We
recommend using the same Fibonacci sequence levels for these pairs but keep in mind that
the pairs are able to push to higher Wizz levels on average.
Where to place ecs.WIZZ indicator exactly
This is how you can calculate which Wizz level price has been reached.

1. Find the spot where price hit the 144 ema close (or come very close to hitting it - see
the next sub paragraph on when to reset the Wizz indicator).
2. Then calculate how many pips the recent top or bottom has moved away from 144
ema (the spot where price last hit the 144 ema - see point 1)
3. Either based on our ecs.WIZZ indicator or via your manual counting, understand
which Wizz level price has reached.

The good news is that you can use our ecs.WIZZ indicator to do this automatically. The
advantage of using the most current version of the ecs.WIZZ indicator is that traders only
need to add the indicator to the MT4 chart and the Wizz levels will be added automatically.

No manual work at all and the ecs.WIZZ indicator does all the work error free as well. Once
the Wizz indicator is attached to the MT4 charts, it shows the Fibonacci sequence levels that
are plotted from the 144 MA:
a. Wizz levels appear above 144 ema in uptrend.
b. Wizz levels appear below 144 ema in downtrend.

If you are using the concept on other platforms (besides MT4) or if you are using an older
version of ecs.WIZZ, there are a couple of points that you can use for starting with the Wizz
levels of placing the Wizz indicator:

1. The Fractal closest to the most recent hit of the 144 ema.
2. The candle high (downtrend) or candle low (uptrend) closest to the most recent hit
of the 144 ema.
3. The 144 ema value itself.

Mislav Nikolic likes to use more precise rules for placing the Wizz tool around the 144 ema:

1. The candle high or low is closest to the most recent hit of the 144 ema.
2. There are a couple of exceptions to the main rule:
A. When a larger candle (over 90 pips) crosses over 144 ema → Wizz base is placed at
the 144 ema itself, rather than at the base of the candle.
B. When a candle of between 80-90 pips crosses over 144 ema and the body of the
candle (open - close) is at least 60 pips → use 144 ema and not high/low of candle.
C. When a full or almost full body candle (with no wick or minimal wick) crosses over
the 144 ema close and the candle is more than 70 pips in total (measured from high
to low) → use 144 ema and not high/low of candle.
 D. If the next candle after crossing over 144 ema close is less than 2 pips from ema →
use that next candle rather then the candle that crosses 144 ema.

When to reset the ecs.WIZZ indicator

The standard idea behind ecs.WIZZ is to use the 144 ema close.

Generally speaking the Wizz base and starting point is only moved or changed when price
hits the 144 ema close. In other words, each time candle hits that ema 144 close, base of
wizz is restarted.
But Mislav Nikolic made an improvement after he noticed that there should be an
exception once price gets close to the 144 ema after a certain period of time.

1. If candle approaches 144 ema close within 10 pips or closer AND after not hitting
144 ema close for 20 candles or more, this is also a new wizz base (even though
price failed to actually make a full hit at the 144 ema close) .

2. When the market creates a price gap which goes over or below the 144 ema, then
we use the base of the new candle after the creation of the gap. For example when
a price gap closes above the 144 ema close and there is no candle that actually
broke through the 144 ema, then we use the low of the candle which created the
gap.
Using ecs.WIZZ indicator as targets
The value of using Wizz is for understanding where traders can find the open space on the
chart and when they can expect impulsive and corrective price action. But ecs.WIZZ levels
can also simply be used as targets. Keep in mind that they are best used in confluence with
other tools and indicators rather than as a stand alone concept.

Here is how traders can use the Wizz levels:

● Below Wizz 3 → Aim for next Wizz level or Wizz 3

● Between Wizz 2 & 3 → Aim for Wizz 3 or breakout at Wizz 4
● Break of Wizz 3 level → Aim for Wizz 4 or Wizz 5
● Break of Wizz 4 level → Aim for Wizz 5 or Wizz 6
● Break of Wizz 5 level → Aim for Wizz 6 or Wizz 7
● Break of Wizz 6 level → Aim for Wizz 7
● Break of Wizz 7 level → Aim for Wizz 8
● Break of Wizz 8 level → Aim for Wizz 9
When to use tops/bottoms or 144 ema close
The standard idea behind ecs.WIZZ is to use the 144 ema close but traders can also use the
top or bottoms for additional targets. They need to use an older version of ecs.WIZZ where
traders need to click on the spot where they want the Wizz tool to start.

● In a downtrend, traders can add the Wizz tool to the top.

● In an uptrend, traders can add the Wizz tool to the bottom.

Traders could also use the tops or bottoms for reversal or retracement targets:
 ● In a downtrend, traders can add the Wizz tool to the bottom for reversal levels.
● In an uptrend, traders can add the Wizz tool to the top for reversal levels.

ecs.WIZZ indicator explained

Although traders can efficiently use this concept without any tool or external help, the Wizz
indicator and Wizz Expert Advisor help reduce any errors by simplifying the process. They
make it a lot easier to immediately see all the correct levels and it’s much faster to remove
and add a new set of levels.

As mentioned before, the ecs.WIZZ indicator automatically plots the levels based on the
144 ema close. The ecs.WIZZ EA is manually placed on the desired spot of the chart
together with the desired direction (up or down). The advantage of having two Wizz tools is
that it can be useful for pinpointing extra confluence.

To summarize: our analysis of the market structure is incomplete without using Wizz
because it immediately informs us of so much information such as:

1. Is the market trending?

2. Will it be impulsive or correction?
3. Is the trend overstretched?
4. What are realistic targets?
5. Should I aim for a small or large profit?
6. Should I use a trail stop loss to catch a bigger win?
Most people advertise their system when it works best. A trending system will work well in
a trend but how will it handle a range? Usually real trouble occurs when a trending system
faces a corrective market. Wizz shows how to detect and avoid this.

Step 4: read the waves via oscillators

We already have mentioned wave patterns and the Elliott Wave Theory a couple of times in
this book, such as in chapter 5. Now it is time to explain how the ecs.SWAT method
approaches the wave count and wave labelling based on the oscillator just as we already
showed how the MAs can be used for waves in this chapter.

Wave analysis is an extra method that traders can use to understand the market structure
of the chart in a deeper way. But it is not a must. Traders can get all of the key information
just from these items:

● MA’s
● ecs.WIZZ
● swat.FRACTALS
● swat.CANDLES
● Price swings and Fibonacci
● Price patterns (chart, time, divergence patterns)
● Trend, trend channels and lines
● Support and resistance

That said, there are strong benefits of using wave analysis. It provides more depth and
information about the expected strength or weakness of a price swing, the expected price
movement (retracement or target), the expected length of a price swing, and the
characteristics of the current and next price swings.

If you are already using price swings and if you are already analysing impulse and
correction, then adding a lighter version of wave analysis is a low bar and easy next step to
complete. Wave analysis is just a matter of analysing previous swings and estimating what
the next swing could be. Analysing price swings is in a way, trying to understand the story
behind price.

Wave analysis usually gets more complicated when traders a) dive into great details about
certain wave counts and outlook and b) trade their wave analysis without any experience.

Using an oscillator is a great short-cut for understanding the most likely wave count and
wave patterns. We use the Awesome Oscillator (AO) or the ecs.MACD for this purpose.

Each wave pattern is accompanied by a specific movement in the AO or ecs.MACD

indicator. Traders can pay attention to the indicator movements to understand what is the
likely wave pattern of the price swing. Let’s review all of the waves and the expected
oscillator behavior for that wave.

Wave 1
The oscillator bars are showing a first stronger push back or away from the middle (zero)
line, often into the opposite direction of the previous swing.Some waves 1 are more
impulsive than others, which in turn will impact the oscillator too. That said, the wave 1 can
also be hidden and sometimes just barely cross the zero line as well. The fact is that waves
1 are often counter trend and therefore more difficult to spot and trade.

A good aspect to keep in mind is that the oscillator should be indicating weakness (and
reversal potential) to the opposite direction (divergence pattern(s)) which means that the
oscillator bars are losing pace and speed. Traders can also zoom into lower time frames to
see whether they can see impulsive wave patterns within the wave 1. A 5 wave pattern
should be visible on a lower time frame both in price and on the oscillator.

Wave 2
Waves 2 should see a shallow retracement back to the zero line. The oscillator bars are not
expected to go far into the opposite direction of wave 1 and will most likely confirm
convergence with the previous bottom. This means higher lows on price and oscillator with
a bullish reversal and lower highs on price and oscillator with a bearish reversal.
Wave 3
Waves 3 are expected to be very strong and the oscillator bars are expected to move away
a large distance from the middle point. The main characteristic of wave 3 is its impulsive
nature, which means that the oscillator bars are powerful. Keep in mind that the wave 3
might become extended and hence you might see several strong pushes away from the
zero line before price retraces back to the middle line. These pushes are part of a larger
wave 3.

Wave 4
Eventually the strong wave 3 will finish but keep in mind that the wave 3 sometimes has
internal 5th wave extensions. This means that the oscillator could push away and stay away
from the middle line for a long time. Eventually a larger retracement will take place and the
oscillator bars will return back to the middle line of the oscillator or even go slightly into the
opposite side of the wave 3. This means that with a bullish trend, the wave 4 oscillator bars
could dip below the 0 line and in a downtrend, the wave oscillator bars could rise above the
0 line. Waves 4 are known to be lengthy in time, which means that the price is likely to go
sideways.

Wave 5
This is the last push in the trend. The oscillator's bars move away from the 0 line but not as
much as the wave 3, which creates a divergence pattern between the tops or bottoms of
wave 5 versus wave 3. Divergence occurs when price makes a higher high but the oscillator
does not.
Wave A
The oscillator bars were already closer to the middle line usually because the trend is
slowing down and usually divergence appears between wave 5 and 3. The first counter
trend move shows impulse as the oscillator bars cross the zero line and keep their speed,
moving into the opposite direction. On lower time frames price could also show a 5 wave
pattern if the ABC correction is a zigzag pattern.
Wave B
A last push with the previous trend but the oscillator bars hardly cross the zero line any
more, which indicates that the old trend is over and a larger ABC correction (or even
reversal) is possible and likely. A lot of trend traders are caught off guard and get trapped
in a wave B trend setup.

Wave C
The wave C continues in the same direction as wave A, which is against the trend and
direction of the 5 impulsive waves. The correction continues via a large 3rd counter trend
push (2nd into the opposite direction). The wave C oscillator bars could be quite strong but
it is not a must.
ABCDE triangle
When a triangle or wedge chart pattern takes place, the oscillator bars will be mostly
hanging around the zero line and oscillating back and forth.

Step 5: using new ecs.SWAT indicators

The ecs.SWAT method has been recently updated and upgraded and we added cool new
indicators that primarily help support our rules based strategies. The new SWAT indicators
are also a welcome help with the wave strategies and discretionary setups. Let’s review
them all one by one!

ecs.MACD

The ecs.MACD has already been used in most of the images but now this oscillator has
been officially added to the SWAT approach. Originally the indicator is from Nenad and his
ecs.CAMMACD method. But Nenad had no objections with ecs.SWAT using the same
oscillator for its approach. So a big thanks to my friend Nenad! Now ecs.SWAT traders can
also use the benefits of this great oscillator. It does a wonderful job of showing trend,
momentum, and pullback.

Trend: the ecs.MACD lines are a great way of spotting the trend. Once they both cross the
middle line, then a new trend is often starting.

● Both lines above the middle line indicates uptrend (left side chart below).
● Both lines below the middle indicate downtrend (middle and right side chart below).
Momentum: the ecs.MACD histogram bars indicate momentum or correction.

● Thick bars indicate momentum:

○ Blue bars confirm bullish impulse (green box image below)
○ Red bars confirm bearish impulse (purple boxes image below)
● Thin bars indicate a correction:
○ Blue bars indicate a bearish correction or a reversal (orange box image
below)
○ Red bars indicate a bullish correction or a reversal (dark red box image
below)

Pullback: the ecs.MACD histogram bars regain their thickness, which means they change
from thin to thick. This could indicate a shallow pullback and potential continuation of the
momentum and/or trend.

● From thin blue to thick blue (blue arrow in the image below)
● From thin red to thick red (red arrow in the image below)
Retracement: the ecs.MACD can also pinpoint the end of the deeper retracements. To help
spot these moments, we actually created a new indicator that is developed based on the
ecs.MACD. This indicator is called swat.PULLBACK. More on that is explained in the next
segment.

swat.PULLBACK

The swat.PULLBACK is based on the ecs.MACD. It appears when a specific combination of

events takes place that indicate the end of a deeper retracement within the trend.

1. First of all, both of the two MACD lines need to have crossed from one side to
another:

a. Uptrend: both lines crossed from below the middle line to above → change
from downtrend to uptrend.
b. Downtrend: both lines crossed from above the middle line to below →
change from uptrend to downtrend.

2. Then the histogram bars need to cross to the opposite side to indicate the deeper
retracement:

a. Uptrend: MACD lines are above middle line → histogram bars go from thin
blue to thick red.
b. Downtrend: MACD lines are below the middle line → histogram bars go from
thin red to thick blue.
 3. The histogram bars then lose their opposite momentum to signal that the
correction could be finished and a trend continuation might take place:

a. Uptrend: histogram bars go from thick red to thin red.

b. Downtrend: histogram bars go from thick blue to thin blue.

4. When the first 3 steps occur within the ecs.MACD indicator, then the swat.PULLBACK
indicator comes into action and it places a diamond on the price chart to signal /
indicate / confirm that a deeper retracement has occurred:

a. Uptrend: dark blue diamond blue the candle low of the signal candlestick.
b. Downtrend: dark red diamond blue the candle low of the signal candlestick.

The good news? All of this is done automatically by the swat.PULLBACK indicator.

The swat.PULLBACK diamond can be used in various ways:

1. It supports my potential entries with swat.CANDLES.

2. It can even be used for a stand alone entry.
3. It gives discretionary information about the end of the pullback.

From my experience I can say that the 21 ema zone is a key factor whether the
swat.PULLBACK diamond is worth trading as a stand alone signal. If the candle is unable to
break above the 21 ema zone with a bullish diamond or unable to break below the 21 ema
zone with a bearish diamond, then the price is often lacking the impulsiveness needed for a
continuation.
Another factor is the relationship of the 21 ema zone versus the 144 ema close. If the 21
ema zone (high or low) is hitting the 144 ema close then this is considered to be a type of
range or corrective zone, which is not beneficial for a pullback and trend continuation
scenario. This is why the swat.PULLBACK diamonds are less viable and not used when the
21 ema zone is touching the 144 ema close.

swat.CS-DOTS

One of the main weaknesses with the standard, traditional ecs.SWAT approach is that the
new red and blue swat.CANDLES are vulnerable to deeper retracements or reversals. What
I mean is that price looks to continue with the trend by breaking the 21 ema zone after a
retracement but the breakout fails as price builds a deeper retracement or even reversal.
Do not misunderstand me, not all breakouts fail or turn out to be false breakouts but it
does certainly lower the overall chance of success.

This where and when the swat.CS-DOTS do their magic. They help locate areas where price
is likely to make a failed breakout. The CS-DOTS (6 dotted grey lines in image below
indicated by purple arrows) are a powerful filter for skipping weak breakouts and for
catching strong with the trend setups.

If price is able to break above or below the CS-DOTS, then it increases the odds of a
sustainable breakout. A failure to break the CS-DOTS indicates a more risky breakout.
You might be wondering how the swat.CS-DOTS are calculated?

The CS-DOTS were created by myself, Chris Svorcik. I selflessly named the indicators after
my initials (CS), which is why they are called CS-DOTS. :) It could be that the concept already
exists somewhere in a similar or same form as it is always difficult to create something that
is truly unique.

The logic behind the CS-DOTS is that price creates a wave of support or resistance into the
future. The idea is similar to the Ichimoku indicator that also creates a cloud of future
support and resistance via the Kumo cloud and the historical trail left behind via the Chikou
Span. The CS-DOTS are plotted in the future at various intervals, which creates a ripple
effect of price. The most recent price has the most impact on the current price. The impact
of price action from the past slowly fades away the further back a trader looks.
The swat.CS-DOTS indicator offers a series of 3 lines. I add the CS-DOTS indicator twice
which means that there are a total of 6 lines (two times three). The CS-DOTS indicator can
be changed in two different ways:

1. Number of candles before:

a. I use numbers that are based on the Fibonacci sequence, similar to the
ecs.WIZZ concept and also the choice of the moving average numbers.
i. 3 candles back
ii. 8 candles back
iii. 21 candles back

2. Shift back or forward

a. The price from step 1 is either shifted forward or backwards. Here are the
settings I use:
i. Indicator 1
1. Shift +1
2. Shift +2
3. Shift +4
ii. Indicator 2
1. Shift +3
2. Shift +8
3. Shift +21

The CS-DOTS are calculated on the average of each candle, which is calculated by taking the
halfway mark of the candlestick in question. This is done to get a better idea about the
volatility of price movement rather than just the highs and lows.
The CS-DOTS shows a history of price which is projected into the future. Price creates a
shadow into the future which acts as support or resistance. It works great for identifying
weak or strong breakouts. Let me show you how I use it for this purpose: a new red or blue
candle needs to be accompanied by a break above or below all of the six CS-DOTS lines. If
one or more of the DOTTED lines remains unbroken, then the CS-DOTS indicator is still
effective as support or resistance.

The effect of the indicator is that it offers multiple dynamic support and resistance levels
which have a ripple effect that creates price waves into the future. Past price is projected
into the future.

The swat.CS-DOTS indicators are used for the rules based method of trading, but can of
course also be used in discretionary trading.

swat.IMPULSE

One of the ecs.SWAT ideas is to wait for price to move away from the 21 ema zone. With
“move away” I mean that neither the candlestick low or high are hitting space between the
21 ema high or low. Why is this important? Because when price action is pulling away from
the 21 ema zone, then the price is likely building impulsive price action.

The momentum is even stronger if 5 candlesticks in a row are able to pull away from the 21
ema zone. The more candlesticks that are not hitting the 21 ema zone, the stronger the
impulse in fact is. The momentum is again stronger when 10, 15 or 20 candlesticks are not
hitting the 21 ema zone.
The swat.IMPULSE indicator helps traders by automatically showing when and where 10
and 15 candlesticks have not hit the 21 ema zone. It provides this warning by adding a
diamond on the chart, once with 10 candles and once with 15 candles.

The swat.IMPULSE indicator does this for both bullish and bearish momentum, which
means when candles are above and below the 21 ema zone.

● Bullish momentum on the same time frame:

○ First green diamond is below the 10th candlestick (not hitting 21 ema zone).
○ Second green diamond is below the 15th candlestick (not hitting 21 ema
zone).

● Bullish momentum on one time frame higher:

○ First dark diamond is below the 10th candlestick (not hitting 21 ema zone).
○ Second dark diamond is below the 15th candlestick (not hitting 21 ema zone).

● Bearish momentum on the same time frame:

○ First pink diamond is below the 10th candlestick (not hitting 21 ema zone).
○ Second pink diamond is below the 15th candlestick (not hitting 21 ema zone).

● Bearish momentum on one time frame higher:

○ First purple diamond is below the 10th candlestick (not hitting 21 ema zone).
○ Second purple diamond is below the 15th candlestick (not hitting 21 ema
zone).
swat.OSCILLATOR

The swat.OSCILLATOR indicates the difference between the current previous candle close
and a “x” number of candles back. There are three lines that make this comparison with 3
different moments in the past. The values used are again based on the Fibonacci sequence
levels: 5, 13, and 34.

This means the swat.OSCILLATOR is automatically plotting 3 lines which show the
difference between the current price and 5, 13 and 34 candles ago. The short-term (5) line
is bright green, the medium-term (13) is blue and the long-term (34) is purple.
What kind of information can traders get from this indicator:

● The trend direction:

○ Lines above the middle line indicate uptrend.
○ Lines below the middle line indicate downtrend (orange box).

● The alignment between the swat.OSCILLATOR lines:

○ Uptrend: purple above blue above green indicates full trend alignment
○ Downtrend: green above blue above purple indicates full trend alignment
(dark red box)

● The angle of these lines:

○ Bullish angle is bullish momentum.
○ Bearish candles have bearish momentum.

At this moment the swat.OSCILLATOR is used as a discretionary indicator and it has no role
in a specific strategy setup.

swat.CANDLES-MTF

This indicator is a practical way of getting more information from different time frames
without having to zoom out and change the settings. Rather than having to check one time
frame higher to see whether price is confirming a swat.CANDLE or not, this indicator
automatically adds that information on the current time frame.

The swat.CANDLES-MTF is added via a star on the chart:

● Green star below the candle indicates a bullish (blue) swat.CANDLE on a higher time
frame.
● Golden star above the candle indicates a bearish (red) swat.CANDLE on a higher
time frame.
For instance, if a green star appears on the 1 hour chart, then this means that swat.CANDLE
closed on the higher time frame which is the 4 hour chart. A swat.CANDLE indicates
momentum which is useful information to have and use.

Here is how it works when a star appears on a time frame:

● Weekly chart → swat.CANDLE on monthly chart

● Daily chart → swat.CANDLE on weekly chart
● 4 hour chart → swat.CANDLE on daily chart
● 1 hour chart → swat.CANDLE on 4 hour chart
● 30 minute chart → swat.CANDLE on 4 hour chart
● 15 minute chart → swat.CANDLE on 1 hour chart
● 5 minute chart → swat.CANDLE on 15 minute chart
● 1 minute chart → swat.CANDLE on 5 minute chart

The swat.CANDLES-MTF only appear when NEW swat.CANDLES appear on a higher time
frame, which means that there was a grey or opposite color prior to the new candle:

● Grey or red → then shows a first blue one.

● Grey or blue → then shows a first red line.

The swat.CANDLES-MTF will confirm the first three swat.CANDLES in a row and then stop.
So if there is a series of 20 blue or red swat.candles in a row then the swat.CANDLES-MTF
will show the first three on a lower time frame.
swat.FRACTALS-MTF

The swat.FRACTALS-MTF also offers help with providing information from multiple time
frames just as the swat.CANDLES-MTF. The swat.FRACTALS-MTF does this for the
swat.FRACTALS using the same time logic:

● Weekly chart → swat.FRACTAL on monthly chart

● Daily chart → swat.FRACTAL on weekly chart
● 4 hour chart → swat.FRACTAL on daily chart
● 1 hour chart → swat.FRACTAL on 4 hour chart
● 30 minute chart → swat.FRACTAL on 4 hour chart
● 15 minute chart → swat.FRACTAL on 1 hour chart
● 5 minute chart → swat.FRACTAL on 15 minute chart
● 1 minute chart → swat.FRACTAL on 5 minute chart

The swat.FRACTALS-MTF are indicated by different symbols. Here is how it works:

● Dark blue diamond: the candle with the diamond is the low of a support fractal on a
higher time frame.
● Dark blue square: the candle with the square indicates when the support fractal has
been confirmed on a higher time frame.
● Red diamond: the candle with the diamond is the high of a resistance fractal on a
higher time frame.
● Red square: the candle with the square indicates when the resistance fractal has
been confirmed on a higher time frame.
The main benefit of this indicator is the ease of getting more information about critical
support and resistance levels from multiple time frames without having to change the time
frame that you are watching.

swat.STRENGTH

Last but certainly not least is the swat.STRENGTH indicator, which indicates relative
strength and weakness of currencies versus each other. The main idea behind the indicator
is to find a currency pair which is matching the relative strong versus the relative weak
currency. That particular currency pair is likely to see the most movement.

This is one of the major advantages of trading currency pairs and the Forex market
because traders can focus on the currency pair(s) that have the most expected price
movements. This is especially valid when a strong currency is paired with a relatively
weaker one, which will typically be (one of) the fastest moving currency pairs.
The swat.STRENGTH indicator does that by comparing eight currencies with each other.
The indicator includes:

● USD
● EUR
● JPY
● GBP
● CAD
● CHF
● AUD
● NZD

These 8 currencies can form (if my math is correct) 28 different currency pairs.

The swat.STRENGTH indicator calculates the total strength or weakness of each currency by
analysing its relative strength or weakness against each of the other 7 currencies. The
swat.STRENGTH indicator does that on the basis of price and moving averages. Here is how
the indicator does the math:

1) Price versus the 21 ema zone:

a) Candle close above the 21 ema high = +1 point
b) Candle close between the 21 ema high and low = 0 points
c) Candle close below the 21 ema low = -1 point
d) Example: EUR/USD → the EUR/USD is above the 21 ema high → +1 point
means +1 for the EUR and -1 for the USD.
e) Example: GBP/USD → the GBP/USD is below the 21 ema low → -1 point
means -1 for the GBP and +1 for the USD.

