AlphOmega Elliott Waves 5.0
For MetaStock® 8.0 and MetaStock® Pro 8.0 and higher
All Rights Reserved
Copyright © 2003
Welcome to AlphOmega Elliott Waves! This set will display Elliott waves count, price projections and time projections. The wave count is calculated from individual wave definitions, their relationship in size or time and a specific hierarchy. The wave count is intended as a basis for analysis and does not pretend to be an end in itself or exhaustive. Interpretation is always necessary when dealing with Elliott waves, but the basic rules are strictly enforced within the set.
The purpose of this manual is not to teach in depth theory of Elliott Waves or the use of MetaStock® software, but to give you directions on how to use the tools provided in The Expert Advisor™, Indicators, System and Explorations you have just purchased. From the Web site http://AlphOmegaEW.com , you can run Viewlets that will show you how to perform the most important tasks. A simple way to understand the set is to go through the various templates of the set and the screens you can create. This booklet was made short so you can read through it in less than a couple of hours, so please take the time for your own benefit. You will get a deeper understanding as you use the set of Experts, Indicators, Systems and Explorations. For information on the theory of Elliott Waves, an address is provided on page 60. All screenshots in this manual are unedited except for annotations hence offering a true picture of the set’s displays; the data is from the market and has not been manipulated.
First let’s make sure you have correctly set-up your set of Experts, Indicators, Systems and Explorations. From MetaStock® 7.2 and up, the import is done automatically. Open a chart and right click to select a template. Use the AlphOmega Simple template (Elliott Waves) that should contain in addition to the price and volume data, the following indicators:
Ø AO P&T Duration in gray and Wave Time Projection for 21% (Normal) in red
Ø AO STORSI in green and Demand Index in red
Ø Exponential Moving Averages on Close for 13, 55 and 144 days in green, dark yellow and red
Ø AlphOmega Elliott Waves NV v6.0 Expert
Ø AO PTF Indicator set-up for 21% (Normal)* in dotted red lines
Ø Wave Highlighter (already set-up for 21%) (Normal) in red
Ø Trendline* for 21% (Normal) in blue
Ø AO Elliott Oscillator in gray
Ø AlphOmega RSI/RMI Trend, RSI (Close, 14)* in magenta, Dynamic Momentum Index in blue and Trendline in green and Relative Momentum Index (20, 5)* in red
Ø Volume Moving Average (50,E) in dark yellow
(Note that an asterisk indicates the indicators that may be verified for proper parameters set-up in the provided template. MetaStock® imports with default set-up but it is rarely a problem.)
The first two are in the top inner window while the last four should be in the Volume inner window. You can choose to have no scale or use a left side scale to protect your volume scale. Your AlphOmega Simple template should look like the graph in Fig. 1 below. The other AlphOmega templates (Elliott Waves (8%), Elliott Waves (13%) and Elliott Waves (34%)) will have all of the above where the 21% is replaced by 8%, 13% and 34%.
If you place an icon at the bottom of your window, the templates are called at will and do not replace your smart charts.
All these templates are included in your set. Please take the time to verify that the correct settings are in place for the indicators with an asterisk otherwise all the templates will show the same Wave depth.
One word before we get in the screens layout, The Explorer™ and the charts should be run with the largest amount of data you have. In the options I have used “Load 3500 records” because the slowest cycle can evolve over many years. Since you must capture one full wave (At least one Peak and one Trough) before The Expert Advisor™ can see it, you must also have a full cycle of waves before you can track accurately wave 5 or A, B and C. The Expert Advisor™ forms an opinion on what is displayed, and so it cannot know that this wave is actually the fifth if it doesn’t see the previous four. The more data you have and the more reliable is the wave count.
This is the Load Options for the chart
This is the Load Options for the Explorer
If you want coherence between your explorations and your charts, make sure you load the same number of bars in both. Do not do as in the above example!
