Max Retracement: 60
The retracement indicator uses a very interesting concept. Essentially this tool is looking for an indication of strength followed by a pullback and then signs of new strength. This is the quintessential wave pattern in charting being; the pulse, pullback and then the next impulse that takes out the previous high.
Trend following system
All equities, not options
The variables for this indicator are:
This parameter sets how far back in time the analysis will be conducted. If for example, a setting of 50 is used on a daily chart the indicator will find the price data for which there is no lower price within 50 days either side of that price data. The indicator will then find the highest high that occurred subsequent to the established low point. Once the relevant price low and high have been established the remaining parameters of the indicator are then checked. It is important to note that if the same setting of 50 where to be used on a weekly chart the relevant price low would be established using a 50-week time window.
Max and Minimum retracement levels:
This parameter sets the band that the percentage retracement can occur within. Technicians generally agree that a 50% retracement level is a low risk entry level within a trend. However, chartists are often interested in other percentage retracement levels. Chartists who follow for example, Fibonacci summation ratios may prefer to use other settings for this variable.
The idea of the retracement indicator is not to give signals in its own right, but rather to assist in the intelligent monitoring of the stock universe.
The diagram below shows the pattern the indicator is looking
This is an indicator to alert you to possible trading opportunities. The following chart of CBA, the R (in fuchsia and on a setting of 35) alerts you to the potential trade. The blue line indicates the Fibonacci Retracement.
The chart above shows CBA has run from $62.00 to a high of $74.00 before retracing 50% to $68.00. What you need to do after being alerted is to draw a resistance line down on the highs to give us an accurate indication of the current trend so that we have an indication of when the trend has changed. You also need to determine whether the level at which it has paused has been significant in the past.
If entering the market, you now make an estimation of where the stock has the potential to go, in terms of dollar value. You can expect the share to run a dollar value potentially comparable to that of the first run. This then would take the price to approximately $80.00 before major resistance is encountered.
Note that the share is susceptible to other outside influences that may interrupt this run or aid it, therefore it is imperative that you use the usual technical analysis required to give indications as to the general condition.
The following chart shows what happened to CBA and the red resistance lines indicate the short-term resistance while the green lines indicate the up-trending support.
The chart above illustrates that the share did run to almost $80.00 before the retracement. That gave us wave one, two and three of the wave patterns. Interestingly the share then retraced to the 50% level of wave two at $69.50. This is the base of wave three, at the base of which the Retracement Indicator alerted us to another trade. It is interesting to note the volume increases at all the major pivot points, especially when the indicators have come up.
“Don’t try and beat the rest of the market by being the only person to buy.” With this in mind, the volume at the pivot points helps in your valuation of the potential trade.
If you were more interested in trading the shorter time periods note that the indicator is run on the smaller setting of 13, you can see that it alerts on the basis of a smaller pattern within, the larger one. The retracement for 13 indicates the R (in green) at the point of the forth waves cycle. It’s a small but profitable trade. The orange line indicates to us the pattern.
The Retracement Indicator is an alert to highlight shares that may be a potential trade.
You must conduct further analysis, such as the position of the share in relation to the larger picture and confirm that it meets with all your entry criteria before entering the trade. Eliot wave analysis fits very well with this indicator.
The indicator can be used in conjunction with other indicators to give us the right timing for the trade.