2) 21 ema zone (high and low) versus the 144 ema close:
a) 21 ema zone is above 144 ema close = +1 point
b) 21 ema zone is hitting 144 ema close = 0 points
c) 21 ema zone is below 144 ema close = -1 point
d) Example:USD/JPY → the USD/JPY 21 ema zone is below the 144 ema close →
-1 point means -1 for the USD and +1 for the JPY.
e) Example: GBP/AUD → the GBP/AUD 21 ema low is above the 144 ema close
→ -1 point means +1 for the GBP and -1 for the AUD.

The indicator automatically calculates both of the above factors for all currency pairs of
these 8 currencies. By analysing the winner of price vs the 21 ema and the relationship of
21 ema zone vs 144 ema close, the indicator gives an update on the currency that is
relatively strong, neutral and weak. How does the indicator do that?
Basically the indicator counts all of the points for each currency in all of the 7 currency
pairs for one particular time frame. The currency then receives a total score for that time
frame.

● The max bullish score is +14 if a currency is bullish against all other currencies,
because each currency pair can generate a max of +2 points (1 for price vs 21 ema
and 1 for 21 ema vs 144).

● The max bearish score is 114 if a currency is bearish against all other currencies,
because each currency pair can generate a max of -2 points (1 for price vs 21 ema
and 1 for 21 ema vs 144).

● The score can also be anywhere between +14 and -14 as well.
○ A score of 0 means that the currency is neutral with equal strength and
weakness.
○ A positive score indicates that the currency is relatively stronger than weaker.
○ A negative score indicates that the currency is relatively weaker than
stronger.
○ The higher the score, the stronger the currency is.
○ The lower the score, the weaker the currency is.

● Currencies can also be compared with each other:

○ A currency with a higher score is more bullish than a currency with a lower
score.
○ A currency with a lower score is more bearish than a currency with a lower
score.
○ The best is to find a currency that is strongest and match it with a currency
that is weakest. That currency pair could be interesting because it matches
strong and weak with each other.

The swat.STRENGTH analyses the score of all 8 currencies on 4 different time frames: 15
minute chart, 1 hour chart, 4 hour chart, and daily chart. The indicator allows traders to
change the time frames and choose TFs of their choice but these 4 time frames are the
standard levels used when applying the indicator to the chart.
The swat.STRENGTH indicator also shows the history of the relative strength and weakness
of each currency and time frame. The most recent moment in history is on the left, which is
indicated by 1 and indicates the value of a currency 1 candle ago. There are 5 moments
where the score is calculated. The standard levels are: 1 candle ago, 5 candles ago, 10
candles ago, 20 candles ago, 30 candles ago. These levels can be changed to different
values by editing the indicator.

All in all, the swat.STRENGTH indicator shows which currencies are strong or weak by
automatically calculating the values of price vs the moving averages for 8 currencies, 4
different time frames, at 5 different moments in history. The end result is a heat map of
currencies that are strong, neutral and weak at different moments. The heat map adds a
color at and above +7 for strong and at and below -7 for weak to provide an easy visual
reference for strong and weak currencies.

Step 6: ecs.SWAT strategies

The ecs.SWAT method offers different ways to trade the path of least resistance, the
market structure (charts), and the trader’s expected road map of price.

Here is an overview of the different approaches:

1. Rules based strategies

These approaches are fully rules based. The strategy explains how and when to
trade and when not to without the need for any discretionary choices.

2. Discretionary strategies
Traders can combine any and all of the concepts, tools, and indicators to make a
case-by-case judgment. The first step is to do complete analysis first and then look
for trades if the chart is interesting.
 3. Wave strategies
Three with the trend and two reversal trades setups are offered as a way to trade
the impulsive waves 1, 3, and 5 plus waves A and C.

Each approach has its own pros and cons:

● Rules based strategies are good for beginners and intermediate traders but equally
usable for everyone including traders with experience and traders that like to trade
patterns.

● Discretionary strategies intended for advanced traders.

● Wave strategies are logically especially useful for Elliott Wave traders who are
looking to simplify their trading.

In step 1 we mentioned SWAT Basic. This is basically a simple version that can be used for
all 3 approaches. It has few rules (but not that many), which make it profitable as a fixed
strategy. It can also be used for discretionary trading and for wave trade ideas.

That said, by adding indicators (steps 2-5) and rules (step 6) to SWAT basic, we are able to
improve the expected profitability, making it a better fixed strategy. This is what we call
SWAT Classic. We have more fixed strategies that we explain once you become a SWAT
member.

Let’s review some examples of SWAT basic entries based on swat.CANDLES.

Discretionary traders do not necessarily need to wait for the swat.CANDLES to appear,
although they can. Discretionary strategies have more freedom to decide from a case to
case basis. Here are some examples of entries based on discretion:
All 3 types of approaches will be discussed in this part. Both discretionary and rules based
strategies will be added after going through the wave approach first.

Approach 1: Wave strategies

There are three with the trend strategies and two reversal setups based on the waves. As
you can see, the strategy ideas are either with the trend setups or reversal setups.

Range trades are not usually the type of trades that ecs.SWAT method focuses on... But
traders could trade within a range by zooming into a lower time frame and trading a
bounce or zooming out to a higher time frame and trading the breakout.

Once again, the wave strategies are most useful for traders that know or are learning the
Elliott Wave Theory and want a simple method to trade those waves. If you are a beginner,
then it could be better to first start with rules based SWAT strategies but taking a look at
the information below will be useful in any case.

Trend 1: 21 ema bounce and break via swat.CANDLES/ARROWS

Once price has moved away from the 144 ema, the trend can often be strong enough for
price to stay away from the 144 ema for a while (and move towards higher Wizz levels). But
that does not mean that price will not make any pullback within the trend. In fact, pullbacks
occur regularly within a trend and these are great moments to look for with the trend
setups at a discount (pullback).
Usually price will retrace back and into the 21 ema and then will bounce away from the 21
ema zone for a trend continuation. The 21 ema bounce is a great zone for the trading the
break, pullback, and continuation (BPC) within the trend - the image below shows a few
examples (orange boxes).

The 21 ema zone is often where a wave 2 or wave 4 pattern is completed of a smaller wave
(price swing) degree whereas a bounce at the 144 ema (the next trend 2 strategy) is also a
wave 2 or wave 4 of a higher degree.

The main danger is that the correction is not yet completed and that a larger corrective
pattern could take place. The first breakout is therefore always accompanied with more
risk. See the part on rules based strategies for ideas how to avoid breakouts with lower
probability.
Now let us summarize our preferred methods for trading the 21 ema bounce:

1. New swat.CANDLE upon breakout away from 21 ema zone with the trend.
If strong momentum is present, then swat.ARROW can work well too.

2. New swat.CANDLE upon breakout away from 21 ema zone with the trend on 1 time
frame lower.
Generally speaking, the 2nd breakout is more successful than the first breakout attempt
because price can make a retracement after the breakout.

The disadvantage of waiting for a 2nd breakout and not trading the 1st breakout is that
price moves away from the 21 ema without any retracement and hence, traders might miss
the setup. Sometimes splitting the risk on both entry types can be a useful alternative.
Trend 2: 144 ema bounce via swat.CANDLES/ARROWS

Waiting for a bounce at the 144 ema with the trend is the second way of trading with the
trend. When price bounces at the 21 ema zone, then this is considered to be a shallow
pullback but price also makes deeper pullbacks within the trend. The ecs.SWAT method
uses the 144 ema close for this purpose.

Usually this is done on the trend time frame or entry time frame (usually one below trend).
For instance, if you are using the H4 chart for trend and H1 chart for entries, then looking
for a bounce at the 144 ema on either the H4 or H1 charts make sense.

The 144 ema is a key level for the trend. A bounce at the 144 ema indicates trend
continuation whereas a break in the opposite direction could indicate a reversal. With the
trend, price usually retraces to and bounces at the 144 ema for a couple of times but
eventually price will break and establish a potential new trend. The image below shows
how price is bouncing at the 144 ema close for more downside.
There are a couple of ways how to trade at the 144 ema, which is best done by:

1) New swat.ARROW after bounce at 144 ema. This is considered to be a more

aggressive approach because the Arrow usually appears earlier than the
swat.CANDLE.

2) New swat.CANDLE after bounce at 144 ema. This is considered to be a more a bit
more cautious approach when comparing swat.CANDLE.
3) New swat.CANDLE or swat.ARROW upon breakout away from 21 ema zone with the
trend on 1 time frame lower.
 4) Waiting for a fractal or time pattern to confirm a bounce at the 144 ema close. When
price has confirmed a Fractal at the 144 ema, then this could indicate a pivot and
turn back into the trend direction. A confirmed Fractal (2 candles left and right)
helps recognise that. Another way is to wait for a time pattern, which is 5 to 6
candles not breaking above the top or bottom of the retracement. This also could
indicate the end of the counter trend price movement.

Trend 3: 144 ema break via swat.CANDLES/ARROWS

Trading the breakout of the 144 ema is half a reversal and half with the new trend.
Eventually trend directions change and the best way for measuring that is by using the 144
ema again. A bounce at the 144 ema indicates a potential trend continuation but a break of
the 144 ema could indicate a reversal and new trend or a transition into a range period.

How do we recognize when price is building a new trend or range?

● A new trend occurs when price is pulling the 21 ema into the opposite side of the
144 ema.
○ 21 ema was below 144 ema but now 1 ema is crossing above 144 ema →
change from down to uptrend.
○ 21 ema was above 144 ema but now 1 ema is crossing below 144 ema →
change from up to downtrend.

● A range often occurs when price does not have sufficient momentum to move the
21 ema zone away from the 144 ema. Once the 21 ema goes flat and starts to move
sideways around the 144 ema, then a range zone is likely. This is even more likely
when the very long-term 610 ema is near to the 21 ema and 144 ema.

Trading the break can be done in a similar fashion as the trading the bounce at the 144
ema but there is a key difference:
● The 21 ema zone must be hitting or crossing the 144 ema
OR
● The 21 ema zone must have made a full cross-over. Keep in mind that a full
cross-over is not a must.
○ Previous trend is up: 21 ema must be in the 144 ema or below it for a new
bearish trend and short setups.
○ Previous trend is down: 21 ema must be in the 144 ema or above it for a new
bullish trend and longsetups.

The 21 ema crossover the 144 ema is not an entry but does indicate a potential trend
change and is the first moment to trade with the new trend direction. But if the moving
averages have not crossed then the trend has not changed yet. Let me explain with
examples:
● If a short setup takes place when the 21 ema is above the 144 ema close (still
uptrend), then this does not qualify as a trend setup but is considered a reversal.
● If a long setup takes place when the 21 ema is below the 144 ema close (still
downtrend), then this does not qualify as a trend setup but is considered a reversal.

If a trend change is taking place, then the same candles and arrows can be used:
1. New swat.CANDLE/ARROW upon breakout from 21 ema zone with the new trend
direction.
2. New swat.CANDLE/ARROW upon breakout from 21 ema zone with the trend on 1
time frame lower.
What if price breaks a fractal that is beyond the 144 ema?

Technically speaking, it is still called a reversal. However, a Fractal breakout which has good
momentum before it does often work out well. The old trend is often over and the
breakout into the opposite direction indicates the potential start of a trend in the opposite
direction. Officially not a trend setup but usually this occurs at a spot where price is very
close to switching trends.
Reversal 1: move back to 21 ema via candlesticks

Traders can also trade reversal trade setups. Trend setups are some type of wave 1, 3 and
5 whereas the reversal trades are either a wave A or wave C. The first price movement back
to the 21 ema zone is a wave A.

Personally I am not a fan of trading reversals and I rather wait for trend setups to arrive.
However, I do occasionally trade reversals when multiple factors align themselves. If a
confluence of factors make a reversal likely, then I would consider a reversal setup. But I
am very critical and careful before trading reversals because often these types of reversal
setups tend to be mediocre trades or even failures. Only a few of them tend to do really
well, but if you are lucky enough to catch a reversal and hang on to a decent target, then
the rewards can be quite interesting. My advice: choose your battles and entry spots
carefully, otherwise why not trade with the trend and momentum because it’s less
headache.

The first reversal setup is to trade back to the 21 ema zone, which is also the main target as
well. The 21 ema zone is a typical bouncing spot for a wave B correction.

The best reversal setups have plenty of space between price and the 21 ema zone. The best
moment to trade the first reversal price is when the price has extended away from the 21
ema and a reversal or retracement becomes more likely. Generally speaking, a reversal
becomes more likely if:

a) Momentum is running out of steam

b) Price is hitting a key support or resistance zone
c) Divergence pattern appear
 d) Multiple divergence patterns appear on the same and/or multiple time frames

The most direct way of trading this first reversal is by waiting for a clear reversal candlestick
pattern after a decent impulse of candles (at least 5-6 candles). The image below shows two
such setups (green boxes at spots a and c).

The “a” setup (image above) has a lot of space to the 21 ema but price makes a correction
and only moves up slightly. Price eventually does reach the 21 ema zone (spot b) but only
because the MAs move down lower as price corrects.

The 2nd setup (green box at spot c) does not have much space to the ema but this setup
worked out better due to the presence of divergence between the recent bottoms. Price
made it almost to the 144 ema close in just a couple of candles.

The entry can be done upon:

● Candlestick close
● Break of the candle high (long setup) or low (short setup)
● Retracement of the candlestick pattern

Traders can also zoom into one time frame lower and wait for price to break the 21 ema
zone into the expected reversal direction. So if I am looking for a reversal against the
uptrend on the 4 hour chart, then looking at the 30 or 60 minute chart for a bearish
breakout below and close below the 21 ema zone could be a potential way of entering too.
The opposite is valid for a bullish reversal (price breaking above 21 ema zone for move
against the downtrend).
Reversal 2: move back to 144 ema via swat.CANDLES

Reversal number 1 is the very first push back against the trend. This is like the wave A of an
ABC correction. The 2nd reversal is when the price is also able to break away from the 21
ema and go back to the 144 ema. Price is in this case entering the space between the 21
ema and 144 ema. An ecs.ARROW or ecs.CANDLE could confirm the potential trade setup.

It is important to keep in mind that the space between the 21 ema zone and 144 ema is
large enough. If they are too close to each other, then it could be better to skip the trade.

Stop Loss and Targets for Wave Trades

The stop loss can be placed at various levels:

1) Using the candle high or low if there is a strong and large candle.

2) Using the opposite of the 21 ema zone if the angle of the 21 ema zone is aligned
a) Bearish 21 ema zone: use 7 pips buffer above 21 ema high
b) Bullish 21 ema zone: use 7 pips buffer below 21 ema low

3) Using the swat.FRACTAL that is outside of the 21 ema zone:

a) Resistance Fractal above the 21 ema high for short setups
b) Support Fractal below the 21 ema low for long setups

4) Using two Fractals away rather than the nearest Fractal. This indicates a stronger
level because there are 2 Fractals standing in the way.
 5) Use Fractal of higher time frame. This is a stronger level as it's a S&R from a more
important time frame.

The targets are best aimed at the Fibonacci targets and the ecs.WIZZ levels.

Approach 2: Discretionary setups with ecs.SWAT

The wave trades (trend 1, 2, and 3 and reversal 1 and 2) are more fixed ways of trading
patterns. There are also plenty of discretionary ways of trading the markets. For beginners
and intermediate traders, however, using the swat.CANDLES simplifies the analysis and
allows traders to focus on the moments where traders have a better edge.

Advanced traders can, however, use a mixture of these concepts, tools, ideas, indicators
and other tips to find their own entry spots. This does require more experience, which is
why we emphasize that this approach is best suitable for advanced traders.

How could an advanced ecs.SWAT trader find entries?

Before trades can use the ideas below for finding entries, we need to emphasize that the
very first starting point is analysis. Only if a trader likes a particular chart based on their
analysis can they move on and use these ideas for trades.

● Candlesticks patterns confirming a bounce.

● Breakout of swat.FRACTALS with the trend.

● Time patterns (5-7 candles not breaking for a high or low).

● Candlestick breaks of 21 ema.

● Trend line breaks.

● Fibonacci bounces.
 ● Momentum starts after 3 candles out of the maximum 6 candles .

All of these advanced techniques are discussed in our ecs.SWAT method.

The main aspect however is analysis first, SWAT tools second. So the main focus for finding
trades is based on the analysis of the charts rather than on specific SWAT strategy rules.

Then after the analysis, advanced traders can use multiple SWAT tools, indicators, and
concepts for finding entries - not just the swat.CANDLES.
Analysing the charts for trading purposes, however, takes more time and experience and is
therefore more difficult. We did explain how to perform analysis based on S&R, trend and
momentum, and price patterns, which are the pillars of such analysis. That said, trading
with the SWAT method is for most traders probably an easier step to complete.

I myself have a lot of experience of looking at the markets but I prefer to trade with the
SWAT tools so even advanced traders might prefer to simplify their approach and trading
decisions by using SWAT strategies.

Stop loss approaches for discretionary trading

We gave a rough indication how traders can approach discretionary entries. Generally
speaking, it is important to use a balanced stop loss, which is not based on a fixed number
of pips but rather on the market structure of the chart. A fixed stop loss is just a random
number of pips, which could be at the wrong spot from a technical point of view.

The best stop losses are always placed at candle low/high, fractals, 2 fractals back, candle
low/high of higher time frames, fractal of higher time frames, 2 fractals back of higher time
frames, and the entire top or bottom.

Candle high / low

Fractal

2 Fractals back
Candle high / low of higher time frame

Fractal of higher time frames

2 fractals back of higher time frames / Entire top and bottom

Take profit approaches for discretionary trading

The best take profits are best aimed at Fibonacci levels, ecs.WIZZ leves, Pivot Points,
Support & Resistance, and the average volatility of the instrument.

Fibonacci retracement
Fibonacci targets

Fib retracement and targets

ecs.WIZZ

Pivot Points
Support and resistance

ecs.FRACTALS
Approach 3: Rules Based SWAT Strategies

The ecs.SWAT method offers strategies based on waves (approach 1) and discretionary
(approach 2) trading ideas but we also have strategies that are based on fixed and precise
rules (approach 3). This is our 3rd approach and most applicable for beginning and
intermediate traders but it can really be used by all traders.

The ecs.SWAT method has multiple fixed strategies and we are always working on adding
new ones. There are so many different instruments, time frames, tools, indicators, sub
systems that can be tested and explored - we have an endless list of inspiration and we will
add new (sub)strategies when possible from 1 and 5 minute charts, to 1 and 4 hour charts,
and daily and weekly charts.

We will share one of the methods in this book but not all. To get access to all of the
approaches, please become an ecs.SWAT member. If you want to join ecs.SWAT, then:
1. check out the page with more information here:
https://www.elitecurrensea.com/wave-analysis-trading-swat/

The approach that I will share here is SWAT Classic, which is based on SWAT Basic
(swat.CANDLES) but adds extra SWAT tools and indicators. So SWAT Classic works with the
“red” and “blue” candles too. The benefit of working with these candles is that monitoring
them requires little time and effort.

Only SWAT members will have access to all of the rules, indicators, tools, templates, and
video material. But parts of the SWAT logic itself are explained in these SWAT chapters of
this guide, besides SWAT Pro.
Let’s review some of the rules.

STRATEGY 1: SWAT CLASSIC

There are a) basic rules, b) special rules which depend on the depth of retracement, and c)
ecs.WIZZ rules.

Please note that the rules might seem complicated at the start. But do keep in mind that
the rules can be implemented without analysing the charts first. So its RULES BASED ONLY.

With the waves and discretionary approaches, analysis is a must and needs to be done at
all times first. Then traders can trade the breakout and bounces, swat.CANDLES,
swat.FRACTALS, etc as they like. SWAT Classic focuses only on the rules and SWAT
indicators so it is easier to implement.

When working with fixed rules though, it’s a must to setup clear filters that can work well to
avoid setups with lower probabilities. Once again, SWAT Basic is of course the easiest way
to trade but SWAT Classic improves the accuracy and profitability.

Do not worry if the rules seem difficult at the start. It will get easier with experience.

Let’s start with the basic rules.

Basic Rules
1. The first step is to wait for a new red or blue swat.CANDLE. The idea is to trade a
new price swing with the trend.

Let’s explain again, what is a “new” candle?

a. Grey candles followed by a red or blue candle

(image below shows red candles after grey ones)
 b. Blue candle followed by a red candle (green box image below).
c. Red candle followed by a blue candle (dark red box image below).

2. Although swing trades consist of both counter-trend and with the trend setups, this
particular system is only focused on with the trend setups. Once again, the trend is
defined by using the 21 ema zone (high and low) and 144 ema close.

a. 21 ema zone above 144 ema = uptrend

i. Only looking for long setups / blue candles
b. 21 ema zone below 144 ema = downtrend
i. Only looking for short setups / red candles

c. 21 ema zone hitting 144 ema = dual trend (both trends are possible)
i. Looking for both long and short setups / blue and red candles
d. 21 ema zone hitting both 144 ema and 610 ema = range / stay out
3. Are all entries valid? No, there are extra filter rules that need to be applied which are
based on the swat.CS-DOTS indicator and how deep the price has retraced.
a. Rules with 610 ema close:
i. Skip trade if price has bounced at 610 ema close (dark red box image
below).
1. First approach to 610 ema is ok (purple box image below). First
approach is considered a candle that is candles 1 to 6 after the
breakout.
2. A break, pullback and continuation around the 610 ema is ok
(green boxes).
b. Rules with CS-DOTS indiators:
i. Although a setup can be traded without the break of the CS-DOTS
indicator (orange boxes in image below), we have noticed that the
long-term results are much better when using the CS-DOTS indi as a
filter and only entering once price is beyond the CS-DOTS too (dark
red box in image below).

ii. Aggressive traders can skip the CS-DOTS indicator or traders can
decide on a case by case basis. If they like a setup, they can skip the
CS-DOTS indi (blue boxes in image below).
iii. Moderate traders can take a small risk on the breakout without the
CS-DOTS indicator and add to the trade with the CS-DOTS indi.
iv. Conservative traders can wait for the full breakout when price closes
beyond the CS-DOTS indicator (green box in the image below).
v. If the breakout of the CS-DOTS indicator is more than 40 pips away
from original swat.CANDLE entry, then skip the trade (40 pips on 4
hour chart). This number can be less on lower time frames, we use 25
pips on 1 hour and 15 pips on 15 min. These numbers can vary also
per currency pair as the GBP/JPY, GBP/NZD, and GBP/AUD (add 20
pips) move more than the EUR/GBP, AUD/NZD (deduct 10 pips).
Retracement Rules

Opposite candle in retracement

1. A new swat.CANDLE appears after a retracement takes place that has an opposite
candle included (in that retracement).
2. If price is approaching higher Wizz levels (7 and higher) for a second time or more,
then the swat.CANDLE needs to break the Wizz level. If it's a first approach, then no
breakout is required.

3. Need either an ecs.ARROW or a swat.PULLBACK dot/diamond to appear together

with the new swat.CANDLE → valid entry.
 4. If no arrow or pullback dot is visible, then wait for the next candlestick to close. If the
next one is the same color as in step 2 → valid entry unless the candle is a Doji.

5. If price is a Doji, then check the 3rd candle and if it’s the same color and in the same
direction → valid entry. If it's not, then skip trade.

Grey candle in retracement

1. A new swat.CANDLE appears after a retracement takes place that only has a grey
candle and NOT an opposite colored candle.
2. If price does close beyond the 21 ema zone, then the break of the CS-DOTS indicator
is needed. If price does not close beyond the 21 ema zone, then the break of the
CS-DOTS indicator is not needed.
3. The minimum number of grey retracement candles is two (unless there are 3 single
grey candles in the pullback). If there is only one grey candle in the retracement,
then price must break and close above or below a 3rd Wizz level or higher.

4. Need either an ecs.ARROW or a swat.PULLBACK dot to appear together with the

new swat.CANDLE → valid entry.
5. If no arrow or pullback dot is visible, then wait for the next candlestick to close. If the
next one is the same color as in step 2 → valid entry (blue box below). The CS-DOTS
filter remains an optional filter and entries could be done later on (green box
below).