When you are looking at the oldest price data you have for a security (at the beginning time of your chart), you will find that the wave count is undefined. This will lead to strange patterns initially until there is enough data analysed. The long and deep waves are mostly subjected to this problem or a security that is not very volatile. When you are dealing with a very volatile security, you will go through all the cycles very quickly. Another issue we have to contend with is when the security enters a consolidation period. This means that the price is trading in a narrow range and forming triangular or sideway patterns. When this situation is at hand, failing waves or repeated extensions break up the wave count and the count is erratic.
To jump right in and get a head start, drag your cursor in the price pane, right click on an empty portion, select Apply Template and choose AlphOmega Simple, apply and close the dialog box. The screen should look like this after a few seconds…
Template AlphOmega Simple
This screenshot is your basic Elliott wave screen with this set. Arrows point to all the indicators that are included in the template. The Expert is producing the wave count labels you see for each cycle (8, 13, 21 and 34%). Note that the label appears at the end of a wave. When several waves from a different cycle end at the same bar, the largest cycle has priority over the lesser ones; its label will be superposed over the others making them invisible. Since the larger cycle needs more retracement to be confirmed, the labels of the other cycles will show until then. Retracement is a word that we must explain before going any further. To know that we have reached the end of a wave (and the beginning of the next), the price must reverse direction and retrace a portion of the distance (difference between peak and trough) covered during the wave deployment. The importance of the distance and that of the retracement will determine the cycle of the wave. This puts a lot of emphasis on the threshold of retracement for a specific cycle, retracement being measured in percent (distance retraced over distance traveled during the wave). The threshold we name Trigger and the Expert can color the bar on which the trigger is crossed for a specific cycle. To this end, the Expert must be edited, using the password, go the Highlights tab and check the box for the selected cycle; the default value is set to uncheck for all but the 21% cycle. This trigger can be a signal for entering or exiting a position.
The Elliott oscillator is the next indicator of importance in your chart. It is the difference between a 5 and 35 day moving average of the High or the Low (depending on the trend). We use it to differentiate between a third wave and a fifth wave as you will find out later in this manual. The RSI and the STORSI are used to time entry or exit but not to pick a top or a bottom of market. The Demand Index is better at picking top or bottom of market because it incorporates volume in its calculation. Do not be concerned if you do not understand everything at this point, we will discuss in more details each part of the screen.
The terminology we use through the book is that of R.N. Elliott. To describe the various cycles of wave pattern, we use four descriptive in each Expert. The cycles are divided in fast (8%), moderate (13%), normal (21%) and slow (34%) for the normal volatility (NV) expert; they are divided in ifast (1%), inormal (3%), islow (5%) and fast (8%) for the low volatility (LV) expert used in the AOi Simple template. These cycles correspond to intermediate, primary, cycle and supercycle for the normal volatility expert; they are minuette, minute, minor and intermediate for the low volatility expert. The correspondence is approximate since we use a mechanical approach to the evaluation. Sensitivity refers to the % used as a filter.
When uncertain, look at the AO ZZ indicator to check that you are still on the same leg you are investigating. This indicator is wonderful at pointing out failures or end of waves not quite complete!
Below is a screenshot of vertical lines to display time projections that are also helpful in this situation. To use this type of indicator, simply drag it in the price section of the chart, select histogram in properties and use no scale in scaling properties. Remember that MetaStock® cannot show lines for bars in the future but a line will appear when you reach a qualifying bar.
