| Using eSignal, Advanced GET Edition, to Find Opportunities within a Range
My underlying philosophy is to understand price as it flows through time from contraction to expansion.
The contraction phase is the zone where predictive price swings yield profitable price excursions of a large degree. It is within this phase where trades take place. The completion of the contraction phase leads to the expansion swing in price. Think of contraction and expansion of price as the pulse of the market.
To help find the expansion and contraction phase, I use swing charts.
The main advantages of using swing charts are that:
- They aid in reducing the amount of confusing market noise
- Analysis allows the trader to compare price movements of similar magnitude
Once swings are drawn, I apply a number of simple definitions to find the buy and sell phases in price.
One of my favorite patterns to apply swing analysis to is trading ranges. A characteristic of a trading range is contracting volatility. Generally speaking, the larger the range, the larger the contraction.
I look for corrective structures within the range to generate buy and sell triggers well before a breakout occurs.
When you are analyzing a trading range, the first parameter you need to draw is the mid-point or point of control (POC). Corrective buys at the POC can lead to expansions to the top of the range or higher while corrective sells target declines to the bottom of the range or lower.
For the purposes of this article, I have chosen the company Colgate Palmolive from 2001 to 2006. To draw the swings, I used the Arps Universal swing tool.
Because I was using a weekly time frame, I adjusted the sensitivity from the default of three to one. To further rid the chart of noise, I used "edit studies" to change the price bars to white. The next step was to apply the Advance GET Elliott Wave study. When Advanced GET’s Elliott Wave study was applied to Colgate, you’ll notice that price advanced in an uptrend to the POC.
The advance to the POC was the first impulsive swing structure in the range (bullish). The impulsive advance was followed by a three-swing corrective decline (A, B, C). The corrective decline at the POC was the contraction phase of price where low-risk, high-probability trades originate.
A daily close above $51.50 triggered a buy. I then placed a stop below 2 (C) at $47.90.
To manage the trade and take part profit, I applied the MOB to the extreme high marked 1 (5). If price formed a pivot at the MOB, I would realize a one-third profit. (The reason I would take a one-third profit [selling 1/3 of my purchased stock] would be to free up my psychology and help pay for the expenses associated with trading.)
I protected the last two-thirds of the trade by trailing a stop below each consecutive swing low.
After the buy was triggered at $51.50, price continued to trace out impulsive swing structures to the MOB. Then, a pivot formed at the MOB, where a third profit was taken.
Once profit was taken, I moved the stop from $47.90 to below the swing low at $50.70. My objective was to use the swing structure to move the stop to create a neutral trade -- play good defense.
Eventually, price broke above the MOB, advancing to the top of the range and breaking out to historical highs.
Following the process and adjusting stops below swing lows allowed the trade to develop into a 5-to-1 risk / reward trade. Combining swing analysis with contractions in volatility and the tools in eSignal Premier and Advanced GET can lead to dramatic expansions in price.
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