6. Price must break above or below the 21 ema zone for a valid setup. If not, then wait
for the 2nd colored candle to break the 21 ema zone → valid entry. If not, skip
setup.
 7. Check time pattern rules. Break between candle 1 to 6 after recent low or high is ok
(green boxes below), but not candle number 7 to 12 (orange boxes below), but ok
again between candle number 13 to 34.

Wizz Rules
1. If price shows a pretty exact bounce at Wizz level 7, then skip future setups unless
price breaks Wizz level 7 or unless a set of new Wizz levels appear (new Wizz base)
or if there is enough space upon breakout to Wizz 7.
2. Move to break even if price is bouncing at Wizz level 7.

3. Do not trade if price is bouncing at Wizz level 8, unless new Wizz levels are visible
(new Wiz base with new Wizz levels) or if price breaks Wizz level 8 or if there is
enough space upon breakout to Wizz 8.
4. A break of Wizz level of 8 is OK.

5. If the price is close to Wizz level 9, then skip the trade. With close we mean a reward
to risk that is not at least 1:1 ratio.
6. If the price is in between Wizz level 8 and 9, it is ok to aim for the -61.8% or -100%
Fibonacci target (and not at Wizz 9) when placing a Fib on the entry candle and the
candle before that (high to low for down - or low to high for up).

7. Do not trade before the new Wizz level 7 or higher after price has reached Wizz level
9 with the previous Wizz zone. Level 6 after Wizz level 9 is ok.
8. With an exact bounce at Wizz level 6 and a failure to break that Wizz level, it is a
discretionary call to trade or not trade. A beyond Wizz level 6 is always good.

9. WIth a long period of correction around Wizz level 8, skip trades due to range.
Targets
To establish the target, I use Wizz but also the following steps.

1) Place a Fibonacci level on the entry candle and the candle before the entry.
Here is how it works:
a) For long setups, place a Fib tool from candle low of the previous candle to
the candle high of the entry candle.
i) If the previous candle does not provide a lower low, then use the
current candle low.
ii) If the previous candle has a higher high, then use the high of the
previous candle.
b) For short setups, place a Fib tool from candle low of the previous candle to
the candle high of the entry candle.
i) If the previous candle does not provide a higher high, then use the
current candle high.
ii) If the previous candle has a lower low, then use the low of the
previous candle.
2) The next step is to locate the -100% Fibonacci target.

3) Then find the next Wizz level after the -100% Fib target.
a) For long setups: look above the -100 Fib target to find the next Wizz level.
b) For short setups: look below the -100 Fib target to find the next Wizz level.
c) It’s OK to aim at other, further Wizz levels too from a discretionary point of
view.
4) Aim 4 pips away from that Wizz target
a) For long setups, place take profit 4 pips below Wizz level.
b) For short setups, place take profit 4 pips above Wizz level.
c) With higher time frames (daily chart and higher), use a wider buffer than 4
pips like 20-25 pips.
d) With the 4 hour chart, a wider buffer can be used. Discretionary decision.

5) Aim at the 610 ema and not the Wizz level under these circumstances:
a) The 610 ema is before the Wizz target.
b) The reward (target minus entry) is at least 70% of the risk (stop loss minus
entry), which means a r:r ratio of 0.7 : 1. If the r:r ratio is less, then aim at the
Wizz level as usual.
Stop loss
The stop loss placed on the opposite side of the 21 ema zone in most cases but there are
some exceptions. Here is an overview:

1) Both 21 ema low and high are aligned with the trade direction:
a) Long setups: 21 ema low and high are bullish
b) Short setups: 21 ema low and high are bearish
c) Use opposite 21 ema and add 7pips buffer
i) For long setups: add 7 pips to the 21 ema low
ii) For short setups: add 7 pips to the 21 ema high
2) Either the ema low or high is aligned but not both.
a) Long setups:
i) 21 ema high is aligned but not the 21 ema low.
(1) Use the previous candle low plus 7 pips buffer.

ii) 21 ema low is aligned but not the 21 ema high.

(1) Use the last Fractal or 144 ema close - whichever of the two is
closest.
(2) If both are too far, then use the previous candle high.
 (3) Add a 7 pips buffer

b) Short setups:
i) 21 ema low is aligned but not the 21 ema high.
(1) Use the previous candle high plus 7 pips buffer.

ii) 21 ema high is aligned but not the 21 ema low .

(1) Use the last Fractal or 144 ema close - whichever of the two is
closest.
(2) If both are too far, then use the previous candle low.
(3) Add a 7 pips buffer
 3) The ideal buffer does vary per time frame. 7 pips is ok for 15 minutes, 60 minutes
and even 240 minutes charts but a larger buffer can be used for daily charts and
higher.

Trail stop loss

Start using a trail stop loss once price hits the -61.8% Fibonacci level of the Fib mentioned
above in step 1 of the targets section. Place the trail above (for shorts) and below (for longs)
the most recent fractal and any new future Fractal (if the stop loss size becomes small or is
locking in profit).
● The buffer depends on the time frame, but 10 pips works well for the 4 hour chart.
● 5 pips is a good buffer for 1 hour charts and lower.

Case study
The GBP/NZD 4 hour chart saw price break below the 144 ema close on the left of the chart
below. It was also pulling the 21 ema zone below the 144 ema. Then a red swat.CANDLE
appeared. Does it qualify (first purple box)?

Not if we use the CS-DOTS indicator as price did not manage to break below it, nor did the
candles after. The same is true for the second and third breakout attempts (other purple
boxes).

Some might think that the 610 ema is a factor too (orange line) but in this case either the
144 ema close or 610 ema remain outside of the 21 ema zone. If both were in the 21 ema
zone, then a range would be indeed confirmed.
After another correction takes place, a new red swat.CANDLE appears, is this a valid short
setup?

Yes. Here is why.

TREND: the trend is considered down because 21 ema is below the 144 ema.

PULLBACK: there was a strong retracement because prior to the breakout there were blue
candles visible. That means that we will use the deep retracement rules for analysing the
setup (break of the 21 ema is not needed).

CONFIRMATION: the breakout candle has also a confirmation, which is the red sat.ARROW
(difficult to see but it’s there). Also, price clearly closed below the CS-DOTS indicator, which
means that it cleared important support.

WIZZ FILTERS: price is also far away from higher Wizz levels, which means we do not need
to be worried about any of those rules.

The setup qualifies and a short setup can be entered upon the candle close.

STOP LOSS and TARGET:

● The stop loss is placed 7 pips above the 21 ema high because both 21 ema low and
high are bearish. See the red box in the image below.
● The target is the blue box in the image below because after placing the Fibonacci
tool on the candle high before the breakout and the candle low of the breakout
candle, we find the Wizz target closest to the -100 Fibonacci target. In this case, that
 was Wizz level 7.

RESULT: 140 pips win versus a 82 pips stop loss, which is a reward to risk ratio of 1.71 : 1.
This means that if I took 1% risk on the trade, I made 1.71%. If I risked 3% then I made
5.13% of the trading capital that I am using on the account.

What about the setups via the red candles after that (dark red and black boxes)?

The retracement was shallow because there was just one grey candle in the pullback prior
to the breakout candle. So we need to analyse it with different retracement rules in place:

● We need two confirmations, which is not visible with the dark red box (only
swat.CANDLE). This means we need to wait for the next candle.
● We do see a break of the Wizz level 4 which is deep enough to qualify and be valid.
● We also see a break of 21 ema low, which is another requirement. Valid too, price is
below 21 ema low.
● Time patterns are not a factor because the recent lowest was more then 12 candles
ago.
● The CS-DOTS indicator break was a close call. The price close versus the CS-DOTS
value seems to be very close so waiting for the next candle might be better.

The next candle after the breakout is red too but failed to break the CS-DOTS indicator,
plus it looks like a Doji. We skip this one and wait for a third candle.

The 3rd candle (black box) qualifies as the candle is red, not a Doji, and clearly closes below
the CS-DOTS indicator support. An extra short setup is available upon the candle close.
The stop loss can be 7 pips above the 21 ema high because both 21 ema low and high are
bearish. This target is aiming at Wizz 8 after using the same Fibonacci process.

Reward: 216 pips

Risk: 124 pips
Reward to risk ratio: 1.74 : 1

This means that if I took 1% risk on the trade, I made 1.74%. If I risked 3% then I made
5.22% of the trading capital that I am using on the account.

The total of both trades is 1.71% + 1.74% = 3.45%. Or 5.13% + 5.22% = 10.35%. If I am
trading with 5,000 euro, then that is more then 500 euro profit. But always keep in mind
that the system will see winning and losing streaks also known as drawdowns.

The system usually has on average a 60% win rate and average reward to risk ratio of 1.5 :
1.

What happened after?

Well price broke below the Wizz level 8 and then made a consolidation below that level. A
red swat.ARROW (purple box) appeared offering some traders the chance to enter a small
trade towards the 9 Wizz level (pink dotted line below it).

Then price makes a large retracement but the continuation (orange boxes) fails to break
the CS-DOTS indicator and this filter helps me avoid losses. Eventually price broke below
that indicator and there was a potential small trade (first dark red arrow).
Taking this setup is dangerous as price bounced at the Wizz level 9 before. Normally
speaking this setup therefore does not qualify but in some cases I make a discretionary
decision to enter if I think that the trend can break a high Wizz level. But the best is to see a
break of the higher Wizz levels.

In any case, there was a better breakout candle (second dark red arrow) just a bit later after
price made a shallow retracement before it (one grey candle). This breakout worked out
well and the price fell quickly lower.

Other live examples

Last but not least, here are live examples of trades that were taken via our ecs.LIVE channel
which includes live webinars, trading ideas, analysis and our own trading setups such as
these:
Final words on ecs.SWAT

The ecs.SWAT method, strategies, and indicators are meant to trade the waves, price
patterns, and the market structure while avoiding complex analysis. The strategies
presented in this chapter are based on 3 types of methods: waves, discretion, and rules
based approaches.

Besides SWAT Basic and SWAT Classic, there are more SWAT rules based systems that are
added and will be added once you become a member.

Step 7: trade management

Once the trade setup has been entered, it is time to either manage the open trade (active
trade management) or leave it as it is (passive trade management).

Active trade management means that a trader could:

● Move the original stop loss to reduce the stop loss size.
● Move the original stop loss to lock in profit (never to increase the stop loss size).
● Change the take profit to a closer or further spot.
● Scale out the trade (close part).
● Close the trade (market exit).
Passive trade management means that a trader:

● Not change the original stop loss or take profit.

Passive trade management is easier for beginners because the main rule is not to
intervene in the setup in any way. The disadvantage is that new available information after
the trade has been opened is not used or analysed in any way.

Active trade management requires more time and attention because traders are regularly
analysing the information from new candles (at appropriate times, not too soon or late).
The advantage is that they can adjust their trades and find better exits based on that new
information.

Ideally traders do use active trade management - if they can manage to combine it with
their daily work and activities - because it is a waste not to use the new information that the
market offers. In a way, all new candles are communication that traders can use for their
trading plan.

The danger of active trade management is that the trader intervenes in the wrong way and
at the wrong spot. A trader either acts too soon or too late and finding the optimal spot
requires practice.

The best approach for active trade management is that traders start with patience and
become more active in their trade management at the end of the trade. The longer the
trade is open without price going into the expected direction, the higher the chance that
volatile price action will take place and hit the stop loss.

Our ecs.SWAT approach therefore identifies 4 distinct phases of trade management:

1. Wait - patience
2. Tight - more aggressive
3. Wait - patience
4. Tight - more aggressive
Phase 1: wait
The wait phase means that we are patient. We do not want to intervene in the trade setup
unless there is a very specific reason. It is usually not done and any change is an exception.
The reason is simple: we just entered the markets based on our analysis and/or strategy.
There is no need to change the parameters of a setup if we placed a trade properly based
on the plan. At this point, you need to trust your analysis and not second guess yourself. If
you do feel unsure, then you might want to re-analyse why you entered in the first place.

Traders often make the mistake of zooming into lower time frames, which makes them
fearful. Or they expect trades to develop quickly and hence they lose patience with their
setup. Many times it is internal thoughts like this (trading psychology) that work against us.

The best advice is to use the same time frame or higher for monitoring the chart. Then try
to not intervene in the trade for at least 4-5 candles after entry. An entry on the H1 chart
means that we should at least wait for 4-5x hourly candles before judging or analysing
whether the new information has changed the original setup in any way.

Only when more information is available, such as 6-7 candles which is 1-2 candles on a
higher time frame, will traders get a better picture of whether their original analysis is
working or not. At that point, they could consider using the approach mentioned in phase
2. Of course, how long traders choose to be patient is their choice and could depend on
whether their stop loss is far away or if there are strong reasons for taking the trade setup.
But in any case showing some patience at the start of a trade helps a great deal.
Phase 2: tight
In this phase, more information is finally available and it makes sense to check how the
trade has developed. New candles shed a light on whether the analysis and trade have
worked out as expected or not.

After being patient at the start of the trade and waiting for the trade to develop, It is now
time to seriously consider being less patient with the trade management. It could now be
the time to act on the new information because six to seven candles can seriously change
the outlook and analysis of the trade setup in a good and bad way. This is not a must and
sometimes we wait longer for a trade to develop. But if we do act, then we apply a range of
techniques:

● Move trail stop loss to reduce the loss

● Move trail stop loss to lock in profit
● Change target
● Scale out (partial market close)
● Market close

This is the moment when traders want to reduce their risk and exposure to the market if
and when possible. Traders do not want to hang in there and hope for the best at this
moment but rather choose the best way to reduce the risk while still giving the trade a
chance to develop (unless a market exit is taken).

Phase 3: wait
Now that the risk has been reduced, removed, or profit locked-in, it is time to take a deep
breath and sit back again. Now it is time to be patient again. Let the market speak and wait
for new information to arrive. This is a phase where we do not want to reduce our chances
of catching a full win. If our risk is less or some profit is in the pocket, then it is ok to be
patient and wait for the price to develop towards our original target.
In this phase, traders tend to get greedy or too nervous. If the trade goes into the expected
direction and profits are visible, traders often close (too) soon to grab the profits
immediately. If the trade does not go their way and a trade could end up closing for a small
loss, then traders tend to want to avoid losses at all costs, even miniscule losses. From a
psychology point of view, accepting any type of loss, even small ones, is difficult.

The best approach just after phase 2 is to be patient. Wait for your target to get hit and give
the trade some time (at the very least a candle or two).

Phase 4: tight
Finally, the last phase has arrived. We have been patient, tight, and patient so far. Now it’s
time to be tight again, which can translate into this:

● Using a very tight trail stop loss

● Scaling out
● Exiting at market
There are usually two scenarios at this point. The trade setup is either going sideways or
the market is moving nicely into the expected direction and target. Trades that went
against us have already closed for a loss, small loss, break even, or small win by this point
of time.

If a trade is moving sideways, then it’s really a 50-50% chance whether the price is going to
move into our direction or not. At that point, it could make sense to be more tight and think
carefully if and how to stay in that trade.

If the trade is going into our direction, then it could be a good time to lock in profits.
Traders are often greedy and think that they can catch more than the market might be
willing to offer. If the market is moving (again) into your direction, then it might be a good
moment to grab the profits before the market reverses.

Step 8: multiple time frame analysis

Although there is nothing wrong with using simple time frame analysis for analysing the
charts or trading the markets, using multiple time frames provides traders with an
all-round view of the ‘charting landscape’. The advantages of using MTF (multiple time
frames) are that traders can see various levels of price movements and how they connect.
For instance, a downtrend on one time frame could just be a pullback in an uptrend on a
higher time frame. Traders can use that information and for instance look for pullbacks on
a lower time frame.

Here is a full overview of all of the advantages that MTF offers:

 ● Finding pullbacks and continuations in a trend. SWAT likes to use 4 hour charts for
the trend and 1 hour charts for entries after price has made a pullback and
continuation.

4 hour trend

1 hour pullbacks

● Discovering which time frames are trending: sometimes a 4 hour chart could look
choppy and corrective but the daily chart could show that the correction is just a flag
chart pattern within a larger trend.
4 hour range

Daily trend

● Understanding how the corrective pattern fits into the larger picture, from a trend
and pattern point of view. A 15 minute chart might show a bull flag continuation
pattern but if the 4 hour is showing multiple bearish reversal signals, then the
pattern might be vulnerable to failure.
15min chart

4 hour chart showing double top and resistance fractal at spot of bull flag on 15 min.

● Spotting key support and resistance levels on higher time frames. We like using the
4 hour charts for trends but the higher time frame, such as the daily, could be good
for spotting strong S&R levels where price might have troubles to break through.
There are multiple ways of using MTF and the above concepts are the main ones we use.
The best way to use MTF is by using 2 or 3 time frames, depending on the experience of the
trader. The more experience, the easier it is to use MTF even up to 6 or 7 time frames.

Here is how traders can use 2 time frames:

1. Higher time frame: support and resistance, trend

2. Lower time frame: patterns, pullbacks, entries

Here is how traders can use 3 time frames:

1. Higher time frame: support and resistance

2. Middle time frame: trend, patterns
3. Lower time frame: patterns, pullbacks, entries

Regardless of how many time frames you actively review, using the daily, weekly, and even
monthly candlestick highs and lows for stop loss placement, targets or entries always have
their value too.
Chapter 9: Automated Trading System
Elite CurrenSea (ECS) offers a wide range of automated trading systems. For the latest
offers from Elite CurrenSea, please check out our page:
https://elitecurrensea.com/forex-cfd/

Chris Svorcik started working on EAs together with Mislav Nikolic back in the year 2018.
Mislav completed the first EA on his own, called Ultima EA. He then created more EAs
including Ultima Pro (2019), Rush EA (2020), and Invictus EA (2021).

Chris Svorcik also completed his own EAs with programmer Carlos Cordero such as SWAT
EA, SWAT EMA EA, SWAT Scalping, and Zeus EA.

Carlos also made his own EAs such as Let’s Dance, LOA.EA with Nenad Kerkez and LOA
Bitcoin.

In the past, we only offered traders a chance to trade single EAs - either via profit share
module or via rental.

From the year 2021 (May), we also offer a portfolio approach. This means that we combine
the best EAs that trade just 1 account.

The main advantages of this are:

1. Less draw-down
2. More consistent results (hardly any losing quarters)
3. Robust gains
4. Easier to add capital as the equity curve is more stable (whether the system is in a
draw-down or not matters less when capital is added for trading).
5. Easier to withdraw capital as the equity curve is more stable

All our EAs - via rental, profit share, and portfolio - are fully automated trading systems for
the Forex market and the MT4 (MetaTrader 4) platform. No action is needed nor wanted
from the trader. This includes entry, exit, and trade management. Zero manual
intervention is needed - nor wanted.

Our portfolio approach allows traders to trade the Forex market without being chained to
the PC and charts. In fact, checking the platform for a few seconds a day is enough. Any
type of trading can therefore benefit, even those with demanding full-time jobs or other
full-time commitments.
Live Trading Since June 2019
The live trading results can be seen here:

https://www.myfxbook.com/members/elitecurrensea

The Back Test Results from A to Z

The back-testing results can be seen here:

https://www.myfxbook.com/members/elitecurrensea

The Methodology Behind the Back Testing

It is important to mention that the back testing was done with 99.9% modeling accuracy
(quality) and real variable spreads. What does this mean?

● At its best by default, MT4 can only achieve 90% modeling quality and no real
variable spread

● BUT our testing was done with 99.9% modelling quality and real variable spread

● 3 reasons to use 99% modeling tests:

1) A more accurate back test shows what to expect from EA, because it simulates a
real trading environment.

2) 99% testing and real historical spread is the most accurate test available in MT4.

3) 99% testing with high-quality tick data reveals the actual system performance.

What is historical variable spread? Basically the testing is completed with the spread that
was actually seen in the past and a spread that changes per tick. This is more accurate than
simply using a fixed spread for the entire history.

What Are the 2 Main Traps for EAs?

The system was built with a forward looking mindset. The two largest problems are:
A. Over optimizing.
B. Unreliable data.
Over optimizing happens when traders focus on a relatively small period of time. They
change the settings so they get the best results. But the settings usually fail when used in
other time periods.

Unreliable data occurs when traders only test on the MT4 platform. They usually test the
strategy with 90% modelling accuracy. This does not provide sufficient information about
the system’s actual past performance.

We used two solutions:

● Remedies against over optimizing:

○ All changes had to make logical sense according to and within the system
rules.
○ Changes were first tested on about 6 months of data. The goal was to avoid
very small periods and very large periods. Small periods do not provide
sufficient information. Large periods lead to over optimizing. By choosing
something in the middle.

● Remedies against unreliable data:

○ We tested the all EAs using 99.9% modelling accuracy, which provides a real
simulation of how the EA would have performed in the past. The data came
from Dukaskopy, Darwinex and Alpari.
○ Historical spreads were used to make the testing even more accurate.
○ Lengthy test periods gave the results more robustness. The EUR/USD 15 min
chart was tested for a whopping 3 years. The GBP/USD 60 min chart was
tested for more than a decade. That means that testing used 60-80,000
candles for each time frame.
Chapter 10: Decision Zones and Triggers
Regardless of the trading strategy that you choose or develop, knowing about the market
structure will help you understand the charts in a deeper yet quicker way.

Patterns are an important part of our analytical methods but that is also true for support &
resistance and trend & momentum. These three aspects are, as mentioned before, the
triangle of analysis and it allows us to understand the potential path of least resistance.

The triangle of analysis is the pillar of technical analysis. Based on that triangle of analysis,
you can then decide about the following:

● Do you like the particular chart and financial instrument?

● Do you like other time frames?

If the answer is no, then you can move on to analyse new charts and instruments.
If the answer is yes, then it’s time to translate that analysis into an actual trading plan.

The triangle of analysis is your road map and indicates whether you are interested in
trading the instrument. Each instrument will have a path of least resistance, but not every
path offers an interesting environment to trade.

So how do you decide about trading decisions once you completed your triangle of analysis
and you like the structure of the chart?
Triangle of Entries
Then it is time to use a new triangle, what we call the ‘triangle of entries’. You can use this
approach regardless of the strategy, whether it is my ecs.SWAT method or your own.

The triangle of entries is based on these 3 aspects:

1. Decision zone
2. Open space
3. Trigger & entry

This is how we summarise it:

● We use the triangle of analysis to:

○ Analyse the likely path of least resistance.
○ Understand whether we find the chart interesting and whether we want to
trade it.

● We use the triangle of entries to:

○ Determine zones of interest.
○ Take and exit trade setups.

Simply said, once you have a path of least resistance established then it’s time to analyse
whether you are interested to trade it, in which price zone(s) do you want to trade, and how
do you want to enter the setup.
Let’s first review discussion of decision zones, triggers and entries.

Decision Zones
A decision zone is like a point of confluence or point of control (POC), which indicates that
there are multiple factors that indicate the importance of a price zone.

POCs are often used to indicate that there are multiple support or resistance (S&R) levels at
one price zone, which makes that particular S&R more important.

Decision zones often have POCs as well but they are even more important because there
are usually other factors that play a role such as key price patterns, momentum and trend.
A decision zone is therefore more critical than a POC and it is the place on the chart where
price must show its true intent of moving lower or higher.

Why are decision zones important? Traders want to take trades at decision zones and avoid
spots which are in the ‘middle of nowhere’ because:

● This is where trades usually do not have a long-term edge.

● This increases the chance of a substantial movement in price.
● We avoid taking setups that are too close to support and resistance.
● We wait for price action to confirm the direction at the decision zone.

Many trades take place in the middle of nowhere because traders enter too soon (jump in
early) or enter too late (chasing the trade) due to their own trading psychology such as fear
of missing a setup.
Let’s give an example. Based on your analysis, you expect price to …. Entering now would
be in the middle of nowhere. It is better to wait for the price to reach the decision zone.

How do you decide what is a decision zone? This is fully based on your triangle of analysis.
Here is the sequence of steps:

1. Complete triangle of analysis.

2. Evaluate if you like the instrument and time frame.
3. If not, check new charts.
4. If yes, determine the decision zones based on your triangle of analysis.
 5. Determine in which direction you would like to trade at the decision zone.

If you have identified a key resistance zone in a strong downtrend, then this could be
marked as your decision zone. You want the price to return to this decision zone before
you trade it and you will not want to trade this instrument before it reaches this decision
zone.