Elliott waves are based on a study of market behaviour from R.N. Elliott. His theory was not as complex as the rules derived from it by modern technical analysis. Generally the market will move in cycles and Elliott postulates that a cycle is made of a rising trend of five waves followed by a corrective move of three waves, hence an eight waves cycle. Within each of these waves, you will have a smaller cycle that will repeat itself. This is called the fractal theory and it says that the patterns are replicating from a small scale to a larger. An example of decomposition of waves for a complete cycle would be 5-3-5-3-5-5-3-5, read 5 waves followed by 3 waves and on. To make it easier to follow a simple graph will describe what Elliott Waves and its typical patterns are:
Knowing the waves pattern in itself would not be of great help if it was not for the complementary knowledge brought by Fibonacci, an Italian mathematician from Pisa. Although he lived in a very different era, his contribution is enormous to the use of Elliott Waves. He postulated that there was a proportion or ratio that applied to natural phenomenon which he called the golden ration. He proceeded to prove it with calculations and a list of numbers came out. These numbers are 1,1,2,3,5,8,13,21,34 and so on. Each number is the sum of the previous two and in addition corresponds to the previous number times the golden ratio, in other words times 1.618. When applied to the waves, this theory enables the projection of price and time objectives for the market behaviour. Modern technicians have established relationships between the different waves of the cycle and elaborated rules and probability calculations. This set makes use of these rules and accepted relationships between the eight waves of a cycle. In addition, it will monitor 4 different cycles to enable you to trade different timeframes and risk levels.
Now let’s see how this relates to the basic clean chart as displayed by MetaStock®…
If we link the tops of each bar we get a line that changes direction and sort of looks like ocean waves. Elliott quickly seized this similitude and defined a wave as: series of successive bars where each high is equal or higher than the preceding one and each low is higher than the previous one, conversely series of successive bars where each low is equal or lower than the preceding one and each high is lower than the previous one. If we apply this to our chart using the AlphOmega Absolute Elliott indicator, we get the following…
Already the waves are more discernible and steeper by the mere fact that we chose between the high and the low to connect the bars. We also observe that the rule as simply as it is stated does not answer all possible relationship between the bars. For example, inside days (the last bar has a lower high and a higher low than the previous) or outside days (the last bar has a higher high and a lower low than the previous) cause a dilemma as too which from the high or the low do we choose? On top of this, this rule does not account for the direction of the trend within the bar itself, from the opening price what was the direction of the price? Did it go from high to low to close or something else? The later cannot be answered from the data downloaded, all that is certain is that the opening took place before the closing but we don’t know if the high was hit before the low or the reverse. However we can elect that when the close is higher than the open, the trend is bullish and it is bearish for the reverse situation. It may look trivial at this point but when you will be faced with making an entry, you will understand its importance. Furthermore, when making projections for price, the results will be noticeably different. Note that the indicator has a set of rules to decide which of the high or low it should take, making it easier than remembering the individual rules.
Back to our waves, could we trade on the basis of this information alone (from a technical analysis standpoint)? We certainly could but the whipsaws would be costly in commissions or brokerage fees. We need to filter or eliminate some of the swings; we need to look at a broader picture. Let’s apply the AOZZ indicator and use a 21% filter. The percent filter relates to the minimum retracement from a peak or trough (top or bottom) expressed as the price change over the initial price (price at the peak or trough). A picture is worth a thousand words…
Now this is a lot better in terms of number of swings! From this point on we will switch from a bar to a candlesticks presentation, why might you say? Because the open and close are hard to tell when the bars are squeezed together, moreover the candlesticks patterns will be easier to see. How can we use these waves to trade? It is quite obvious that if we enter at the trough and sell at the peak, we will do very well. If everything was that simple… alas look at the last bar… can you tell it is the bottom or trough? Of course, no you can’t tell and nor can I. We need to wait for the price to start going up before we know we had a bottom. This means that we need to allow for some slippage at both ends and already we can assume that some waves will not be big enough to leave us with a gain. Is there a way to know from the start if the wave will be strong? This is where Elliott comes to help us by differentiating impulses from corrections and additionally giving us patterns that repeat frequently during trends. In Figure 3 we saw that a cycle was made of 8 waves, wave 1 to wave c; all the odd numbers are impulses hence 1, 3, 5, a and c, while all the even numbers are corrections so 2, 4 and b. Most of you already concluded that a correction will be smaller than an impulse; hence we will prefer impulses for trading. Our goal in trading is not to identify all possible wave configurations but to identify the trend and trade with it so we can make a profit by placing the appropriate orders. Remember that impulse waves alternate with correction waves. W...