Once price is in the decision zone, then based on your triangle of analysis you might decide
that you are looking to trade only a short setup once a bearish bounce at the resistance
zone is confirmed. You would skip a bullish breakout at the decision zone (point 5). In other
cases, there could be decisions where you might be willing to trade in both directions.
Trigger and Entry
Once you have established a decision zone and a directional bias, then it is to think about
the next steps, which are trigger and entry.

The trigger is the confirmation that you expect in a decision zone. For instance, if you are
looking for a bullish bounce at the support zone, then examples of a trigger could be a
bullish candlestick pattern or support fractal in the expected price zone or a swat.CANDLE
below the support trend line and 21 ema zone (see image below).

The advantage of the trigger is that you wait for price action to confirm your analysis. If you
assume that your analysis is correct and you do not want to wait for the market to confirm
it, then you could see prices simply push through your zone and invalidate your analysis.

The best trading is done by following the market movements closely rather than trying to
outguess or second guess the market. Many traders try to anticipate the market’s
movement and then hope that the market will follow their lead. Wise traders always let the
market move first, and they follow their lead. Many traders tend to say this: “markets
should speak, traders should listen”. Or an example that I often use is a comparison with
dancing. The market is the leader dancer and traders should be following the footsteps and
rhythm of the market.

In the image below, a trader might hope for a bullish market (black box) but they are better
advised to wait for the break above the 21 ema zone and 144 ema close so that the chart
confirms the breakout. Even if your analysis is incorrect, then you avoid losing this trade as
the market never confirmed the setup. In fact, new swat.CANDLES arrived just a little later
(orange box), which makes a short setup more interesting and logical. The best approach is
always to follow the market’s lead rather than trying to anticipate its direction.

Traders can best achieve this by waiting for triggers at decision zones. The advantage of
trading without the trigger is that traders can get a better entry but often it is difficult to
find a proper place for a stop loss. Or the stop loss size is quite wide. It could be tempting
to trade right at the decision zone and assume / hope that your analysis is correct, but a
trigger at the decision will often provide a couple of benefits:

1. A clear response and reaction at the decision zone (as you expect) will increase the
chance of the trade working out well. The image below shows how price tried to
break below the 21 ema zone (purple box) but ultimately failed to confirm the
breakout with swat.CANDLE. The next breakout attempt however did see a candle
close below the 21 ema and also saw a confirmation of a red swat.CANDLE
appearing (with a clear down move after that).
2. The opposite reaction at the decision zone means that you avoided trading in the
wrong direction and a potential loss.

3. Using a stop loss after a reaction at the decision zone makes it easier to find the
correct place (technical spot) for the stop loss.

4. Placing a stop loss above or below the reaction at the decision zone keeps the stop
loss small.
Once a trigger is visible in the decision and in the expected direction that you want to trade,
then traders can think about looking for entries. There are two options:

1. The entry can be the same as the trigger.

2. The entry can be determined after the trigger is confirmed.

If a trader really likes a particular chart, then it could be best to enter the market as soon as
the trigger is confirmed. Waiting for a better entry could mean that you miss the trade
setup.
If however you think that trigger has provided you with an entry spot which is much worse,
then there are ways to look for a better entry. An often used concept is BPC: break,
pullback, continuation either on the same time frame, a lower time frame, or even a higher
time frame. The image below shows potential entries on the 15 minute chart after the
trigger was confirmed on the 1 hour chart (see image above).

Whether price is expected to break or bounce at the decision zone, traders can use BPC in
both cases. On top of that, there are really dozens of options when using various tools and
time frames:

1. A trader could stay in the same time frame, or zoom in one or two time frames.
2. A trader could opt for using Fibonacci levels, candlesticks, fractals, trend lines,
moving averages, pivot points, bands, and or a combination of them to find a good
entry.

For instance, let’s say that you are looking for a trigger at the … Fibonacci level. You could
enter at different spots on the same time frame or a lower time frame:

● At the Fibonacci level.

● Break of the candle high.

● Retracement of the candle.

● Break of the next Fractal.

● Support Fractal at the Fib level.

● Close above the MA high.

● Break or close above a Pivot Point.

● Close above a trend line.

● Appearance of a time pattern.

● Pullback after a momentum.

 ● Chart pattern after momentum.

● Break of the chart pattern after momentum.

This is a bullish example but of course the same methods work for the bears as well.

The BPC concept is a strong concept because it allows traders to look around for better
entries. Of course, there is always the risk that a setup might be missed. For instance, if you
expect a pullback on a H4 time frame but price in fact decides to move ahead in one
direction without any substantial retracement. That is why using the right time frame is key
too. A pullback often happens on a lower time frame.
Whether you trade the break, pullback or continuation depends on your trading strategy
and your analysis. Most traders will naturally gravitate towards one or two of the three
styles.

Once again, all of these tools could be used for 2 or 3 time frames: the entry time frame,
and one or two time frames lower.

Here is a summary:

1. Decision zone:
a. Identify ‘decision zones’ on the chart within that path of least resistance.
b. Understand whether a break or bounce is more likely and desirable for
trading within that path of least resistance.
2. Trigger and entry:
a. Measure whether a break or bounce is taking place at the decision zone.
b. Find the best way to enter.
c. If a trade is entered, then to monitor and manage the setup till the exit.

The entry should also take into account any upcoming major news that could impact your
trade setup. Trading a 15 minute setup just 30 minutes before an interest rate decision
from the US is not a good practice because the charts will respond massively to the news
event and not to your technical trade.

Besides news events, also keep in mind that the volatility will differ depending on the
currency pair and time of day. The EUR/USD usually does not move that much during the
Asian trading session but an AUD/USD or EUR/JPY will move more because the AUD and JPY
are pairs from countries where the market is open.

The least price movement is seen at the beginning and end of each trading week, month
and also year.

Last but not least, there is no need to take the same trade setup on instruments that are
highly correlated, unless you pre-plan it in this way on purpose. If both EUR/JPY and
GBP/JPY are in uptrends, then taking a long setup on both pairs is in effect almost the same
as taking the same trade twice.

Open Spaces
Now it is time to understand open space and how it helps traders analyse the charts:

1. Identify the confirmation and invalidation levels for the break or bounce at the
decision zone.
2. Understand how far price can move when price bounces or breaks at the expected
decision zone: where is the next decision zone.

3. Compare how big the zone is for the target with the zone where the invalidation
level is.
a. If the next expected decision zone is close by, then there is not much space
for that trade and it could be better to skip the setup or enter with lower risk.
 b. Traders can compare this space zone (reward) to the risk zone (their stop
loss size) and measure the reward to risk ratio, which will be explained as
well in the risk management chapter 13.
c. As a standard rule of thumb, traders want to have at least 1:1 reward to risk
ratio when comparing the potential target zone with the risk zone.

Open space is important because a trade which has small expected space could in fact not
be worth trading whereas a trade with large expected space could be very interesting.

The best places on the chart for traders are wide open spaces. Areas of the chart where
price has little standing in its way. This is where and when price action can capitalize on the
lack of a decision zone and move quickly impulsive into one direction.
Understanding the space is difficult without moving averages and the ecs.WIZZ tool. If price
is moving into medium and/or long-term moving averages, then its movement will most
often be naturally limited by those MAs. If price is moving away from the medium and
long-term MAs, then this indicates a trend and the potential for a larger push. In that case,
the potential space depends on the Fibonacci sequence zones, which are easily seen when
using our ecs.WIZZ tool.

The ecs.WIZZ tool is a wonderful tool for spotting the wide open spaces. When price is able
to pull away from the 144 ema (long-term MA) without retracing back to it, then the price is
showing impulsive price action and the path of least resistance indicates that price is likely
to keep moving away from the 144 ema. Of course, nothing is certain in the market but
once price breaks away from the 3rd Wizz level, then the odds are certainly in favor of an
impulsive continuation towards the 4th or 5th Wizz level. The space between the Fib
sequence levels expand and become wider and wider as price moves further away from
the 144 ema.

The space between levels 4 and 5, 5 and 6 and 6 and 7 are truly wide open spaces. Catching
a win that can move that far away from your entry can give an enormous boost to your
trading account and really help the equity curve a lot. This is a key part of any trader’s
motto, which is let your winners run and cut your losses short.

So far we have explained the two main concepts that we use for understanding the charts
which are the triangle of analysis and the triangle of entries. Here is a summary:

● Triangle of analysis
○ Trend & Momentum
○ Support & Resistance
 ○ Price patterns

● Triangle of entries
○ Decision Zone
○ Open Spaces Available
○ Trigger & Entry

Now it’s time to discuss the concept of invalidation too.

Confirmation and Invalidation Levels & Patterns

We basically use confirmation patterns and invalidation levels for each decision zone:
1. Confirmation pattern/level: confirms a particular price direction in the decision
zone.
2. Invalidation pattern/level: the expected analysis is not working out and invalidated.

Confirmation and invalidation are important concepts for traders and analysts because
they provide clarity about these aspects:

1. The price patterns and market structure

2. Your chart analysis of the market
3. Your trade setup and trade management

Invalidation and confirmation can be used for all 3 aspects.

Traders can use confirmation and invalidation patterns and levels:

1. Confirmation pattern
2. Confirmation level
3. Invalidation level
4. Invalidation pattern

The confirmation level for your trade setup is what we called the decision zone.

The confirmation pattern is also something that we already have mentioned before:
triggers. The trigger is the confirmation pattern that gives the trader a green light to trade
it.

Confirmation and Invalidation of price patterns

Similar to the path of least resistance, price patterns do not provide 100% certainty. A
pattern could get confirmed and behave in the way we would expect it to. But patterns can
also ‘fail’ or ‘collapse’ and the path of least resistance could turn out to be different then
expected.

Both a pattern and a path of least resistance can become confirmed or invalidated
depending on how price moves and behaves at key levels or price zones:

1. A price pattern can be confirmed by an expected pattern and if price moves at the
expected level.
2. A price can be invalidated by an unexpected pattern and if price breaks the
expected level.

Both continuation and reversal patterns have their confirmation and invalidation levels.
When price breaches such a key level, then traders are receiving a warning signal:

● Break of an invalidation level indicates pattern failure.

● Break of a continuation level indicates pattern confirmation.

The invalidation and confirmation level of each price pattern is different. Let’s start with the
continuation patterns:

1) Bull or bear flag pattern:

a) Confirmation: break beyond the flag
b) Invalidation: break below the 50% Fibonacci level

2) Contracting triangle pattern:

a) Confirmation: break into the expected direction beyond the support or
resistance.
 b) Invalidation: break into the unexpected direction beyond the support or
resistance.

3) Sideways range or consolidation:

a) Confirmation: break into the expected direction beyond the support or
resistance.
b) Invalidation: break into the unexpected direction beyond the support or
resistance.

4) Ascending and descending triangle:

 a) Confirmation: break into the expected direction beyond the support or
resistance.
b) Invalidation: break into the unexpected direction beyond the support or
resistance.

5) Cup and handle pattern:

a) Confirmation: break into the expected direction beyond the support or
resistance.
b) Invalidation: break into the unexpected direction beyond support or
resistance.

Let’s now review reversal patterns:

1) Double bottom or top:

a) Confirmation: break into the expected direction beyond the support or
resistance.
b) Invalidation: break into the unexpected direction beyond the support or
resistance.
2) Triple bottom or top:
a) Confirmation: break into the expected direction beyond the support or
resistance.
b) Invalidation: break into the unexpected direction beyond the support or
resistance.

3) (Inverted) head and shoulders (H&S) pattern:

a) Confirmation: break into the expected direction beyond the support or
resistance.
b) Invalidation: break into the unexpected direction beyond the support or
resistance.
4) Falling or rising wedge:
a) Confirmation: break into the expected direction beyond the support or
resistance.
b) Invalidation: break into the unexpected direction beyond the support or
resistance.
Confirmation and Invalidation of Your Setups

Similar to the chart and price patterns which can be confirmed or invalidated, the same
logic applies to your potential trade setup (entry) and open trade setup (trade
management).

The confirmation and invalidation levels provide important information about whether
price is continuing with the pattern as expected or whether perhaps a different pattern is
valid. But although the invalidation and confirmation levels are key, they are not
unbreakable patterns. A breakout confirmation pattern could fail and so could an
invalidation pattern. The best way to measure whether price is indeed confirming a
confirmation breakout or an invalidation is via these three ways:

1) Measure whether the candlestick closes near the high or low.

2) Compare the candlestick size to candles in the recent past.
3) Realise that the patterns are impossible to forecast with 100% accuracy.

Let’s review all of these key factors.

Candlestick close

We measure the success of a breakout by simply monitoring the strength of the candle
close. A strong candle close is when the candlestick closes near the high or low.

Here is how a candlestick close works together with a breakout setup:

● A strong bullish breakout is indicated by a candle close near the high.

● A strong bearish breakout is indicated by a candle close near the low.
Here is how you can measure the strength of the breakout candle:

1) Calculate the candlestick length like this: high minus low (high - low).
2) Calculate how far the close is from the high or low:
a) Bull break: candle high minus close.
b) Bear break: candle low minus close.
3) Compare close (point 2) with candle length (point 1):
a) Example: total candle size is 60 pips. The close is 20 pips away from the high
or low. Then the close is 33% away from the high or low (20/60 = 33%).
Here is how we rank the candle closes:

1) 0-5%: extremely strong. The close is almost right at the high or low which is
indicating extreme strong candlestick close. The bulls or bears have a dominant and
clear control of the candle.
2) 5-10%: very strong. The bulls or bears have a dominant and clear control of the
candle.
3) 10-20%: strong. The candle is under control by the bears or bulls but not as
dominant as the first two groups. The breakout is strong and most of the time plays
out well.
4) 20-25%: decent. Breakout should work but analysing other parts of the chart is
useful.
5) 25-30%: ok - mild. Be careful, the odds of a good break are going down.
6) 30-35%: doubtful. Here a breakout is not looking that good and the context of the
chart is important.
7) 33-50%: weak. The breakout is not so successful and traders should keep an eye on
the next candlesticks to estimate the direction.
8) 50-66%: very weak. The breakout is looking bad but a reversal does not look that
good either. Best to keep an eye on new candles.
9) 66%+: reversal potential.The breakout of the confirmation or invalidation level is not
going as planned and there is a potential reversal taking place against the expected
direction.
Candlestick Size

Another sign of strength is also visible via the candle size. A larger candle indicates a strong
breakout candle than a smaller candle, relative to the candles of that time frame. Although
candle size is a factor to consider, I personally think the candle close is more important.

When using moving averages and trend lines (as mentioned in tip 4), it is a useful tactic to
review the relationship of price action with the support or resistance (S&R) level. One
aspect is mentioned in tip #2, which is that the candle closes near the candle high or low.

Here are a few more vital parts:

1. The best breakouts occur when the candlestick closes above the MA or trend line.
2. The best breakouts occur when the candle body is above the MA or trend line
(50% is decent).

Patterns Are Imperfect

No trader can know for sure whether the breakout will turn into a false break and fail. As
always, the market decides and speaks and we traders need to listen and follow – NOT
the other way around.

1. Many traders fall into the trap of analysing and predicting the Forex markets and
then blaming the market for not following their plan. This is not how trading works.
2. You need to continuously establish the most likely path of least resistance, which
acts as a road map for price. This requires regular updating and is not a fixed path.
3. Also realize that breakout trade setups occur after chart patterns have appeared. It
is crucial to learn and recognize all of the chart patterns, or at least the most
common ones.

Invalidation Levels

Invalidation levels and patterns provide traders with boundaries. If a certain level is hit or a
certain pattern unfolds, then they know that their analysis, potential trade or open trade is
not doing that well.

Your analysis could be invalidated if for instance price shows impulsive price action rather
then corrective price action (pattern). Or if price breaks below the top or bottom (level). If
your analysis is invalidated, then you need to re-analyse the chart and try to understand
what new scenario is likely.

Your potential trade could also become invalidated by certain patterns or levels. For
instance, you could be interested in trading a long setup at the 50% Fibonacci level but if
price breaks that zone with strong momentum, then your potential trade setup could be
invalidated.

Last but not least, your open trade also could rely on invalidation levels and patterns.
Invalidation level is where you hopefully have placed your stop loss level or trail stop loss.
An invalidation pattern could be a good reason to exit or manage the setup.

Breakouts and Bounces

My first tip is to make sure that the pattern is visible on the same timeframe. The best level
of zoom is when the chart is showing +/- 150-200 candlesticks. Here are the various
scenarios that could occur:

1. No chart patterns available → move on to the next time frame or pair.

2. A chart pattern is available but it extends back into the past → zoom out one time
frame to see the full pattern on one chart.
3. A chart pattern is available but it’s a very small part of the chart → zoom in one time
frame to see the pattern properly on one chart.

Finding the correct time frame is where many traders start off wrong with their breakout
trading system. Once you find a pattern on the correct time frame, we can move on to step
2.

A key for avoiding false breaks it using the concept of trading the breakout after the
pattern break. The best is to zoom into one time frame lower. So if the breakout is
occurring on a 4 hour chart, then the next time frame to analyze is the 1 hour chart. With a
daily chart, it’s best to see a 4 hour chart. With a 1 hour chart, go to the 15 minute chart.
Why? Because I am able to read and understand the psychology of the market better by
seeing the internal price action develop within the breakout itself. That sounds perhaps
complicated so let me simplify it. On a lower time frame, traders are able to see the
reaction after the breakout: Is price moving correctively? Or is price moving impulsively
against the direction of the breakout?

Situation A: when price moves correctively, it is building another chart pattern. This
indicates a strong breakout because price is in fact building a new correction after
momentum. The market is therefore of no interest in the other direction. This is a
continuation signal indicated by the market psychology of price.

Situation B: when price does not build a pattern after the breakout and it moves
impulsively against the breakout direction, it is indicating a potential reversal and change of
trend direction. It could be a false breakout or the presence of major support and
resistance levels (from a higher time frame). Either way, best practice is to avoid this setup.
Only when situation A appears, will breakout traders continue with this breakout trading
system and implement the next step.

The final step of our journey in trading breakout patterns is waiting for the break of the
pattern on the lower time frame. This corrective pattern should not last too long and it
should be a relatively quick pullback and breakout continuation. Anything from I think 13
candles to 24 is fine. From 24 to 36 could be ok depending on the overall market structure.
The break of the corrective pattern on the lower time frame is trading the breakout of the
pattern break. So basically, this is trading the break of the break. In this lower time frame,
traders can look for a good breakout candle, a break of a trend line, a break of a fractal or
use our ecs.SWAT method for the actual trigger and entry. Waiting for the setup does take
some patience but it will be worth it in the long run. I love trading breakouts by zooming in
one time frame because it provides me with more exact detail and information. This in turn
makes me feel more patience, plus it also provides more control over the breakout
development.

These are the key steps:

1. Find the chart pattern

2. Find the correct time frame
3. Wait for a breakout
4. Zoomin one time frame
5. Wait for a smaller pattern
6. Enter next breakout

Wrapping it up
Here is a summary of steps discussed in this chapter:

1. ANALYSE: the first step is always to analyse the charts by using the triangle of
analysis.
2. SKIP: if a trader does not like a chart, skip and analyse other charts.
3. DECISION ZONE: if a trader does like a chart, then they can determine the decision
zones.
4. DIRECTION: based on the triangle of analysis, they also want to decide about the
trade direction: long, short or potentially both.
5. SPACE: now it’s time to think, if there is a trade setup available what would the next
decision zone be? Traders want to have enough space before trading it.
6. TRIGGER: then they want to decide the trigger that confirms their expected trade
direction. If you are looking for a short at the 50% Fib (decision zone), what trigger
would confirm the reaction? Candlestick patterns often work well.
7. ENTRY: now that you have a trigger that confirms the expected direction at the
expected decision zone, you can look for an entry. The entry can be the same as the
trigger or traders can use different ways of entering such as the BPC (break,
pullback, and continuation concept) and various time frames.
Chapter 11: Deeper Market Thoughts
The market price moves up and down in waves and patterns, which is visible for everyone
who has seen a chart. Interestingly, the price movements are similar regardless of the time
frame. A trader who is looking at a large time scale will see the same price movements and
patterns on a lower time frame. Let’s try a little experience: can you guess the time frames
of the two images below (without looking at the answers)?
The time frames are a 1 hour chart (1st) and a 15 minute chart (2nd). Perhaps you guessed
the answers correctly, but in any case, I believe that my point is clear: readers can see that
both images look very similar.

Patterns that repeat in a similar way on all scales are called fractals. The fractal nature of
financial markets is in many ways similar to the fractals found in music notes, sea coast
lines, and nature such as snowflakes, shells, flowers, crystals, lightening, and food
(broccoli). So what do music notes, snowflakes, the sea coast and the charts have in
common? They are all fractal in nature.

Price Fits within Fractal and Chaos Theory

All of these Fractal shapes might appear chaotic and random but they are actually more
organized than we expect, at least that is what the “Chaos Theory” explains. The name
Chaos might make you think these objects, such as weather and financial markets are
chaotic but ironically, it is the exact opposite.

Both Fractals and Chaos Theory is a branch of mathematics which focuses on the behavior
of dynamical systems that are highly sensitive to initial conditions. Chaos Theory indicates
that within apparent randomness of chaotic complex systems, there are actually:

1. Underlying patterns: movements that behave in a similar way.

2. Constant feedback loops: an action reinforces a certain direction.
3. Repetition: repetitive movements.
4. Fractals: same movements on all scales (a curve or geometric figure, each part of
which has the same statistical character as the whole).
5. Self-organisation: spontaneous process where some form of overall order arises
from local interactions between parts of an initially disordered system.

The “butterfly effect” describes how a small change (in a deterministic nonlinear system)
can result in large differences to a later state. The most known example is how a butterfly
flapping its wings in the Amazon can supposedly cause a rainstorm in Texas. Chaos
behavior exists in many natural systems, such as weather and man made ones such as
road traffic.

This might sound complicated so let’s focus on trading. Chaos Theory is an equally relevant
theory for financial markets and price action, because in our opinion, they also show
underlying patterns, constant feedback loops, repetition, fractals, and self-organisation.
This means that charts behave in accordance with the characteristics of chaos theory
(these 5 aspects define Chaos Theory).

Let’s review all 5 aspects of the Chaos Theory in relationship to price:

 1. Underlying patterns: the charts have a wide range of price patterns, such as
divergence patterns, chart patterns, time patterns, waves patterns, candlestick
patterns.
2. Constant feedback loops: buyers and sellers are creating loops of feedback
(concepts such as chart patterns, impulse and range).
3. Repetition: the market movement, price patterns, and support and resistance
levels are used and repeated over and over again.
4. Fractals: price action moves in the same way on various time frames and markets.
5. Self-organisation: lower time frames provide information about the movement on
higher time frames (5 waves on a lower time frame indicate an impulsive wave on a
higher time frame).

Patterns repeat (fractals) and allow us to look deeper at the true market structure, which is
not as random as it might seem (chaos theory). The financial markets are just not (as) well
understood without these concepts.

But traders can understand the markets better by using the 5 concepts of Chaos Theory:
the price movements occur on all time frames (fractal), repeat themselves (history repeats
itself), self organise, impact higher time frames (self-organisation), create feedback loops
(of buyers and sellers), and are full of underlying patterns (chart patterns etc).

To us, it makes sense to analyse the chart and price patterns via the primism of Fractals
and Chaos Theory. The definition of a complex system works extremely well for explaining
the nature of the financial markets and the corresponding price charts.

The Chaos Theory teaches traders that they can understand the underlying price
movements by analysing the chart itself with its price patterns, fractals, price repetition
(trend, S&R), wave patterns, and chart patterns. In our view, traders are able to understand,
analyse, and forecast better by analysing these patterns (based on the theories of Fractal
and Chaos).

This is why understanding the price movements in finding the best trade setups. Patterns
are important from both a practical and theoretical point of view:

● Practical for understanding the path of least resistance.

● Theoretical because they fit within the theories of Chaos and Fractals.

By using price patterns, chart patterns, trend, momentum, S&R, and price action, we can
understand the path of least resistance and understand where the decision zones are
located, which in turn allows us to confirm or invalidate the development of patterns and
analysis, to enter trade setups if desired, and apply trade management if needed.

Indicators and tools help us determine the path and decision zones and locate setups and
exits that provide us a long-term advantage. As this book has mentioned, we use indicators
and tools such as swat.FRACTALS, moving averages, ecs.WIZZ, Fibonacci, swat.CANDLES,
candlestick patterns, chart patterns, etc to analyse the charts, find decision zones,
determine trade direction, setup triggers, find entries, and manage trades.

Here is an overview of the tools that can be used per category.

● Underlying patterns: divergence patterns, chart patterns, time patterns, waves

pattern, and candlestick patterns.
● Constant feedback loops: concept of trend / momentum /range, moving averages,
ecs.WIZZ, swat.CANDLES, swat.ARROWS.
● Repetition: support and resistance, Fibonacci, moving averages.
● Fractals: swat.FRACTAL indicator, multiple time frames.
● Self-organisation: wave patterns, multiple time frames.

We think that some extra information on feedback loops makes sense. The first type is the
positive feedback loop. For example when the US Dollar is showing positive economic
statistics or news, it often causes the USD to go up. When the price in fact does go up, then
investors/traders believe that the news is having a positive effect on the price, which could
cause it to go up even more. Basically, this causes positive news regarding the price which
causes the price to go up.

A negative feedback loop is two negatively correlated variables. When one goes up, then
the other goes down. Traders might expect good news but the actual news is not as good
as expected.

These are of course just short-term examples. The same however is valid for long-term
economic fundamentals of a country and its currency and technical analysis too.

Both feedback loops occur regularly. The positive feedback loop creates trends and one
directional price movements. A negative feedback creates a range and sideways price
action.

Positive: price rises → traders buy → prices rise → traders buy

Negative: price rises → traders sell → price falls → traders buy

Patterns Remain a Probability

Whether price patterns play out within the expected path of least resistance always
remains a probability and is never a guarantee. Some price patterns will play out as
expected and confirm the expected path of least resistance whereas other patterns
become invalidated and fail.
Price patterns and price movements can always confirm or fail compared to the expected
pattern and compared to how we analysed the charts. There is no way that traders can
ever be 100% sure about the development of a particular pattern or trade setup. Simply
said, the markets remain vulnerable to changes.

You might be wondering how come nothing is certain in the financial markets and if
nothing is certain, how can you forecast anything. Forecasting is not about being right or
wrong about one isolated event. Everyone can be lucky at one occasion.

In many ways, forecasting the weather is in my eyes similar to trading the markets.
Meteorologists are nowadays very skillful in forecasting the weather patterns in the
upcoming 7 days (short-term). Studies show that their forecasts are very accurate, as
mentioned in the book “Superforecasting” by Dan Gardner and Philip E. Tetlock. For
instance, when there is a 30% chance of rain, then 3 out of 10 days do indeed have rain and
7 do not. The accuracy is just as accurate for all forecasts across the spectrum with the
exception of low probable events between +/- 0 and 10%. The reason for the slight
inaccuracy with low probable events is that the weathermen are actually correcting for our
human bias because humans tend to regard a probability of 0-10% as “impossible”.

The Forex market is similar to the weather because traders also can calculate the
probability of their strategy working out in the long run. Each strategy will have a historical
win rate of 70%, for instance. This will vary of course from strategy to strategy. Although
traders know that historically speaking they will usually win 7 out of 10 trades, there is no
way for them to know when the winning setup will occur. It is impossible to find out
whether the next trade will be a win or a loss.

The weather and Forex strategies work in the same way. A 70% chance means that 7 out of
10 days will be raining and 7 out of 10 trades will be winners, but we just don’t know when
that will happen. Will that be today or this trade or rather the next?

Not being able to predict one particular outcome with 100% certainty does not block the
ability to perform accurate forecasting:

● Weather: 70% chance of rain means that on +/- 70 out of 100 days, there will be rain
and on +/- 30 days there will be no rain.
● Trading: 70% win chance with a strategy means that, as long as we trade each setup
with the same approach, traders will win +/- 70 out of 100 setups.

Conclusion: in the areas of trading and weather, the next isolated event can never be
predicted but the probability of particular situations (70% rain chance i.e.) can be
forecasted with precision when analysing the long-term.

Which situations qualify? The accuracy of forecasting weather dramatically drops after 7
days. Weather forecasts beyond those 7 days are inaccurate and in fact, using the average
climate data of the year provides a more accurate estimate. In weather the accuracy of
forecasting is limited to 7 days.

In trading I think that a similar number (7) works pretty well too. In any case, the general
idea and concept does apply well to the price charts. The accuracy of technical analysis is
more precise in the short-term than in the long-term. Why? The further away we try to
analyse from the current candle, the more difficult it becomes because there are more
factors that can change the path of least resistance. New information continuously changes
the most likely path of least resistance. A trader who is looking further into the future will
have to deal with more variables and unknown factors, which can change the path of price
and its expected path of least resistance.

What is short-term and long-term in trading? I like to use the same figure (7) as in weather
but for counting candles. So anything up to 7 candles is short-term and easier to forecast
than looking beyond 7 candles. This means that what qualifies as short-term is dependent
on the time frame too. A daily chart indicates that anything up to 7 days is short-term (7
weeks on weekly chart, 7 hours on hourly chart, and 105 minutes on 15 minute chart).

This is one of the reasons why the SWAT method uses time patterns and Fractals that have
values quite close to 7. Our swat.FRACTALS and time patterns are based on 5-6 candles. We
also use similar numbers for our trade management ideas (be patient with the trade at the
beginning during phase 1).

Generally speaking, traders can use these fractals, patterns, and tools to evaluate which
trades have an edge in the short-run. And if they repeat those setups again and again, they
can check whether similar setups show long-term consistency and profitability.

Many trades do not necessarily close in the short-term (within 7 candles), which is why we
are in favor of using active trade management based on the new information available at
the right time (not too soon, not too late).

It is important that traders keep in mind that the long-term results are more important
than the performance of any single setup. Traders need at least 40-50 trade setups before
they can make any judgment about any strategy or entry method. Anything less then 40-50
setups is just too random.

Traders therefore must keep two goals clearly in sight:

1. PROBABILITY:
a. See trading through the lens of probability.
b. Nothing is certain.
c. Keep trading the same way, unless your long-term results are questionable.

2. TRADING PSYCHOLOGY:
 a. Manage your emotions during the life cycle of a trade setup.
b. Manage your emotions during small dips (streaks of losses).
c. Keep trading the same way, unless your long-term results are questionable.

Generally speaking humans are weak in two aspects, which is why trading is often so
difficult for traders:

1. Assessing probabilities. People tend to believe that a 30% chance of rain means that
there is in fact 0% chance of rain. Of course, in reality, the actual chance is 3 out of
10 but people struggle to comprehend probability.

2. Accepting losses. The pain of a loss is psychologically much more difficult to accept
than the pleasure from a win. More on this will be explained in the part on trading
psychology.

Probability is a difficult concept to comprehend and most people tend to overestimate

something that is very unlikely or underestimate something that is actually quite likely.

1. Unlikely events: the author Rolf Dobelli mentioned in this book “The Art of Thinking
Clearly Book” that people respond to the expected magnitude of an event, but not
to its likelihood. He added that humans lack an intuitive grasp of probability, which
leads to errors in decision making.

2. Likely events: the same example of a 30% chance of rain works great as an example.
In fact, a 30% chance of rain is actually quite likely but many people complain about
the accuracy of the weather forecast if it does rain on such a day.

3. Conclusion: 30% chance of rain of a likely event is seen as unlikely (point 2) but a
0.1% or 0.01% chance of unlikely event seems likely (point 1). Humans have
difficulties in correctly assessing and using probabilities for their decision making.

4. Impact on trading: this human bias impacts the decision of traders as well. Traders
are known for:
a. Overreacting to new information on the chart: a small change on the charts
might make a trader think that the odds have significantly shifted.
b. Underreacting to new information on the chart: a large change on the charts
might not receive enough attention from a trader.
c. Focusing on being correct: traders tend to care only about the win
percentage being as high as possible, even though this increases the chances
of losing big when things go wrong. The correct approach focuses on
profitability which is a combination of win percentage and the avearge win
versus average loss ratio.
 d. Focusing on winning the current/next setup: traders tend to care whether the
current or next setup is a win. The correct approach is to focus on the
consistency of long-term (40-50 setups at least) results.

Why Do Patterns and My Analysis ‘Fail’?

Although many chart patterns are surprisingly reliable for predicting the next price move,
they are not a dead certain either. That’s because they can morph seamlessly into a
different pattern from what one might have expected. We can only ever know for sure
what pattern has formed in hindsight because by the time it is 100% confirmed, the trading
opportunity it would have provided is already over.

Trading is a continuous analysis of the path of least resistance, which can change as price
action and the chart provide new information. This new information changes the old
perspective and makes your analysis, your trade idea, your open trade setup, or the price
pattern more or less likely. This in turn impacts the expected chances of a setup.

A concept found in quantum physics / mechanics has a remarkable parallel to chart

patterns and trading. It is called ‘wave function collapse’. Put very simply, wave function
collapse is the moment when a particle of matter first becomes measurable or definable in
any way (i.e. it ‘collapses’ from a potential into something observable). Prior to that, it exists
more in an undefined state of potentiality, where it could still turn out to be one of several
things. However quantum mechanics can to a certain degree predict in advance how a
‘wave’ will collapse into a particle.

We engage in a very similar process when we trade chart/wave patterns. We can predict
what price is going to do next to a certain degree. But the pattern will never be 100%
confirmed until after it has played out. There is a certain sweet spot; a moment when just
enough price-action has played out to validate our analysis, while it is also still early enough
to make the trade entry viable. That’s why it is better to be more selective with the setups
you choose (i.e. choose only the best). Once we are committed, we have to trust in the
quantum vacuum, the field of potentiality, to deliver the final result.

That is why it is a best practice to keep analysing the new information available on the chart
because it provides new information about whether the observable is forming the pattern
or wave that you expect.

To make sure that we are analysing the charts based on reality rather than on a clouded
judgment based on our bias, it is important to use invalidation and confirmation levels and
invalidation and confirmation patterns.

Here is a summary of the 7 steps mentioned in chapter 11 on decision zones:

1. ANALYSE: triangle of analysis.

 2. DECIDE: like a chart or not.
3. DECISION ZONE: key zone.
4. DIRECTION: trade direction.
5. SPACE: available space.
6. TRIGGER: confirmation at decision zone.
7. ENTRY: entry after trigger.
8. TRADE MANAGEMENT: changes after entry.

You can use the concepts of invalidation and confirmation levels and patterns for all of
these steps. Whether you use them for your analysis, for the chart patterns that you see,
for deciding whether to trade, if to trade at the decision zone, in which direction, whether
the space is useful for not, whether there is a trigger or not, whether an entry is still likely,
or whether the open setup is working as expected.

The concepts of invalidation and confirmation allow you to setup boundaries along the
expected path of least resistance and confirm whether price is still following that path or
whether it is likely to move into a different path.

Once again, trading is a continuous analysis of the path of least resistance, which can
change as price action and the chart provide new information. This new information
changes the old perspective and makes your analysis, your trade idea, your open trade
setup, or the price pattern more or less likely.

The path of least resistance can also change due to other financial markets as there is
larger interdependence, interconnection, and interaction between the stock market,
currency market, commodities, bonds, stock indices etc. A small change in one asset can,
through the butterfly effect, cause much larger changes in the system.

Tying It Together

These are the key lessons:

1. Candlesticks provide information on buyers versus sellers.

2. Candlesticks and candlestick patterns make up price swings.
3. Understand the importance of identifying price swings.
4. Understand how to find the start and end of price swings.
5. Price swings are either impulsive or corrective and bullish or bearish, which is the
heartbeat of the market and charts.
6. Identify price swings via AO, swat.FRACTALS, zigzag, and momentum and correction.
7. Price swings make up price patterns.
8. Wave analysis is just simply identifying and labelling price swings and patterns.
9. Labelling price swings / waves only makes sense once you can identify swings.
10. The charts are fractal in nature, repeating on all time scales. swat.FRACTAL
indicators help show the fractal nature of the chart.
11. The fractal nature of the charts is part of Chaos Theory, which explains that traders
can understand the financial charts in a more advanced way when they are able to
understand, recognize, read and interpret patterns – patterns repeat.
12. The Chaos Theory also explains that:
a. Charts repeat throughout time, which means trends and S&R concepts add
value.
b. The charts can either be in a trend (positive feedback loop), reversal (positive
feedback loop), or range (negative feedback loop).
c. Charts offer underlying patterns, like chart, divergence, time, wave patterns.
d. Self-organize: lower time frames can impact and help explain higher time
frames and vice versa.
13. Price, charts, financial instruments follow the path of least resistance, which is based
on repetitive impulsive and corrective patterns (Fractal/Chaos Theory).
14. The chart is a continuous battle between energy (impulse) and gravity (price back to
mean and average).
15. Price moves away from MAs if there is sufficient force, but retraces back to MAs (like
a gravitational force) once force is slower than the strength of S&R. These
movements make waves.
16. The path of least resistance can be analysed by using the triangle of analysis, which
is price patterns, support and resistance, and trend and momentum.
17. The path of least resistance helps determine decision zones, direction, triggers,
entry, and trade management.
18. Traders can analyse the expected path of least resistance better in the short-term,
up to 7 candles, than in the long-term as more factors can affect the price path.
Time patterns help traders understand the chart by allowing 5-6 candles to confirm
impulse, or else price is correcting.
19. The chart is our road map for understanding the path of least resistance but
everything on the charts is a probability.
20. The probabilities of patterns playing out can change depending on new information.
21. Patterns and the path of least resistance can change, which is based on the ‘Wave
function collapse’ from quantum physics.
22. The most difficult part is identifying the correct pattern and understanding when the
patterns are likely/looking to break down (fail) or be confirmed. Once you can
identify it, then you can trade it.
23. Use invalidation and confirmation levels and invalidation and confirmation patterns
to place boundaries on the expected path of least resistance.
a. If price stays in the path, then the path of least resistance is being confirmed.
b. If prices move away from the path, then the current path of least resistance
is (being) invalidated and a new path becomes more likely.
24. The patterns create a trading bias. But you need a bias to trade. Trading without any
bias will mean lack of commitment to the trade. Use invalidation and confirmation
levels and invalidation and confirmation patterns to base your analysis and trades
on reality.
25. Base your bias on patterns and analysis and use it to build up experience.
Chapter 12: Risk Management
Risk management is the number one factor for defending your trading capital. In essence,
it allows traders to keep trading. Your trading capital is like the inventory of your retail
shop. If you have no goods to sell, then you will be out of business soon.

Of course, if you are able to add more trading capital, then you can continue to trade but if
you lose too often and too much, then eventually there will be an end to your trading
business. Protecting the trading capital is essential for any trader and the number one goal
of any trader at any given trading day or week is to make sure that they can trade another
day. Their first goal is not to make money, but to limit losses. Always think about risk first
before aiming to make profits.

The market is volatile and any trade can end for a win or loss. This is valid for ALL setups,
even if your strategy says that a particular setup has a high chance, for instance 80% of
winning. Although people are hardheaded to believe that a setup with 80% win chance can
actually still turn into a loss. The reality is that 2 out of 10 trades will be a loss.

The unpredictable nature of the market means that traders should never, ever risk their
entire trading capital on 1 trade setup. This is even more important for traders that are
using leverage*, which is a normal approach when trading. If they do use their capital for
one setup, then there is a high chance that immediately or eventually one losing trade will
lead to the loss of the entire account (or even more).

(* leverage means that a broker or bank is temporarily providing you access to more
capital. A leverage of 30:1 means that traders can use 30x the size of their capital. If you are
trading with 5,000 euro, then traders are in effect trading with 30 times 150 is 150,000
euro.)

Traders can defend themselves by:

1. Using stop loss: using a stop loss for each trade setup

2. Max risk per setup: Limiting the risk on each and every setup.

3. Limiting draw-down: keep the draw-down (series of losses) as small as possible.

The above measures are especially important for leveraged trades. If you are ONLY risking
your own capital, then one could exchange a larger part of their capital (base currency) for
another currency without losing it all (unless a currency has a default).
Using Stop Loss
The stop loss is the exit point where traders accept a loss. Traders are tempted to avoid
losses and hence not use a stop loss but they run enormous risk. Without a stop loss,
traders are in fact risking their entire trading capital and more.

Many traders misunderstand the purpose of the stop loss. It is not to protect the trade
setup… It is to protect the trading capital.

That said, traders do want to use a technical spot for their stop loss to avoid taking
unnecessary losses. Losing trades is unavoidable but finding a technical spot for the stop
loss will help the survival odds of a trade setup.

Although the best approach is to use a technical spot, this will mean that the stop loss size
will vary from setup to setup.

The stop loss size is the distance between the entry and the stop loss. It indicates the taken
risk if traders use a fixed lot size. Elite CurrenSea however recommends using a fixed risk
per trade. When using a fixed risk, then the lot size is irrelevant. This is a misunderstanding
that traders often do not realize: a larger stop loss size does not translate into a bigger risk
if traders adjust their lot size. Here is how the math works.

Fixed lot size approach trading EUR/USD with for instance 2 minis (0.2 standard):
20 pips → +/- risking $40
50 pips → +/- risking $100
100 pips → +/- risking $200

Fixed risk trading EUR/USD with 1% risk per trade (1% of your trading capital). For instance,
risk 1% of $5000 is $50.
20 pips → 2.5 mini lot size → +/- risking $50
50 pips → 1 mini lot size → +/- risking $50
100 pips-→ 0.5 mini lot size → +/- risking $50

With a fixed risk per trade, the stop loss size impacts the lot size but the risk per trade,
which remains constant regardless of the stop loss.

Traders who apply a fixed lot size will have an incentive to use a tight stop loss in order to
reduce the risk. But that could come at the disadvantage of not placing the stop loss at
technically the optimal or best level. This in turn will it make more likely that price will hit
your stop loss and take your trade out for a loss.
Traders who apply a fixed risk per trade will have an incentive to use the best or optimal
(technical) stop loss level rather than a tight stop loss. The only difference is that the lot size
will vary from setup to setup, which takes some time to calculate manually or via software.
The process works as follows:

0. Know the risk per setup

1. Fin the technical and best place for the stop loss
2. Calculate the difference between entry and stop loss
3. Calculate the lot size based on 0. and 2.

There are also tools that help calculate the lot size automatically.

Max Risk Leverage Per Setup

The risk per setup should be limited but by how much. Is 25% per trade ok or is 10% too
much?

The golden rule is not to trade with more than 5% per risk per trade. Anything more than
5% per setup is considered to be gambling. Granted, you will probably have better odds of
gambling in the Forex than in the casino, but if you want to approach trading with a
professional and long-term approach, then limiting the risk to max 5% is key.

The 5% risk per setup means that if you have a capital of $5000, then you will choose a lot
size and stop loss size where you will not lose more than $250 per trade (5%of $5000).

The 5% risk however is only recommended for high risk traders. In fact, 5% risk per setup is
considered to be a risky approach. But it is within the margins of what is tolerable. This 5%
approach however means that losing your trading capital is still more likely. The main
benefit of 5% risk per setup is for traders who want to build up a small account fast and
who are fine with losing that account.

A more conservative and balanced approach recommends using a risk percentage of 1-2%
per trade. If you risk 1% per trade, then the chances of losing the trading capital have been
significantly reduced. Even if you were to lose 5 trades in a row, then the max you have lost
is 5% of the original capital. This is much less than losing 25% (5 trades * 5% risk).

Beginning traders could even be better off to trade with 1% risk per setup or even less than
1% risk. Trading with 0.25 or 0.5% is a much better starting point for training purposes.

The main benefit of risking smaller amounts is the effect on your trading psychology. The
less risk you take, the more traders can focus on the trading plan rather than on the risk. A
high risk will distract you as a trader. It will make you feel fear, nervous and anxious. All you
care about is the profits you make on that one single trade but you neglect your trading
plan. The problem is that 1 trade setup is never a guarantee. A trading plan is needed and
important to make profits in the long run. High risk trading keeps your attention away from
your trading plan, which is actually the path that leads to long-term success.

When trading with low risk per setup, traders will focus on the trading plan and the
long-term profitability. They will not set aside their trading plan rules because they are
trading with a risk percentage that does not make them fearful.

From this perspective, knowing your risk personality and establishing a risk profile that
suits and matches your trading style is important:
* A risk taker will feel bored if the trade setups use too little risk
* A conservative trader will feel nervous if the trade setups use too much risk

A trader must weigh his risk personality, trading goals, and experience to find a risk
management style that matches his or her short and long-term objectives.

Goals and account size matters too because a trader with a small trading account could
prefer to take more risk per setups in an attempt to build the account quicker. Someone
with a $500 or $5,000 account might not want to withdraw their profits from their trading
account and might prefer to keep the profits instead so that the account grows quicker to
for instance $1,000 or $10,000. Compounding will make this process go quicker as well if
the strategy and results are positive, of course.

Other traders might have larger trading capital, like $25,000 or $50,000, and prefer to
withdraw their profits regularly, like on a monthly basis. If they earn 10% in a month, then
this could equal to $2,500 or $5,000 and these traders might prefer to cash in and remove
those profits from the trading account.

Last but not least, traders should not over-use leverage and be very careful of
over-leveraging their account. But if you adhere to a risk management plan, use a stop loss
for every trade setup, and limit the risk to 1% risk per trade for instance, then you should
not bump into any problems with leverage. Leverage indicates the capital that is being
borrowed from the broker or bank to buy and sell financial instruments.

Traders who risk a lot per setup need to be aware that they are probably using a high
leverage. The danger of that is when the price goes against your position and the available
margin starts to decrease. The available margin indicates whether you have sufficient
capital in your account to maintain the open trade setups. If you run out of margin, the
broker or bank will do a margin call and they could either call you to add more capital
and/or close your open trade positions to limit their own risk.

Traders who trade with limited risk like 0.1-1% should not run into problems with leverage
if they stick to 1-2 setups at a time. Of course, a trader who opens up multiple trades or
more at the same time could face margin problems even if their risk per setup is limited
because the total risk still adds up to a substantial risk.

Limiting Draw-down
The number one method of keeping the draw-down low is by using a small risk per trade.
The draw-down measures the dip of your trading capital from highest point to lowest point.
The ups and downs that your trading capital make via your wins and losses is called “equity
curve”.

● A positive sloped equity curve means that you are consistently making more money
with your wins than losing money with your losses.
● A negatively sloped equity curve means that you are consistently losing more money
when you lose than making money with your wins.

Of course, most equity curves are not only up or down. They move up and down
continuously. But the equity curve slope (up, down or flat) does indicate whether a trader is
profitable in the long run or not. The draw-down measures how the account goes down
before it moves up again.

Let’s review this example: you start with a $5,000 account, which is 100%. In the next 10
trade setups (each risking 1% risk per setup), you won 7 trades and lost 3:
+ 2% Running total: +2%
+0.5% Running total: +2.5%
+1.5% Running total: +4%
-1% Running total: +3%
-1% Running total: +2%
-1% Running total: +1%
+0.2% Running total: +1.2%
+0.5% Running total: +1.7%
+5.5% Running total: +7.2%
+3% Running total: +10.2%

Total profit: 10.2%. What was the draw-down in this series of trades? We would always look
for the largest negative series. In this case, there was only 1 set of trades where the equity
curve went downwards. There were 3x losses in a row (total went down from +4% to +1%),
which created a draw-down of 3%. A draw-down can happen whether the account is in
positive or negative territory.

Furthermore, a draw-down can also occur even if a winning trade disconnects a series of
losses from each other. Here is another example:
+1% Running total: +1%
+0.5% Running total: +1.5%
-0.8% Running total: +0.7%
-1% Running total: -0.3%
+0.5% Running total: +0.2%
-1% Running total: -0.8%
-0.5% Running total: -1.3%
+3.5% Running total: +2.2%
+2.5% Running total: +4.7%
+1% Running total: +5.7%

Total profit: +5.7%. What was the draw-down in this series of trades? Perhaps you think
-1.8% because the two sets of two losses were interrupted by a win. But in my definition,
the low point was not yet reached so I consider the set of 5 trades (4 losses and 1 win) to be
part of the draw-down. The draw-down therefore was -2.8% (the total of those 5 trades).

The second best way to keep the draw-down limited is to use a fixed risk per setup.
Although some traders vary their risk per trade, it’s OK if the overall risk is small and you
have a lot of experience in handling this approach. For most traders, it is best to risk the
same risk percentage on each setup. That way, you don’t lose more on your losses and win
less on your wins. The problem with varying your risk per trade is that you could win a
trade when risking 1% but lose a setup when risking 3%.

Generally speaking, the lower the risk and volatility of your account, the better it is for your
trading performance. The more volatile your equity curve is, the more return you need to
make to justify that risk.

A low draw-down is essential (what is low depends on your risk personality). If traders start
to show large losing streaks, then often they become nervous and fearful that they will lose
their trading account. The trading psychology becomes negatively impacted and this leads
to a spiral of doom (more risk leads to more risk, which leads to losing the account).

The best approach is to compare your total gain with your draw-down. If you are risking a
lot to make a little profit, then this is a very risky approach. If you are making little, but
risking less, then this is in fact more desirable. Let’s provide two examples:

Method A: +25% profit, 40% draw-down

Method B: +20% profit, 20% draw-down

Which method is better?

Many traders would choose method A because it provides them 5% more profit. However,
if you take into account the risk involved, then method B is a much better choice by a long
distance. Method manages to make 20% with 20% draw-down, which is a 1:1 ratio. Method
makes +25% but with 40% risk (draw-down), which is 0.62 ratio. Method A is much better as
the risk (draw-down) is much more tolerable.

A good rule of thumb is to realise that the profit target you have in mind for a year is equal
to the draw-down level that you should expect in a year too. Experienced traders will be
able to gain (much) more than their draw-down but it is a good rule at the beginning.

Another approach could be to consider what draw-down levels you could manage to
handle as a trader. Some traders are conservative and prefer not to lose more then 5% of
their trading capital. Others are fine with 10, 20, 30, 40, 50, 60 or even 70% draw-down
levels.

Keep in mind that the draw-down that you think you can handle is in reality a lot more
difficult to handle in real live trading. So if you have never experienced a draw-down, then
always start with a low draw-down first to see how that works out for you. Depending on
that experience, you can increase or decrease it. A rule of thumb that could work is to take
the draw-down that you think is fine for you, and then reduce it by 50%. So if you think that
you could handle 20% draw-down based on your assessment of your risk personality but
you do not have any experience in this area, then try 50% of 20% first, which is 10%
draw-down.

Based on this maximum draw-down, a trader could calculate the risk per setup. If a trader
does not want to have a larger draw-down than 10% of their trading capital, then they can
divide this 10% with their max expected or historical losing streak. If a trader looks at their
trading statistics and sees that the largest series of losses was 8 units of reward to risk (1%
risk per setup means 8% loss), then a trader could trade 1.25% (10/8) risk per trade and
expect to stay within the 10% draw-down limits in most cases. It is useful to have a buffer
just in case but the rule helps provide an idea about risk.

Let’s use another example where a trader is willing to accept 20% risk. His largest
drawdown streak is 10 units of reward to risk, which means that they could trade with 2%
risk per setup (20/10) and still stay within the 20% draw-down limit.

If you are not sure whether your expected losing streak is tested sufficiently, then it is good
to use a more cautious number. If the current losing streak is 10 but your testing period
has been quite short (only 1 year of back testing for instance), then assuming a value that is
twice as high is a good safety measure. In that case, traders could consider trading with
less risk per setup, just in case.

Account Management
Traders should never ever borrow (loan) money to engage in trading. Trading financial
markets must always be done with surplus capital that can be lost without affecting your
lifestyle in any way. This is very important because traders must focus on following their
trading plan rather then chasing profits. If you feel that you must win so you can earn
money to buy essential goods, then you will make bad trading decisions due to this
pressure. Only risk what you can lose.

You must choose a percentage of your capital that you can handle losing if the entire
capital were lost. And in a certain way, traders should kind of expect that the trading capital
will be lost once they engage in trading. What percent you choose to dedicate to trading
depends on your risk appetite. The lower the percentage, the least risk a trader is taking. Of
course a trader who risks 1% of their total savings has less stress than someone who risks
25% of their savings in their trading account. Houses and other assets should not be
counted towards savings and we are only talking about liquid assets.

Once you have chosen a trading capital that you feel comfortable with, then you can decide
if you want to open one trading account or perhaps multiple ones. If you are trading with a
small account, then probably choosing one broker or bank is sufficient. If you are trading
with larger sums, then opening up two or more accounts and spreading the capital and risk
makes sense. You can check the financial authorities where the broker or bank of your
choice is located to see whether your deposit is insured against bankruptcy and if so, to
what amount. Opening up multiple trading accounts is also a good idea so that traders can
compare spreads and costs, liquidity and price movements.

Generally speaking, withdrawing money regularly is a good practice so you actually notice
the benefits of your hard work when trading. Leaving all the money accumulated can
sometimes tempt traders to risk more and more and sometimes, the profits might
disappear. Locking in profits is good from a psychological point of view.

Elliott Wave Risk Plan

Elliott Wave traders like to vary their risk depending on the Elliott Wave structure of a chart.
Although we prefer taking fixed risk per setup, in certain circumstances it is possible to use
slightly different levels of risk at certain moments. The risk should always vary slightly and
never exceed the max risk of 5% of course.

The logic behind using more or less risk when trading the Elliott Waves is that some waves
are more interesting to trade than others. A wave 3 for instance has more potential than a
wave 4 because the 3rd wave offers space and momentum in one direction whereas a
wave 4 is choppy and corrective.

How a trader divides the risk per wave is an open debate but here is a suggestion:
● Wave 1: 60% of usual risk
● Wave 3: 100% of usual risk
● Wave 5: 80% of usual risk
 ● Wave A: 40% of usual risk
● Wave C: 60%-80% of usual risk

Risk Management Ratios

A trader has a wide range of risk management ratios which they can use and analyse to
assess their risk.

Reward to Risk (R:R) ratio

Traders are usually well aware of the importance of win vs loss percentage but not many
traders realise that it is not only about how often a trade closes for a win. An equally
important ratio is the R:R ratio, which indicates how much a trader wins when they win and
how much they lose when they lose.

Traders love to focus on a high win record but they fail to see the dangers ahead. Even if
you have 100 wins a row, one loss could wipe out all your gains. For instance, let’s say you
win 1 pip in those 100 trades. You just won 100 pips. One loss of 150 pips however wipes
out your gains and places you at a loss, assuming equal risk on all setups. Being “right” like
this could lure traders into a false sense of safety.

Traders must realise that profitable trading is about the win rate and the r:r ratio. Here is
how you can calculate the expected profitability:

Expected profitability = (win rate * average win) - (loss rate * average loss)

If the win rate multiplied by the average win is higher than the loss rate multiplied by the
average loss.

For instance, a system with 67% win rate, average win of 0.91, and average loss 0.73.

(0.67 * 0.91) - (0.33 - 0.73) = (0.6097) - (0.2409) = +0.3688 positive expectancy per each
setup.

This means that with 1% risk per setup and an average of 13 setups a week, traders can
expect to earn 4.7944% a week, or about 20% a month.

These statistics are not random. They are in fact the results that our ecs.LIVE service has
managed to achieve between 23 October 2017 and 12 April 2019. If you want to benefit
from the same trading setups, including our own entries, stop losses, and take profits
pre-fact, plus education, live webinars, and live analysis, then join our ecs.LIVE service now.
Sharpe ratio
The sharpe ratio is an interesting statistic that helps explain whether your return is
sufficient in relationship to the risk of your strategy (or portfolio). The Sharpe ratio was
developed by Nobel laureate William F. Sharpe. The ratio is the average return earned in
excess of the risk-free rate.

It is calculated as follows:

Sharpe ratio: (expected portfolio return – risk free rate) / portfolio standard deviation

The standard deviation is a statistic that measures the distribution of performance

compared to its average. It is calculated by taking the square root of the variance, which is
the distance between result and average. If the data points are further from the mean,
there is a higher deviation within the data set; thus, the more spread out the data, the
higher the standard deviation.

The disadvantage of the Sharpe ratio for trading is that getting large wins is not a bad thing,
yet for the sharpe ratio it would actually increase the standard deviation and make the
strategy more risky. This is what the Sortino ratio has solved.

Sortino ratio
The sortino ratio is calculated as follows:

(expected return – risk free rate of return) / stand. deviation negative assets

The sortino ratio only looks at the volatility of losing trade setups. Large winners do not
count towards a higher volatility, which therefore makes it a better measurement of reward
to risk then the Sharpe ratio, especially in trading and Forex trading.

T-Statistic

The t-statistic helps calculate whether a trader is achieving their results from luck and
randomness OR whether a sustainable approach is behind the success (source: Blue Owl
Press).

This is VERY important as it provides a key understanding whether:

1. The trading system is expected to be profitable in the long run.
2. Traders are handling their risk management properly.
3. Traders are progressing or in other words are we using less luck and more skills
when achieving success.
The t-statistic basically indicates how much distribution you could expect around your
average result (source: Blue Owl Press).

1. When the variance is wide then there is a high(er) chance that the result was pure
luck (image below).

2. However, if the variance is small then there is a higher chance that traders will see a
similar repeat of previous results in the future (image below).
 3. A higher t-statistic indicates low levels of variance and hence increases the level of
confidence.
a. The lower variance and higher t-statistic is better for you as a trader and is a
critical aspect of a trader’s consistency.
b. A t-statistic above 2.0 is considered long-term viable / sustainable.
c. The higher the t-stat figure, the better it is for a trader. A t-stat of 4 is better
than 3 and indicates less variance.
4. A lower t-statistic indicates high levels of variance and thus decreases the level of
confidence.
a. A t-statistic below 1.0-1.5 is bad and a t-statistic of 1.5-2.0 still needs to prove
itself.

Here are the step by step instructions to calculate the t-statistic yourself:

Step 1) Choose a group of weeks, months or a bunch of trades you want to analyze. It’s
good to have a sample size of minimum 30 trades. Take the % result of each setup and
then count the total of all the setups.

Step 2) Divide the total by the number of trades to get the average result per trade.
Step 3) Take the % result of each setup and subtract the average (point 2) per trade.

Step 4) Multiply the result of point 3 of each row by/times point 3.

Step 5) Count the total of point 4 for all rows.

Step 6) Divide the average result per trade (point 1) by point 5.

Step 7) Square root of the number of trades.

Step 8) Multiply point 7 by point 6 = t-statistic.

Chapter 13: Trading Psychology
Do you sometimes wonder what are the best approaches for tackling fear, greed, and
regret when trading? Or do you have problems with following your trading plan or wonder
how we tackle trading psychology in general?

This chapter will review key questions such as:

● Why is trading psychology important?

● Why is trading psychology so hard?
● How do you improve trading psychology?
● And other practical tips and ideas.

Part 1: Why is trading psychology important?

Forex trading is the art and science of successfully combining 3 core elements:

● Risk management - this improves the chances of protecting our trading capital
○ Traders who are lacking in risk management could lose all of their trading
capital, which means the end of business and game over.
● FX trading strategy (CAMMACD, LIVE and SWAT) - this improves the chances of
increasing our trading capital
○ Traders without a strategy might not lose their capital but certainly have
difficulties growing it.
● Trading psychology - this improves the chances of protecting our mental capital
○ Traders, who are weak in the trading psychology department, could lose their
trading capital because their mental capital can’t handle the stress and
strains, which lead to costly mistakes.

Forex traders are running into serious risks if any of the above points called the “3 pillars” is
missing or weak. Traders must carefully maintain a balance in this “house” of 3 pillars to
achieve consistent profitable trading.

A trading plan shows traders how to approach risk and strategy, which is why it is a crucial
method in obtaining success in Forex trading. However, it becomes worthless when the
psychology is incorrect.

If a trader has a great plan but they are not able to follow that plan, then the trading plan
will certainly fail. The trading psychology is basically the GAP between the trading plan on
paper and the reality:
 ● The more problems with trading psychology, the bigger the difference between the
trading plan and the actual real life trading (reality or execution);
● The fewer problems with trading psychology, the smaller the difference between
the trading plan and the actual real life trading (reality or execution).

The gap needs to be as small as possible! That is why trading psychology is important.
One very important way of minimizing the gap is to make sure that our psychology is in
sync with the risk management and strategy.

Minimizing the gap

One of the reasons why the gap widens is because Forex Traders love to break the rules!
Why?

Because it’s part of our DNA! ;)

Forex traders are per definition rule breakers because we are trying to earn income in a
‘non-traditional’ way. Remember the standard way that most people earn their living is via
9 to 5 employment, which is considered secure, safe and socially accepted, yet is often
disliked, low rewarding and not as secure as it seems. As a Forex trader you want to test
those waters and try something else!

So… Now that we have established that YOU are a rule breaker, you need to ensure that
this does not turn into a weakness when trading the Forex. Breaking the rules could be a
good motive to start trading Forex, but will seriously hurt you if you do it during trading.

There are 2 main reasons why Forex traders break the rules very regularly:

● They do not treat trading as a business but as a hobby.

● Their trading psychology and trading strategy do NOT MATCH…

Hobby: most of the trading decisions should be clearly outlined in the trading plan. Trading
is a two-step process where traders set up their trading plan beforehand and then execute
their plan during the trading day. This document is an important rule and guideline book to
keep the head cool and focused on the most profitable decisions in the long-run.

During the heat of the trading battle, however, taking decisions can become more ‘messy’.
Forex traders tend to make emotional decisions, which are often counterproductive in the
long-run.

Difficulty in taking trading decisions often arises in 3 cases:

1. In areas where the trading plan does not specifically explain what trader should do;
 2. In areas where the trader has difficulty with implementing the trading plan;
3. During individual trades where traders might have the urge to abandon their
trading plan.

Ultimately problems arise due to a trader’s psychology OR the lack of clarity in the trading
plan. In all cases traders must avoid emotional and impulsive based trading.

● Another reason why Forex traders break the rules so often is because

Match: what do we mean with “match”?

Simply implementing rules which are “going against” your analysis and outlook… Every
trader has a ‘natural’ way of trading. This is a method that is supported by their view on
markets and trading and instinctively makes sense. When you trade a method that does
not fit with ‘you the trader’, then obviously rules will be broken!

Traders must create a trading plan where it is easier to follow the rules then break the
rules. Otherwise failure of implementing your plan is luring around the corner each and
every trading day. Traders must create a sustainable flow of correct strategy
implementation and keep the mental balance along with it (see the rest of this document
for tips on that).

So the motto is: Forex trading is simple, but it is not easy because breaking the rules
IS easy.

Optimizing psychology and strategy

There are 3 great methods to figure out whether psychology and strategy are aligned with
each other.

● Evaluate YOUR own trading. Here is a checklist:

1. A trader must know if something was not implemented as per plan. Those
areas are usually the weak spots of a trader.
2. A trader can then judge whether this was a repetitive error or a single
occasion.
3. If it was a first time error then it was most likely an unlucky incident and it's
best to analyze how future mistakes can be avoided.
1. With a repetitive rule break, don’t be mad at yourself but instead work on
understanding why the rules were broken.
2. It is best practice to re-evaluate the rules and strategy and analyze which parts need
to be altered so that the new rules are indeed in sync with the psychology.

● Another preventive tool is to complete an analysis of strengths and

weaknesses of you as a Forex trader. A trader is able to comprehend what style,
 indicators, tools, time frames, discretion, etc are best suited by identifying strong
and weak points. You want to understand your strong and weak points on topics
like:
1. Ability to cope with stress and stressful moments
2. Current distractions or other time commitments
3. Ability to focus on one task
4. Determination to complete the job
5. Willingness to take risk and manage risk
6. And any other topics that are important for you and your analysis

● Choose a strategy that allows for flexibility in implementation and

adjustments for personal preferences.
1. When a Forex pro uses a very rigid strategy, there is no guarantee that
another trader can copy that success.
2. This changes drastically when a Forex pro uses a sturdy, strong and solid
strategy, but allows for personal adjustments. In that case other traders can
copy that success because they are able to personalize the strategy to match
their psychology.
3. Elite CurrenSea offers that ideal mix of well-tested, strong and simple
strategies. We offer both rules based (CAMMACD and LIVE) and discretionary
approaches (SWAT).

Part 2: Why is trading psychology so hard?

Every trader has difficulties in different areas. Some traders become nervous when the
trade goes against them, whereas other traders become nervous when the trade gets
closer to the take profit.

Emotion-led trading decisions is THE MOST prevalent factor causing traders to fail in the
cutthroat world of trading. Plenty of mistakes are made when traders become impulsive
and make emotion-driven decisions.

While we’re all humans alike, professional traders are most learned when it comes to the
art of keeping their emotions under scrupulous control. Emotional equilibrium, if you will.

Emotion-driven trading decisions are never based on logic and most often lead to losses.
Profitable traders derive decisions from well-developed strategies designed to keep their
emotions at bay.

If you don’t master your emotions, your emotions master you.

Greed, hope, fear, impatience

The most common trading emotions are:
1. Fear
2. Greed
3. Hope
4. Boredom
5. Frustration

Greed, hope, fear and impatience are the enemies of all traders. Any of these emotions
could easily disturb a trader’s balance and bring the trade and account crashing. Traders
must walk across a thin rope while trading so losing one’s balance can occur quickly.

Traders often make the following mistakes when they notice greed, hope, fear or
impatience:

● A greedy trader could take profit too soon.

● A hopeful trader could exit too late.
● An impatient trader could exit too soon.
● A fearful trader could take a loss too soon.

All of these emotions lead to undesirable outcomes.

For traders, fear is an emotion caused by a thought process because obviously there
should be no fear of any physical harm when being behind the pc. Our internal thoughts,
however, can be destructive. Our internal thoughts distract us by imagining losing trades,
rigged markets, wrong markets, and losing accounts, which certainly will undermine a
trader’s confidence.

Here is a list of possible reasons causing fears:

● Insufficient knowledge of the market, trading, currency pair

● Insufficient experience in applying the knowledge
● Improper risk management
● Money management rules which do not fit your trading style
● Fear of a new trade & fear making a mistake again
● Dwelling about past mistakes
● Paralysis of analysis in their decision making capabilities
● Not enjoying the act of trading and not treating it as intellectual challenge/game
● Any other reason a trader might regard as the cause of fear

Novice or veteran, chances are that you have experienced all of the above listed emotions
somewhere in your trading journey.
Fear wreaks havoc on a trader’s psychology and equity curve. Being the strongest emotion
of the 5, fear is indeed deserving of the number one mention in this article. Fear begins as
soon as a trader starts trading a live account and loses money.

In a trading context, there are 4 major causes of fear.

▪ Fear of losing
▪ Fear of missing out (FOMO)
▪ Fear of profitable trade turning bad
▪ Fear of being wrong

Fear of losing
Growing up in a world where success is quantified by the balance of our bank accounts,
fear of losing is most common in the trading world. Most of the new traders entering the
market are not profitable due to the lack of proper trading education and access to a
sound strategy. [So If you end up here reading this, you’re lucky ;)]

As losses pile up, their psyche suffers and they experience fear. Fear that they can’t figure
out a way to be consistently profitable, that not only would they not find success in trading,
but the fact that they end up paying for it.

The fear of losing causes hesitation during trade executions and exits, making the trader
miss an otherwise good trading opportunity or lose a good entry price.

Even the most successful professional traders experience losses, but the factor separating
them from emotional traders is that they understand and trust their strategy’s statistical
performance, deriving their confidence to execute that winning strategy without fear.

In the midst of a chaotic market environment where the only constant is change, it is key to
find your constant (strategy) and stick with it throughout.

Fear of missing out

Fear of missing out or #FOMO is another major fear. I couldn’t find a better example of this
than the Bitcoin mania in 2017. Everyone, even non-traders, wanted to jump onto the bull
bandwagon. They feared missing out on profits so much that they jumped onboard
throwing caution to the wind.

Notwithstanding the fact that people who got in early made money, those who bought
Bitcoin due to FOMO came onboard too late and got obliterated when price crashed out.

Trading the financial markets requires planning and a sound strategy to be profitable.
Trading decisions based on FOMO is irrational and markets punish those that act in this
way.
“An investment in knowledge pays the best interest” – Benjamin Franklin

Fear of profitable trade turning bad

Fear of a profitable trade turning bad is mostly felt by traders who experienced more
losses than winners historically. Upon seeing profits, they want to “lock it in” as soon as
possible.

These traders often exit prematurely just to see the price go in their favour afterwards. “If
only I’ve held on that trade, I’d have made so much more!” In psychology, we call this
hindsight behaviour and traders without a strategy tend to make these mistakes.

KNOW how to let profits run and minimize risk.

Fear of being wrong

The fear of being wrong has to do more with a trader’s ego desiring to be right, rather than
focusing on the business of money-making. If you have a strategy that has a proven track
record of being consistently profitable, then you wouldn’t have the fear that a trade may
not work out.

Traders afflicted by this often make the most common mistakes; like banking profits
prematurely or widening stop losses in hopes that the trade would eventually go in their
favour.

Fact is, there will always be losses in trading. They have to be accepted as part of the
business. If you fear that you may be wrong about a trade even when it fulfils system
parameters, you are setting yourself up for failure.

Don’t trade the pair. Trade the strategy.

Greed
Greed often creeps in when traders have been on a prolonged winning streak. The feeling
of invincibility clouds judgement and gives the trader a false sense that trading is easy.

Greedy traders often over-risk and break rules. Their behavioural pattern evolves to match
that of a gambler and in the gambling world, the edge belongs to the casino. By engaging in
greed, a trader relinquishes their position of control to the markets.

The out-of-system (OOS) trades, impulsive entries, and volatile risk management quickly
crashes out their account.

Hope
Traders who find themselves in a losing position yet refusing to admit their impending loss
turn to hope. They widen their stop losses and try to compensate for past losses. We all
know how this will turn out. There is no place for hope in trading.

In trading, hope is a nicer term to describe a person living in denial.

Boredom
Trading profitably requires a tremendous amount of patience, planning and EXPERIENCE.
So often traders become bored when they are trigger happy, impatient to wait for their
strategy to tell them it’s time to trade.

Trading for the sake of boredom is trading without a plan. This WILL lead to losses. Even if
one manages to net a profit after trading out of boredom, they stand the chance of doing it
again, creating bad trading habits.
Frustration
Frustration comes in many forms. Whether be it you a trader is frustrated with himself not
following his trading plan, or he is frustrated from experiencing a prolonged draw down. It
happens to the best of us.

We follow our strategy rules religiously without deviation to minimize this. Drawdown
frustrations could be managed by taking a short break or taking a breather (I personally
just take a stroll in the woods).

Protect our mental capital by knowing your strategies, capabilities and limitations. Be
willing to work in the parameters of it, accepting it’s not the holy grail. Confidence in your
system goes a long way indeed.

How to Control Emotions in Trading With Strategy

A good strategy has rules that draw boundaries and keep traders from experiencing
negative emotions, while building confidence in a trader’s ability to follow those rules with
zero deviation.

Once a trader starts seeing positive results on a long-term consistent basis, they begin to
trade more like an EA, without emotions.

Don’t find the holy grail. Find a decent strategy that has withstood the test of time.

Conclusion: Trading Without Emotion

All negative emotions in trading can be managed by following a strategy designed to deal
with these aspects of trading.

Learn to trust a sound strategy when you see one and have the confidence to execute it. At
the end of the day, not all trades will work out but a sound strategy makes it count when it
does.
In the uncertain markets, constantly looking for a new certainty in itself is a form of
uncertainty.

What’s in your hands? Backtest it. If it’s good, stick with it. Finding something supposedly to
be “better” and running both concurrently does bad to a traders mental capital.

No matter which stage you’re at, it is our calling here in ECS to bring you to a stage of
unconscious competence.

Where Does Fear Come From?

Fear is embedded in the subconscious mind. Accessing, interpreting, and understanding
that inner mechanism of the brain is very important, yet difficult to achieve.

Fear often stems from deeper beliefs about what is good or bad, about making a profit,
and the mechanics of the market, according to Bill Williams in this book Trading Chaos.
These beliefs are developed in our past due to our experiences and culture and are the
cornerstone and building blocks for the way we view the market. This belief system
however can run contrary to the nature of the market and therefore hinder success.

A self-protection mechanism embedded in our subconscious is another deeper reason

for fear. Survival is the strongest and the highest overriding goal in our system and the
subconscious mind bears the ultimate responsibility for that. This defense of ourselves by
the subconscious mind is powerful and complex and is very difficult to regulate by the
conscious mind.

But there is a solution… You need to free yourself of these emotional chains to enable
a clear mental state and be(come) a rock (star)!

Our attention, actions and focus go to the area of our thoughts. So if we think negatively,
we might be focusing on it as well. Our view of the world is then seen through a negative
lens.
Therefore ask yourself: am I thinking in fear and failure when approaching the market?
When you think in fear then you will act in fear.

A trader must slowly but surely substitute fear with a balanced confidence.

A balanced confidence means that fear is NOT replaced by arrogance (when too successful)
or by aggression (when unsuccessful).

Personal and market beliefs

We traders filter the information and price action we want to see and use. This is called our
paradigm. Our character, our attitudes, our past, our culture, our experiences and our
beliefs all influence that paradigm. They influence our view of the world. They therefore
also are an integral part of how and what we think of the market and how we approach it.
That belief system will impact our mindset when approaching trading.

The good news is that we always can change our attitude towards the market and
therefore change the paradigm we use to see the market. That new view might make it
possible for an entirely different mindset and approach to trading and to the markets.

Why is a mindset important?

1) You will be able to see more and different kinds of opportunities never seen earlier.
2) With the absence of fear, you will also be able to handle and judge that information
in a confident manner.
3) There will also be no temptation to tinker with risk management. Why over risk or
under risk at any point in time when you know that the market provides plenty of
opportunities.

The individual will become a well balanced trader. They understand that their market
interpretation will be both right and wrong, but their confident approach to trading will
allow them to have fun and achieve better results.

The best thing a person can do to succeed in trading is to have a positive and hands on
approach towards the market, trading and learning.

By having a positive can-do attitude and openly analyzing your thinking process, your
attitudes and actions, you will start to constructively work on making you a better trader.
This will replace fear for a balanced confidence.

Trading Bias

Based on the analysis of the charts, traders can decide whether the chart is interesting to
trade or whether it is a better decision to skip this particular financial instrument. To be
able to trade your analysis, the next step is always to translate this analysis into a concrete
trading plan. This translation often causes problems with traders, because traders feel
emotionally attached to their analysis and trading plan.

Usually there are two types of traders and they have their own challenges:
● Analysts who are insecure about taking trades based on their analysis (they do not
trust their analysis enough).
● Traders who skip the process of analysis and are too secure about taking trades
(they analyse too little based on too little experience).

Here is the solution for both groups.

 ● Analysts:
○ Need to slowly but surely learn to trust their own analysis.
○ Take smaller risks so they feel comfortable following their analysis.
○ Analyse the charts less frequently so they second-guess their analysis less
and only re-analyse the charts at the right time.
● Traders:
○ Need to slow down and actually analyse the charts first.
○ Be open to new information that arrives with new candlesticks.
○ Not assume that they are always right.

That said, trading bias is a problem that exists for all traders and analysts. The main issue
once analysis has been completed is that both analysis and trading plans by their very
existence create a trading bias. Certainly entering a trade will create a bias because traders
are expecting price to move up or down, otherwise they wouldn’t have reason to enter.

This bias in turn creates emotional ties to your analysis and trades. Once you have a
trading bias, then it is difficult to remove this bias until after the trade or analysis has been
closed or concluded. After the fact there is a chance that traders see the charts from a
more neutral point of view.

During the trade or analysis, the trading bias will impact our view of the information that
the chart is communicating. We will be biased to believe that the new chart information is
supporting our own vision and tend to ignore warning signals that indicate the opposite
(that price might not move as our analysis or trade expects). So if a trader thinks that a
chart is bullish, they tend to see price confirm their view.

This trading bias is called a confirmation bias. New information is not properly analysed
because traders try to curve-fit the new information from the chart within their current
bias. Traders lose their ability to analyse the charts with a clear vision and instead, start
cheering for one side (bulls / buys or bears / sells) in the same way as they would cheer for
their favourite sports team.

Another problem with trading bias is that traders, especially beginners, have a bias that
isn’t based on trading experience, but untrained ‘gut’ feelings. These types of trading biases
make traders choose for wrong decisions like breaking our trading plan, not evaluating our
trading, not learning from feedback, not working on improving our trading plan, focusing
on short-term results rather than long-term strategies. A trader with experience will also
have a trading bias, because simply analysing the charts could be enough. The difference is
that their bias is based on experience, a trading plan, and solid analysis based on the path
of least resistance.
That said, a trading bias is a must and avoidable. Why? Having a trading bias is in fact
needed to have sufficient confidence in a trade setup. Without it, you might abandon the
setup too soon.

Successful trading is not about removing emotions but rather learning how to handle
them. All in all, traders need to have a trading bias so they trust their analysis and trading
idea but they need to remain balanced when new information arrives and evaluate it in the
same manner when they would not have any emotional attachments to the analysis or
trade. Above all, the trading bias should all be based on solid methods, a trading plan, and
a feedback process, and certainly not on inexperienced gut feelings.

Successful trading is about being neutral and open to new information. It’s also about
learning from errors and not becoming emotional about a loss or being ‘wrong’. Traders
should favour one side based on their analysis but not attach or cling to one side. Traders
should use new evidence for analysing their current analysis or trade setup, but adjust
slowly and only base that judgment on concrete methods (not gut feelings, unless you have
a lot of trading experience).

Characteristics of a confident versus fearful trader

The views of the confident trader and fearful traders differ. Of course not all traders will
share all of these characteristics.

It is your decision to judge which characteristics are good/bad and which ones can be
improved. In general though, we can see the following distinction between traders with
fear and traders with confidence.
Trader with Fear Trader with Confidence

They like trading sometimes They (almost) always love trading

They use the market to prove they are They love to be wrong - only then do they
right - they seek to confirmation of what is know what elements they are doing wrong
right, and care less of what can be and what needs to be changed
improved

They act in fear and have phases of over They are fearless, but not overconfident or
confidence or insecurity reckless

Their focus is on being correct and having Their main focus is on the return %, not on
a high win% the win %
They fear the market and view it as a They know there is nothing to fear from
dangerous place. They fear their trades, the market - the market speaks, they
their losses, their evaluations listen.

Their main goal is money - trading is a Their main goal is trading - they enjoy the
means to an end act of trading in its own right

They treat trading as a test and not as a They approach trading as a game and an
game or something that is fun to do activity which is fun

They challenge the market and not They challenge themselves and not the
themselves market

They might not be prepared with proper They have everything very well prepared
testing, no strategies or proper strategies, and their game plan is crystal clear
no or incorrect risk and money
management

They might not have a risk limit or they They know when to risk more or less
might exceed that limit depending on the market conditions, but
they never risk more than allowed

They view the market as confusing and They view the market as a place where
directionless price chooses the path of least resistance

They are impatient and absent minded They are patient yet alert

They might freeze in their decision making They are always open and responsive
capacity as the fear and stress paralyzes towards new information and are able to
their ability to evaluate new information (re)evaluate their trading situation without
stress

They will get (very) emotional with every Their emotional balance is (always)
loss or win. They will get mad at the maintained. They accept their wins and
market. their losses.

They see the market as a beast, which is They view the marketplace as a natural
ready to take their money at any point outcome of the psychology of all the
traders in the market

They do not review their trades, they do They review every trade, they evaluate
not evaluate their trading day, they do not every day, they review their evaluations
review their evaluation plan and points

They do not learn from trading mistakes in They make sure they learn from their
the past mistakes
Most successful people are successful because they actually enjoy the activity they are
performing in its own right, without the financial benefit. People learn a lot quicker when
they enjoy something without any external benefit compared to the people who learn
something with the purpose of gaining a benefit.

Discipline and patience

It requires a lot of discipline to diligently and consistently work and improve on your
business and trading plan. But it will lead to better perspectives because the trader will
invest sufficient time into research, charting, demo trading, paper trading, live trading, risk
management, money management, and strategies.

It also requires a good dose of patience. The profits will most likely not be rolling in from
day one. The process of creating a business and trading plan simply requires sufficient
time. In fact, for most traders it takes a couple of years before they become consistently
profitable. This holds true not only in the world of Forex, but also in the broader business
world. Many startup companies struggle in the first few years. It is vital that all of your
stakeholders are aware of this time plan and investment because even if you do not run
out of patience, your environment certainly could.

For many the temptation to immediately capitalize on the opportunity the market provides
is just too great. They start trading with real money way too soon. The early enthusiasm
gets slammed down at one point or another when the luck runs out and the lack of
preparedness becomes apparent. Any patience that was still present just vanished like
snow before a blazing sun.
The level of discipline and patience traders have at the moment they start and progress in
their trading career certainly varies from trader to trader. Despite the variations among us,
all traders equally share the opportunity to improve on their discipline and patience skills.

Discipline

Discipline can be increased by creating a routine.

Remember that you are what you habitually do. If someone is watching TV and playing
video games 20 hours a day, 5 days per week then their chances of succeeding in the Forex
market are – logically – low. When tackling anything in life, the best and fastest route to
success is when a consistent approach is applied. Without the consistency, traders will
swing back and forth between periods of success and losses. The best method is to do
regular (daily, every 2-3 days) activities that are connected to improving your Forex trading.
What you can handle as a routine (intensity) is irrelevant as long as you can apply it
regularly instead of investing a ton of time ad hoc for one week and then not looking at it
for 3 months.

The next golden rule is to tackle goals step by step.

Once you have a routine in play and have developed the discipline to follow it, you can start
working on your goals diligently. The only thing stopping you now is lack of patience.
Creating a step-by-step plan allows you to break down the goals into manageable pieces
and also allows you to prioritize the importance of tasks. In the end, it provides you with a
method of reaching the big goal. The step by step approach is important for remaining
patient: the fact that targets have been hit at the end of the day, week or month boosts
excitement and motivation and keeps the mind on the right track.

Organize yourself by writing down (on paper, pc, tablet) the tasks.
It should be mentioned when the tasks need to be completed by when and how important
they are. The task list provides perfect clarity. Providing yourself an honest grade for your
own performance at the end of the day is one way of keeping your mind focused on the
duties at hand instead of being distracted.

An important part of the step by step approach is the time element. It is important to keep
track of how effective you are in tasks. That way you can consistently try to improve your
speed and quality of your tasks. Actually measuring the length of how long it takes to
complete something and then setting that as a standard for the future is a very effective
method. This of course does take discipline, as mentioned above.

Patience
Forex traders run into trouble when a decision must be taken immediately. This is the
ultimate pressure point which precedes impulsive and emotional decisions during trading.
The pressure slowly grows as the trader is analyzing and reviewing the charts:

● A thought suddenly enters the mind which forces you, the trader, to consider a
decision right now and quickly;
● The market does not pause and wait for your decision to be taken, which can
amplify the nervousness around that decision;
● The longer it takes to make a decision, the more the internal pressure is created and
the more difficult it will be to remain calm;
● This, in turn, increases the chance of an impulsive emotionally based decision.

I think the internal pressure to make a decision quickly increases when traders feel they do
not have sufficient time to reflect on a decision. Those moments happen most of all during
these times:

● The market is moving fast (momentum);

 ● The volatility of the market is high;
● A trader is scalping;
● A trader expects to miss out on a trade opportunity;
● A trader expects to lose their trade;
● A trader expects to lose their profits.

To avoid the problems connected to making quick decisions, traders need to regain control
and patience.

Regain control and improve patience

The ultimate goal is to create space and time in your mind, which in turn allows you to
make decisions without creating an internal pressure. Ideally traders take decisions from
their comfort zone. This is a mental state where traders are not pressured into making
hasty conclusions but take informed and well balanced choices.
An essential component is the importance of removing the necessity of making a decision
NOW. Nothing is an emergency in the Forex market if you adhere to strict risk management
principles (unless perhaps with a black swan event). Here are tips that could help with
maintaining calm and patience during the process of trading:

● Traders need to work on recognizing the moment when they feel compelled to
make a decision now, soon or quickly;
● Traders must implement a trade plan that they feel comfortable with;
● Traders should trade a time frame where they have enough time to reflect on their
plan;
● Traders should take deep breaths and take regular breaks away from the computer;
● Traders should not needlessly look at the charts as it could create emotions;
● Traders can implement the ‘wait 1 candle’ technique.

Wait 1 candle technique

A simple technique to gain a higher level of patience is to wait 1 candle. As soon as traders
recognize the moment where impatience starts, the rule states that traders must wait one
entire candle before making the decision.

Let me explain with an example: trader ABC is trading on the 1-hour chart. He recognizes
that his trade is not going his way and this feeling pressured to move the stop loss. The rule
states that he must let the current open candle and the next one 1-hour bar candle close
before making a decision. This time frame is a mere example and the technique is valid for
each time frame.

The advantage of being forced to wait for the next candle is that it compels us to take time
for our choices and it avoids impulsive and emotional decisions. This technique is a
supportive crutch if traders cannot create the space and patience by themselves. There is a
potential disadvantage of this concept that price could have moved away from its former
level, so consider whether this idea is right for your trading first of all. Write to us at
[email protected] if you have questions or doubts.

Obviously the concept will not miraculously turn all setups into winners. It simply intends
to create more time for trading reflection and trading plan implementation. The wait 1
candle technique is a rule that allows traders to regain a calm mindset.

Conclusion
Impulsive and emotional decisions are created in our own mind. Most of the time the
problem occurs when a trader feels under pressure to take an immediate trading decision.
Traders however should aim for staying calm and patient during trading to optimize
results.
Greed, fear, hope and impatience are the enemies of traders.

Discipline, patience, perseverance and a balanced confidence are the allies of traders.

Part 3: How do I improve trading psychology?

First of all, please realize that part 2 has already mentioned a lot of good improvement
techniques for patience (1 candle technique), discipline (timely routine taking small steps)
and fighting fear (balanced confidence). In this part we will take it to the next step and
focus on creating a winning trading psychology. Our first step is establishing a successful
mindset.
This guide is naming it a “super cool” mindset, because ultimately a cool or focused state of
mind is what leads to success. A super cool trading mindset is when a trader is fully
focused on their trading business and trading skills without being an emotional roller
coaster. The trader is not concerned about being ‘right’ or ‘wrong’… they are only
concentrated about being profitable (also over the long-term).

First question is: how do you recognize whether you have a super cool mindset in trading?
Let us do a test to judge your current status! There is no reason to cheat; the answers
remain private and are only intended as a rough guideline for each trader.

The mindset test

Here are 10 questions that help with judging your current state of the trading
mindset.

Obviously, the scope of the test is very narrow so don’t get upset if your score is low or too
happy if your score is high. In other words, do not get too happy if you have 10 out of 10 or
too worried if you have 0 out of 10 – it is just to get an idea ;-)

● Do you feel any nervousness when completing analysis or trading?

● Are you insecure when you are not participating in the market or when you have not
entered a trade for a long while?
● Are you trying to outsmart the market by guessing what the most profitable decision
is for each decision (instead of implementing your trading plan)?
● Do you notice that you are sometimes missing signs within the trading day that you
only pick up on after the trading day has been completed?
● Do you make (or feel the desire to make) impulsive decisions which are not based
on your trading plan?
● Are you excited when entering or exiting a trade?
● Are you worried about making the best choices instead of focusing on the trading
plan?
● Do you become nervous, greedy, or fearful when looking at price action?
● Do you always analyze missed opportunities or reminisce about missed profits?
● Do you fail to write down evaluations and review trade statistics?

A trader with a super cool trading mindset will tend to answer these questions with a NO.
So the more questions answered with a no, the better it is for you as a trader. But do not
get discouraged if you answered some or many of these questions with a yes. The most
important is the willingness to improve!

Dangers of a ‘nervous mindset’

You might be wondering why creating a successful mindset is of imminent importance so
let us discuss this first of all.
There are serious dangers lurking around the corner if a trader has not yet reached the
level of a super cool mindset.

A trader who ignores the importance of the mind set has a higher chance of running into
trouble:

● They run the risk of overtrading and taking too many setups;
● They are more likely to over-risk on a setup;
● They tend to revenge trade;
● They can blow up the entire trading account / risk capital;
● They show imbalanced emotions;
● They are overly confident of a trade or strategy;
● They are not able to handle losses or draw downs.

Any of the above problems could seriously hinder the development of the trading business.
In fact, any of the above mistakes can turn out to be mega costly and could ultimately
lead to an early exit out of your Forex trading business.

Benefits of a cool mind set

Traders with a successful mindset do not care about being ‘right’ or ‘wrong’. They do not
seek validation from the market. In fact, they see the market as a place of opportunity!
They are able to observe price action and their tools/indicators closely without any bias or
judgment.
These traders keep the flow of information open. Their mindset does not ignore
undesired warning signals, nor do they allow emotions to cloud their decision making
process. They accept both their wins and their losses equally gracefully. They calmly
evaluate the charts and execute their trading plan without the emotional roller coaster.
They demonstrate a balancing of patience and preparedness. They demonstrate positive
thinking.

The main benefit of the super cool mindset is that it allows traders to fully focus on
trading without getting distracted by emotions, moods or presumptions about what
the market should do.

The mindset journey

First of all, reaching a successful mindset is a journey and not a destination. No trader will
ever fully master the mindset because there will always be something that can be learned.
Simply put, there is always a way to keep improving. But obviously some of us will be
further on that journey than others. It is your job to make that progress!
Needless to say, it takes time to cultivate and improve the mindset and never should any
trader expect miracles within days. Winning traders approach the market every day as an
adventure, a journey whose end-of-day destination is unknown.
This process requires a couple of winning traits such as:

1. A dedicated and committed mentality to learning the markets and trading.

2. A step by step approach to avoid over or under loading yourself.
3. An ability to measure your intermediate SMART goals (SMART is an abbreviation
which stands for specific, measurable, achievable, realistic and timely).

Another important factor is that trading can only be done with risk capital that is
acceptable to lose in its entirety. Clearly the goal is to avoid losing the entire trading capital,
but the point is to choose a level of trading capital that a) traders feel comfortable with and
that b) does not create a mental block. Risk taking must never lead to fear, or in other
words there must be willingness to risk.

Once the comfort zone of the risk boundaries is established, then the next aspect is the
application of consistent risk management. It is vital to keep your trading capital intact,
which means both to avoid over-risking at all times and to keep the risk small until you are
completely comfortable with their trading plan.

Critical to that super cool mindset is the “don’t know” mind or attitude, which looks at
the world with vision unclouded by bias, preconceptions, or treasured opinions. The simple
truth is no trader knows what will happen in the markets with 100% certainty. And the best
traders are fully aware of that fact. Only attention seekers claim to know it all, but their
intentions are to become famous. Realistic traders approach the trading day knowing that
they do not know how the trading day will unfold. Therefore, they approach the market
every day with a state of “relaxed focus”. It is comparable to someone who is waiting for
something important to happen and wants to be prepared to react both immediately and
appropriately.

Traders with a super cool mindset are confident in their ability to profit from whatever the
trading day or week brings. They carefully watch the action unfold and are able to catch the
clues to future market movement and are then ready to promptly take appropriate action.
They are experts in “trade what you see, not what you expect”. Most traders have a
preconceived idea of what should happen in the market, which obstructs their ability to
clearly see what is actually happening on the charts. These traders cling on to their ideas
(hope for the best) and ignore all the clues to the contrary. They become overly attached to
their opinions and trades. Then later on when the trade has closed, they suddenly are able
to see all the missed clues and warnings with clear vision. Traders with a super cool
mindset are confident in their approach but open and flexible to new information and
adjustments.
Approach the market without bias, be open to understanding its signals, feel comfortable
with your trading plan and decisions, be willing to risk within your risk parameters, and be
clearly focused without distractions. Also remember you do not control the market! A
trader can only influence their trading plan and the implementation of this plan and
nothing else.

A balanced confidence
Furthermore, it is key to realize that the market has its moments of insecurity and
emotions (this drives price), but that does not mean that traders should follow suit. A
trader needs to find equilibrium. They must be certain of themselves, their approach to
trading, and their belief system, but on the other hand realize that trade setups and
strategies are a probability and not a certainty.

Traders need to be confident on the one hand but accept the insecurity of the market on
the other hand.

The worst is when a trader is overconfident about the market (leads to over-risking, etc)
or
when a trader is under-confident of their approach and/or themselves (leads to missing
trades, etc).

It is important to approach your Forex trading via the framework of probabilities.

Traders must realize that nothing is a ‘sure win’ in the Forex market and each trade setup
has a chance, never a guarantee, of turning into a profit.

A trader can become better at seeing trading as a probability. There is not one magic
formula that provides an instant success. Most of the time, it boils down to a process
where consistent efforts are required from traders. Traders need to train themselves to
view strategy and setups as probabilities.

A trader who is trading a non-discretionary system is already exposed to probabilities.

When making back tests traders quickly notice losses, losing streaks, draw downs, and
slumps occurring regularly and can brace and prepare themselves for that. However, there
is still an important difference between seeing a drawdown on paper and actually living
through one as a trader.

A trader who is either beginning their trading business or is using a discretionary system
might expect and/or want a high level of security (consistent success) from their trading
endeavors. They fail to see the reality of trading: setups are ever a guaranteed win! In fact
traders should expect to take losses - it is part of the business. Many traders desire an ultra
high win percentage and they are disappointed when it becomes clear that the market is
not as easy.
Traders must have a probabilistic mindset if they want to achieve a super cool mindset.
The best training is practice, practice, practice. Here are the steps you can follow:

● Conduct back testing;

● Perform forward demo testing;
● Estimate beforehand the probability of success for each setup that meets your
trading plan;
● Write it down in a journal;
● Monitor how the trade developed and write down why it did or didn’t work out;
● Keep track how close your assessments are compared to the reality;
● Make conclusions based on the assessments in point 6:
1. If the actual win percentage is smaller compared to your assessments, then
you are overrating the odds of success for a particular situation. Let’s say that
the trades you assess with an 80% chance of success actually only win 65% of
the time. You are over-confident in these cases.
2. If the actual win percentage is larger compared to your assessments, then
you are underrating the odds of success for a particular situation. Let’s say
that the trades you assess with a 60% chance of success actually win 70% of
the time. You are under confident in these cases.
3. Attempt to understand why there are any differences in point 7.

Trading in the zone

When a trader starts to incorporate a confident approach with a respect for the market,
and adds a probabilistic mind to it, then you will slowly but surely start trading ‘in the zone’.
This is when a new level of balanced confidence starts to grow and when the past
experiences will make you develop. Remember, a smooth sea never made a skillful sailor.
In trading too your experiences will enable your growth.
The successful mindset will start to evolve from “I might be able to do this” to “I will be able
to do this” to “I can do this” to “I am able to this!”

You will worry less about past losses, past mistakes, lost opportunities and missed
trades. Your focus will move from the past to the current moment (now). You will be better
equipped to protect your trading capital and be more committed to achieving your goals.
It is important, even when you see growth, to keep focused on your journey. Never think
that you are ready. Always maintain this passion for the process. Accept the tedious work
in your learning process. Accept the frustration and see it as a sign of progress. Keep your
expectations modest, do not look for an easy way out and take responsibility for your
decisions.
With a super cool mind now established you as a trader will be in the zone. Trading in the
zone is a great rhythm: it means that you are trading at your best level. Let’s review what
that looks like.
Here is a list of elements when I am IN the zone:

● I stay confident in my approach, analysis and setups but without any arrogance or
overconfidence and with a natural and humble respect for the market.
● I keep my analysis simple yet effective. I remember that trading is not easy but
overcomplicating matters does not help either.
● I am following my trading plan, following my trade management plan, and
implementing my evaluations.
● Trading in the zone is balancing a ton of emotions that can be pulling and impacting
my thoughts before, during and after a trade. Primarily, it’s about managing my own
self-talk before and during a trade setup.
● I am upbeat and have a positive
● I have optimal focus on the charts and am not distracted by social media, mobile
phones, news, need, fear, impatience, hope and greed.
● I am flexible to interpreting new information quicker and I am more adaptable to
change.

Here is a list of pointers when I am in the zone and want to STAY there:

1. I keep my routine going. Staying in the flow is all about consistent repetition. My
motto is: “do not change a winning vibe!”
2. I ride the tide and keep the trend alive. Remember that trends are very powerful on
the charts and with trading streaks. Keep track of it and write down why trading has
gone smoothly. Also, remember the state of mind at this time and what you are
thinking.
3. I keep evaluating and practicing. Do not stop with sensible and useful analysis.
4. I avoid overconfidence. Keep your feet on the ground and remain realistic. Don’t
start over risking due to a win streak but rather keep your discipline in check at all
times.

Here is a list of elements when I want to get BACK into the zone:

● I analyze my trade statistics, trade setups, entries, trade management decisions and
exits thoroughly. Keep in mind that the greatest professionals of any business are
constantly preparing day in and day out.
● I decrease the mental pressure of not being in the zone. When expectations are not
being met, pressure can become overwhelming and the weight on the shoulders
can do more harm than good. Step back and relax instead of freezing up.
● I keep trying. A losing streak never finishes if a trader stops. Just like in baseball, a
trader needs to keep swinging to get back into the rhythm. I practice more paper
trading, more testing, more demo trading.
● I focus on the details. Avoiding a mistake could be the difference between a win and
loss.
 ● I evaluate the market conditions. What is the optimal market structure for my
strategy to thrive in? And how does that compare to current market conditions? Am
I implementing my strategy incorrectly or are the market conditions making my
strategy struggle?

Does that sound like a lot?

Well, realize that trading must be treated like a business if you want to achieve profitability.
The problem is that many traders approach their trading with the same attitude as they do
with a hobby, extreme sports or gambling: adrenaline based decisions. This activity is fun
for a while but when the boredom sets in then they quickly move on to something else.

The solution to profits in Forex trading is a bit ironic because it is simply: find the
“boredom”!
When trading is “boring”, trading becomes successful. Why? Because Forex traders are then
using a systematic and well balanced approach with a smart business mentality. This
enables traders to trade consistently and apply their edge day in and day out.

Sound boring? Good, then you are on the right track!

The smart, well-balanced, systematic, and business-like approach to Forex trading is vital to
a super cool mindset.

You are now aware how the super cool mind set looks like! But there are going to be some
ups and downs along the way. Let’s now work on some details that need to be addressed
and try to remove any potential problems and pitfalls that could occur! The various parts
will be named “working on detail” and will all address different problems.

Working on Detail: Accepting Losses

Part of the winning mindset is accepting losses.

It might be difficult to imagine showing empathy to your losing trades. Also, letting your
losses become your best friend probably sounds exaggerated to most of the readers.
Embracing losses, however, has the possible advantage of speeding up the path to success
tremendously.
The process of improvement is a journey, as we have mentioned before. And the journey
can never start without the realization that each trade in general and each loss specifically
is a moment of feedback. In fact, the market is sending a steady stream of criticism but are
we ready to listen?

The trader can only learn from the market if they show openness to the feedback and if
they are willing to learn from each trade and specifically each loss. There are a number of
factors that can hinder a trader’s openness to learn from the market. Let us discuss a few
of them. Hopefully you will be able to avoid similar mistakes by recognizing the pitfalls.

Difficulties with negative feedback

The number 1 clarification is that people in general can easily accept “positive” feedback,
whereas negative comments are a hard sell. Also people have trouble with accepting
feedback from an external reference when it does not align with their own vision.

Traders are exactly the same. Obviously traders imagine themselves having winning trades
so losing trades are almost a certain mismatch with their perception. Losing trades are
seen as “negative” feedback and the pain and annoyance is often directed at the market.

The solution is to prepare yourself for losses well in advance. When demo trading, paper
trading, back testing, forward testing, testing with a small demo account, and real life
trading, always focus on the losses. If a trader were to test a strategy and only focus on the
winning traders, then no wonder trading in real life suddenly seems so different.

When traders are prepared for, aware of, and expect losing trades to occur, then their
mental willingness to recognize the loss will allow them to receive the market information
with open arms.

The market is the market

It is vital to recognize the fact that neither the market nor the trades are intentionally
hurting you. It makes no sense to get irritated by the market because traders cannot
“control” the market anyhow. The market has no opinion of you or itself. It is a neutral
object. It makes no sense to waste energy by thinking about the market or getting annoyed
by it. The market is the market – end of story.

A trader, who embraces that realization, will have an open mind and heart towards the
feedback of the market. Then they need to remain consistently flexible and open towards
the market’s criticism in order to thrive. A trader equipped with that philosophy and
mindset can embark on the journey of everlasting improvement.

To summarize: an ability to listen carefully to the market slowly evolves when traders are
willing to accept losses. Also a higher level of alertness becomes apparent. Traders can
then in turn pick up and interpret clues during trading quicker and process them faster
without fear hindering their analysis.

Working on Detail: Evaluations

As a rule of thumb, it is better to make evaluations of one’s trading day at the end of the
day; not during the day. Although the goal is always to make our trading better and better,
our primary goal during the trading day is implementing the trading plan.
Traders want to avoid making ad hoc decisions that do not align with their trading plan
during the day. After the trading day is over, traders can evaluate and analyze their
implementation of the plan and perhaps find points for improving their trading plan.

A trader can create a substantial edge in trading when they are able to focus on price
action in relationship to their trading plan and when they are able to avoid getting
distracted by losses, market movement, and social media.

Your engagement in working on your own evaluations is crucial for starting your journey
successfully. Of course, it is easy to skip this step and move on to the next daily activity, but
working on evaluations means that you are taking an important first step.

Most Forex traders know that evaluations are ‘supposedly’ important, but still do not take
the time and energy to seriously complete their sheets. Many Forex traders simply dislike
filling in their evaluation sheets after the trading day is completed. Here are probably the 3
main reasons why:

● For most traders completing evaluations is boring;

● The task becomes especially annoying when losses have occurred;
● Reviewing losses also confronts us with our mistakes, which is unpleasant for our
mindset.

The best and greatest traders are like professional sportsmen, they learn from every kick,
pitch, and throw. Here is why evaluations are the real path to improvement:

● Traders can recognize if they made a mistake in implementation of the trading plan
and can evaluate the real performance of a strategy once their own implementation
mistakes are removed;
● Traders can group together mistakes and try to understand what circumstances,
behavior, and situations are at the root of the issue;
● Traders can assess the performance of a strategy or even multiple strategies, and
evaluate various statistics, drawdown levels, equity curves, etc;
● Traders can implement improvements and monitor these.

Forex traders can make great progress when they start to deal with evaluations as
seriously as they take entering a trade. Each trade offers a ton of information and learning
potential: go out there and capitalize on it!

Here are some practical tips that could help improve the consistency with filling in the
evaluation sheet:

● Keep a scorecard keeping track if you filled in the sheet or not;

 1. Have a target (95% for instance) for filling in the scorecard for the month and
year and update target as your progress;
2. Provide yourself with a bonus if the target is reached;
3. Give yourself a warning if the target is missed (you are your own boss!).

● Mark trades as correct, inaccurate, mistake or blunder, depending on your

assessment;
● Have a target for each of the groups and update targets as you progress;
● Have a weekly review (Fridays and Saturdays are best) of the trades and identify
learning points for the future;
● For trading the new week go through the weekly learning points and the trading
plan;
● Review learning points at the end of each month on a day you do not trade (perhaps
on a big news day or lack of news depending on how you trade);
● Make sure the strategy and psychology are in sync;
● Change the mental mind set: celebrate and embrace losses as much as the winners;
● Change the mental mind set: view losing and failed trades as an OPPORTUNITY to
learn and improve;
● Change the mental mind set: do NOT see losing trades as a failure;
● Start implementing NOW and do not postpone action. Postponement ultimately
leads to never.

Ultimately Forex traders can only improve if they take time to evaluate and actively
implement the improvement points. It boils down to:
Testing – making a trading plan - implementing the trading plan – reviewing trades and
statistics – evaluating, analyzing and learning from trades and streaks – finding
improvements – testing improvements – decision whether to keep strategy or not

Traders must limit inaccuracies, needless mistakes and costly blunders by having a solid
defense of management (risk, money), psychology (patience, discipline), and planning
(strategy, entry, exit). Once this is setup, then you need to focus on consistency and
capitalizing on our edge and strengths. The latter is a gradual progress and emphasis
should be on small increments of gains, not home runs. Traders need to put themselves in
a positional advantage, not hope for the lucky big win.

Working on Detail: Focus

Forex traders face a major mental challenge when trading. Their goal is to remain focused
on the NOW and not let their thoughts, attention and actions become altered or
misdirected during trading sessions. Sounds easy? Guess again!

All traders drift away from current reality because their thoughts and energy are drained
by past mistakes, losses, unrealized profits, and unexpected price movements.
Did you ever start out a trading day with a ton of energy? Did you ever start out a trading
day where you were fully focused and ready, but as the trading day progressed you lost all
of those good intentions?

Snow can disappear quickly in a strong blistering sun; and so can a trader’s focus when
losses occur.

On top of that, the market provides a multitude of distractions due its ability to
continuously make retracements. Traders also get sidetracked by social media, email, TV,
phones, advertisements, and our private lives.

No wonder traders have a tremendously tough time maintaining their discipline.

When looking at other branches of business and sport, there is a ton of material helping
managers, entrepreneurs, and professionals to optimize their focus and efficiency. Lower
attention could have devastating consequences for Forex traders.

Obviously traders must be fully focused to improve their decision making capabilities. Here
are some practical tips on how to increase the attention span.

1) Give yourself a score for today’s trading implementation (attention and focus). Setup a
minimum desired grade/mark that is passable. This way you can easily keep track and
compare the number of successful versus non-successful implementation days.

2) Minimize distractions. It is a best practice to remove as many distractions online and

offline as possible so that you are able to focus with a clear mind and head.

3) Keep checking your mood and establish boundaries for it. It is useful to keep an eye on
one’s mood during the trading day. If you notice unwanted and annoying behavior that
crosses the threshold, stop trading for the day.

4) Stand up, take a break and/or step away from the PC screen. Emotions decrease when a
trader is physically further away from the pc and it could help to regain the balance.

Working on Detail: Adjusting the Mood

The sharpness and focus of a trader is particularly vulnerable when traders have moods.
How does a mood impact the trading?

A mood is a prevailing emotional tone or attitude. When a trader has a mood swing, the
trader is less able to fully focus on the information which the market is providing because:
 1. The mood distracts their concentration away from present reality. In other words,
the trader is absent minded and thinking about past decisions, mistakes, and
missed profits OR about future developments;
2. A ‘negative’ mood adds a bias to the interpretation of information. The trader
creates a pink lens, which distorts the way information is being perceived. Did you
ever look back at charts and wonder how you could have missed important clues
during trading? Your mood could have been the culprit!

Bad mood spells can draw away substantial energy and focus from interpreting the charts
and implementing the trading plan. And it is clear that the trader must be fully
concentrated to benefit from the market communications as much as possible.

A mood blurs the neutral, open and responsive view and lens of a trader towards the
markets and price action. Now that we know that a mood will have a negative impact on
our trading, why do traders actually get them in the first place? What triggers a mood?

Market movements
Forex traders are especially vulnerable to psychological ups and downs because of the
outcome of their trades. Their mood is impacted as their performance experiences winning
or losing trades. It is at times as simple as this: a losing trade leads to a worse mood;
whereas a winning trade translates into a better mood. The particular mood in turn
influences the accuracy of implementing their trading plan.

1) A better mood leads to overconfidence, which in turn means that a trader could be
over-risking, overtrading, or not following their own plan.
2) A worse mood leads to insecurity, which in turn means that a trader could be avoiding
setups, revenge trading, or not following their own plan.

The question lingers: why do traders let themselves be impacted by a win or loss so
heavily?
The real reason why traders have these moods is simple: Forex traders want perfect track
records, want to have fun during trading, and/or are too lazy in focusing on the process
and implementation. I am sure plenty of other reasons exist too.

Let’s make a comparison with the business world and assume we are a business owner of a
retail store. Would the retail store owner risk their entire operations based on one bad
day? Would the retail owner perform less well because yesterday was a day with less
customers?

1. They focus on improving their processes so that they have good days that
outperform the bad days. They avoid risking it all because of one suboptimal
 decision, or due to a bad mood. They perform consistently because they have
controls and checks in play that allow them to treat their store as a business.

Forex traders must do the exact same thing: treat their Forex trading as a business. Forex
traders need to be tougher on themselves and realize that with Forex trading comes with
wins and losses. The real mission for Forex traders is to implement the trading plan
correctly and consistently, which should provide the edge.

Of course the matter becomes more difficult when losses and wins appear in streaks.
Eventually traders are able to get used to handling a single win or loss. This changes when
trade losses and wins come in streaks, as the magnitude of all the emotions quadruples
when a trader encounters streaks. In principle, the same concepts mentioned above are
valid: focusing on the implementation and process of trading will ultimately lead to winning
results. Also evaluate the root cause of the losing streak or trade. A trader can determine
the actual strategy performance by understanding which losses were due to
implementation mistakes.

Working on Detail: React, Do Not Predict

Forex traders should always try to trade with the flow. They should not be impacted by
their opinion on what price should do, but rather focus on what price could be doing.
Traders always want to remain flexible in their mind and actions. Never do we want to
trade a prediction and ‘hope’ that the market confirms our analysis.

Why?

Because this creates emotions, which in turn makes Forex traders feel imbalanced during
the execution of their plan. We have to accept the fact that we, as traders, cannot ‘control’
the market, which means that we are always unsure about our trade developing (but we
don’t have to be unsure about our trade!).

Forex traders are more like road map readers: they are trying to find the quickest and
safest way on the map from point A to point B. The graph is a trader’s compass and
candles, patterns, trends, support and resistance are clues that traders find along the way.
The system how we use those clues depends on our plan. There is no need and time for
second guessing and second doubting.

The best approach is establishing zones of interest and waiting for triggers to confirm a
trade setup.

As price actually reaches the zone of interest, many traders get into emotional storms that
disturb their balance. The best solution is to identify a clear trigger for entering the trade,
and once it shows up take the trade without hesitation.
Here are the 3 rules for what you want to keep an eye on:

● Define exactly what you must see on the chart before trading it (trigger);
● Do not stare at the chart and look at each small increment of price change, which
will make every trader nervous and jump into any trade;
● When the trigger occurs (1st point), take the entry without hesitation. It is too late to
second guess the setup as you have done all of the analysis beforehand plus it is not
possible to have a perfect trading scorecard anyhow.

Establishing trading zones provides a Forex trader with a sense of peace and calm: only
when the price reaches lower and/or higher levels is the Forex trader on guard and ready
to take a trade.
This removes the endless, vicious circle of doubt whether to take a trade or not when price
is stuck in the middle of nowhere. Most often traders just lose patience and discipline
during this process and are unable to avoid taking a trade setup, which ultimately ends in a
nightmarish entry and often an even worse exit spot.

With a clear plan in mind, the trader can clearly execute the trade. Setting up zones of
interest helps deflect our impatience.

The next step is waiting for a confirmation of our levels. The best plans often incorporate a
confirmation signal, such as a candlestick pattern, a pullback or even a breakout, to ensure
that price indeed is reacting at the zones of interest.

Part 4: Other practical tips

This part focuses on general tips and recommendations.

Practical Tip 1: Removing nervousness when trading

Traders want to avoid nervousness during trading. One of the main tips is to avoid zooming
into lower time frames. This often happens once an entry is made because they can keep
an eye on the price action and the development of the trade. The problem is that when a
trader takes a setup on a 4-hour chart and then zooms in to a 15-minute chart, the price
action is NOT relevant for their decisions. The 15-minute chart will only distract them from
the ultimate goal: following the trading plan.

Remember, there is absolutely nothing wrong with zooming into a lower time when
hunting for a trade entry. But do not zoom in to lower frames once the trade is taken. If a
trader wants to keep an eye on the price movement, it is a best practice to watch price
action on the same time frame as the entry or even 1 higher (unless a trader has
specifically tested a strategy that zooms in).
Another tip is to look less at the charts. Once a trader is in a setup it is recommended to
reduce the time spent reviewing the currency pair that is traded. Reviewing the trade over
and over again will only lead to doubts and fears. A better approach is to analyze different
pairs OR even to walk away from the computer. Traders must avoid the habit of mindlessly
following each tick movement, which will only lead to difficulties in executing the trading
plan.

The 3rd practical tip to improve the nerves is by taking small levels of risk when starting
your trading career. Lower levels of risk also help traders overcome their fear. The
importance of a win or loss decreases when only a reasonable amount of capital is lost on
one single setup. This helps increase the ability of a trader to “live” through the cycle of a
setup. Once the confidence matures and the experience increases, the risk can be
increased to a normal level of risk.

One more tip is to focus on higher probability setups. If you are having trouble with staying
in a trade, then focusing on higher probability setups means that less losses will occur on
average. This in turn will help the confidence level.

Practical Tip 2: Trading conditions you want to avoid in Forex market

Here are some practical situations that you as a Forex trader want to avoid.

Chasing the market!

This happens when you had a trade idea but failed to execute, and then see the trade
develop as you expected/planned. Do not try to correct a past mistake by taking the trade
too late.

Jumping the gun!

This happens when you have a trade idea but the circumstances have not yet lined up. Do
not try to take a trade before you have the actual confirmation. Forex traders love jumping
in trades… The idea of making profits and pips pushes their excitement to the max which is
soon replaced by anxiousness when the trade is entered but it does not develop as
expected. How many times are they rudely awakened to reality that price moves up and
down? It becomes much easier for a trader to stay in a trade when that trader enters a
trade setup which has a lot of confluence (technical and/or fundamental) and a good
probability of success. The natural ups and downs of the market will not scare you the
trader when you find a setup with lots of potential.

In need of trading!
Avoid trading Forex if you feel imbalanced. Needing a trade and taking it any cost is a bad
business decision. Take a trade on your own terms, not when you feel forced to take a
trade due the market pressures/price movements. We need to take trades with higher
probabilities.

Proving yourself right or the market wrong!

Trading is not a battle between you and the market. Remember that it is the market which
offers you the opportunity to trade. Trading performance is a scorecard of the success of
your business model and trading plan.

Not mentally focused and ready!

Social media, internet, commercials, TV and our environment can distract you while
trading. Traders must ensure that their attention is fully focused on trading to ensure
optimal performance of their business and trading plan.

Trading without an open attitude!

Be open to the feedback of the market and your trades. If you are not in a receptive mode,
it is best not to trade for a while. Traders want to approach the market with a learning
attitude. You want to learn from every trade and each situation and if that vibe is missing,
trading will be less profitable and certainly provide less learning experience.

Practical Tip 3: Consistency is the final step

Consistency and specialization are the final steps and are not elements that can be hurried.
Developing these will take time and the learning process should be constant.
A trader can compare this process with a chess game. In chess, many victories are achieved
due to one player gaining a positional edge over their opponent. This positional edge is not
miraculously created in one move (unless the opponent makes a blunder or mistake), but
by making a small improvement or better decision each step of the way. Eventually this
creates an ever-increasing edge and at one point a crack in the defense of the opponent is
found OR the opponent makes a mistake due to the mounting pressure. The same can be
said for trading.
Small gradual improvements lead to a big advantage if applied consistently at each
decision point (and we do not make a mistake or blunder along the way that removes our
built up advantage).

Conclusion
Remember, it is all about long-term success. Take it step by step to enable a higher rate of
success.
Conclusion and Summary
The ecs.SWAT approach consists of the SWAT methods, SWAT strategies, and SWAT
indicators. SWAT is a way of analysing based on price swings and moving averages.

The SWAT 2.0 course (https://elitecurrensea.com/forex-cfd/swat/) explains this 600

page eguide via videos. It has 74 videos and 22+ hours of recordings. Traders that prefer a
more visual approach could certainly consider the course, starting at 473 euro one time fee
for life-time access (no upgrades or extra fees later on). There are 2 parts: education (13
hours) and SWAT part (9 hours).

Here is an overview of the entire SWAT 2.0:

● 74 videos
● 22+ hours recording
● Education (13h) and SWAT part (9h)
● 6 PDFs with summary
● Checklist and cheat sheet
● 15+ SWAT indicators
● 10 SWAT templates
● 3 approaches
● 10 strategies
● 5 entry options

The 3 approaches are as follows:

1. Rules based method
2. Wave method
3. Discretionary method

The methods have trading systems, there are 10 in total:

1. Rules based method
a. SWAT Basic
b. SWAT Classic
c. SWAT MACD
d. SWAT Pro
2. Wave method
a. Trend 1
b. Trend 2
c. Trend 3
d. Reversal 1
e. Reversal 2
3. Discretionary method
There are 5 different types of entries:
1. swat.CANDLE
2. swat.ARROW
3. HMA
4. swat.MACD
5. Fractals

The main indicators of the ecs.SWAT method are:

● Moving averages (MAs)

● Fibonacci
● Wizz (Fib sequence levels)
● Fractals
● swat.CANDLES
● swat.ARROWS
● Oscillators
● Price action
● CS dots
● And many more

In this 600 page eguide we explained a decent amount of the SWAT course, but not
everything. SWAT Basic Classic are partly explained, but not SWAT Pro for instance.

Become an ecs.SWAT member to gain access to the ecs.SWAT course that explains 1) the
SWAT method from A to Z via an in-depth video course with extra supporting materials, 2)
explains the wave, discretionary, and rules based SWAT strategies including entries and
exits, and 3) to receive all of the ecs.SWAT proprietary indicators:

https://elitecurrensea.com/forex-cfd/swat/

The ecs.SWAT approach helps simplify trading based on both wave patterns and chart
patterns. It is also equally valuable for traders who appreciate moving averages and
Fibonacci tools.

The ecs.SWAT approach has mostly been traded, analyzed, and tested on the Forex market
but we do think that the logic is valid for other financial instruments too such as stocks,
cryptos, commodities.

If you want to try an automated approach with your risk capital, then our EAs offer traders
an amazing track record in live trading and back testing.
For a full overview of all Forex & CFD items, check out this page:
https://elitecurrensea.com/forex-cfd/

All in all, this book covers a wide terrain of topics. It is not needed to know all of these
concepts before trading the SWAT method but I wanted to share as much information that
I believe is relevant because they are the underlying building blocks behind the ecs.SWAT
approach.

The future: my goal is to move into automated trading in 2021 and beyond. Until then, wish
you good trading!

One last thing before we end, if you enjoyed this book then we would certainly appreciate
your comments and feedback on Amazon (once it's offered there) or on Forex Peace Army.

https://www.forexpeacearmy.com/forex-reviews/13736/elitecurrensea-forex-training

To follow me and my work, please connect to these profiles:

Website www.elitecurrensea.com
Email [email protected]

Twitter https://twitter.com/ChrisSvorcik
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YouTube
tps://www.youtube.com/channel/UCpimDN3XJ9Pg6ML9UALlLOg/featured?view_as=subscri
ber

Thank yous
I would like to thank many people for their support, but first and foremost my lovely wife
Dominika, who has given me guidance, motivation, and focus for the past decade, my son
Alex, who fills my future with hope, and my parents for all of their support in my entire life.

I want to thank my business partners at Elite CurrenSea, which are my friend and trading
buddy Nenad Kerkez for his upbeat energy, contributions to this e-book, and his positive
can-do attitude and my friend Mykyta Barabanov for his critical thinking and efforts for
spreading the word on ecs.SWAT.
Big thank yous too for the entire ECS team, above all Andrey. I also want to express
gratitude for the support and help from our ECS followers. Their positive comments and
feedback have helped fuel our website. Especially, our current SWAT members for reading
this guide and providing their feedback.

I also would like to thank many of our ECS business partners. First of all, my friend Mislav
Nikolic for his contribution on improving the ecsWIZZ tool when he was part of the ECS
team. But above all for his independent and wonderful work in creating multiple EAs, an
automated wayof trading Forex with superb results-. Also thank you for our programmer
friend Carlos for his great help in creating and developing both SWAT and CAMMACD
indicators and tools. I also want to mention my Italian friend and great options trader plus
CNBC contributor Marco Doni who inspired me for taking the time to write this book and
our friend Vladimir Ribakov for his great cooperation in all these years.

Big thank you too to all of our website partners such as FXstreet, Forex News Now,
FXempire, Forex Factory, LeapRate, Forex Peace Army, Investing.com, FinanceFeeds,
FinExtra, Finance Magnates, Michal Stibor.

I would also like to specially mention Jitka, Arjan, Marcel, Jeroen, Ronald, Paul, Bara, David,
Natalia, Anne, Wim, Ria, Martina, Bob, Marketa, Jana, Milan, Jarda, Honza, Magda, Tony,
Dee, Mark, Ellen, Stefan, Kim, Natascha, Kevin, Joanna, Peter, Timo, Maurizio, Nelleke,
Nienke, Sean, Maria-Elena, Antonio, Jitka, Kuba, Ales, Tereza, Tomas, Martina, Selim, Tomas.

Ps. I did not include my cats Lilly and Gracie, but they should be mentioned too :)

Good trading,
Chris Svorcik