How I See the 50% rule

[hwsteele]

Ok so I asked a question in the other thread and things got a little ugly.
I will take the blame for that as I did start the thread.
I was only trying to see if anyone would come up with the same thing I had.
The thing is it is an older idea but I have not researched it more than a couple weeks.
As such, I was not wanting to just openly talk about it and maybe be talked down to or poo poo'd on for what every other trader might already know, and or think is worthless.

BUT

That happened anyway in the other thread so I might as well just discuss it like a big boy(you know like I should have in the first place).

So as such I am openly apologizing to everyone in the other thread that I may have pissed off or been "snippy" to.

I will start to explain what I was talking about later today as I need to go pick up my new tires and have them put on.

 

[hwsteele]

When a market makes a new high or low that is, in its time frame "important", watch the first move.
There will be a retracement and then a new move will continue in the original direction that is about the same as the first one.

Another way to say it is:
A strong move in a new direction from a important top or bottom always takes a pause and then continues.

I say always because I have yet to see it not happen.(from an important top or bottom)

The first move is about half of the total move(50%) in that direction. What I mean is that if the market moves up 50 points and then retrace 25 points the second move is going to be about 50 points back in the first direction. It's not always 50:50 like that but is allot of the time.

Some times it will be closer to 67:33, but the second move always happens.

I have also noticed that these moves will be nested together.
Say the market makes a top.
Then moves down 20 points and then retraces 10 points.
After that it makes a 20 point move back down for a total of 30 points down.
That's the first 50:50
Then the market moves up 15 points and then back down 30 plus points.
That would make the first 50:50 the first part of the second larger 50:50.

The retracement of a 50:50 is also a smaller 50:50 allot of the time.

Now we all know that retracements can range from 1% to 100% but MOST fall at the 1/3, 1/2, and 2/3 areas for what ever reasons.

Knowing this it seems that a trading system would be easy to make with a few rules to play the second half of the 50:50.

Mine is this right now, but could change with more observation and input from others.

Look for the high or low.
Watch first move in new direction.
Wait for a retracement.
If the retracement retraces 50% of the first move I will put an order in to go in the direction of the first move after the price crosses back over the 50% line of the retracement. Depending on how far past the 50% mark the retracement went is what I use to gauge me exit. I shoot for 50% of the first move as a profit target.

Example:
High made at 900. Market move down to 870 in a strong move. Then starts to retrace. It makes it back up to 890. The 50% retracement would be at 885 so the trade is on if the market heads back down past 885. Now my target is 50% of the first move or 50% of 30 points or 15 points. The market moved back up to 890 so that is where I start counting the 15 points from. My target is 875. My stop would be just above 900.
That makes my risk 15 points and my reward 10 which is not that great but when it works out almost always that helps make up for it.
On top of that is the fact that the markets third move in the 50:50 is the same length as the first move allot of the time. So if you are able to watch the trade you can keep it on for more profit.
Also if the market moves past the 50% retracement and hits or passes the 62% or maybe 66% you can use that as your entry and have a much better risk to reward.
I still miss allot of trades cause sometimes the retracement is only 25 or 35 percent.

So that's it in a nut shell.

 

[shadowninja]

Isn't this Fib retracements?

 

[TWI]

I think it is much easier to look at an already established pattern and visually determine exactly how to trade it but when it comes to determining the same thing in real time as bars are being created you run into problems with regard to frequency and wavelength of what you are actually trying to observe. I think your obeservations are correct but can you get in at the right place?

 

[hwsteele]

The 50% retracement rule helps but still needs a little work I think.

 

[montmorencyt2w]

Very interesting.

However, as Shadowninja mentioned, it does seem more than a little suggestive of Fib retracements, doesn't it?


Those Gann videos are also quite interesting, actually!

BTW, via google, I found another "50% rule", although it was not all that interesting. Something about when your trade is 7% in profit, cash in 50% of your trade.

 

[hwsteele]

Isn't this Fib retracements?

Yes you could call it that. The real point I'm trying to make is that the market always pauses in a strong move. So as far as the retracements go you could use Fib or Gann or 1/4, 1/3, 1/2, 2/3, and 3/4.

See one of the reasons I was not so open about it in the other thread is at first glance that's all it looks like.(fib or gann's thirds and such). The thing that I was wowed about was how close to guaranteed the third move was as long as you start from an important top or bottom.

 

[zupcon]

sort of reminds me of

YouTube - Monty Python - Theory on Brontosauruses by Anne Elk (Miss).

 

[hwsteele]

Yah think I will chalk this up to Things I should keep to my self.

 

[shadowninja]

Fib levels are a bit more specific than 1/3 and 2/3.

 

[hwsteele]

Fib levels are a bit more specific than 1/3 and 2/3.

That is very true. The 1/3 and 2/3 is more of a nod to Gann. 50% is still 50% though.:cheesy:

 

[shadowninja]

Sure. Some say the 38.2% and 61.8% levels in fibs are important.

 

[hwsteele]

Sure. Some say the 38.2% and 61.8% levels in fibs are important.

I think more people use fib levels than Gann levels. So I think the retracement levels I should look for would be the famous fibs 38.2, 50, and 61.8.

 

[snipertrader65]

I think more people use fib levels than Gann levels. So I think the retracement levels I should look for would be the famous fibs 38.2, 50, and 61.8.

Don't feel bad for sharing your thoughts. I've noticed this "modulation" pattern before but never really thought to put percentages to the moves and hadn't noticed that the third wave may equal the first wave. I want to do some back testing to see how it works out. Do you have a definition for "strong move"? TIA.

 

[hwsteele]

Don't feel bad for sharing your thoughts. I've noticed this "modulation" pattern before but never really thought to put percentages to the moves and hadn't noticed that the third wave may equal the first wave. I want to do some back testing to see how it works out. Do you have a definition for "strong move"? TIA.

Thanks for the support.

First I will say my definition for an "important" top or bottom is the highest high or the lowest low of the last 44 bars. I like the number 44 thats why I use it. really it seems to work with anything over about 20 to 25 bars or so. Any less than that and the third move starts suffering.

As far as a strong move that part is more art than science at this point for me.
To start with look for two bars that don't overlap much. Then a retracement should be close behind. After that the third move comes and it could be stronger or weaker than the first move.

BUT

This is just the first 50:50. As such the whole 50:50 of above may be the first leg of a bigger 50:50. In that case you could be looking at 6 or 7 or more bar as the strong move and then a bigger retracement. Then the bigger third move down.(Which could be its own 50:50 when looked at closely.)

I hope this chart helps explain.

 

[tomorton]

Hi hwsteele - Nice to see a man who's not going to be put off that easily! This is not bad work and has some valid observation behind it. I hope it shows up well when applied in trading. I suspect if devleoped into a system it would be valid both to spot entry points but also to rule out certain entries that would be losers or high risk - lot of people forget this is a good objective for a system as well as finding the winners. Keep it up.

 

[FXSCALPER2]

It is touching when people think they notice something in the markets most others didn't. Thing about it is you are going to always be wrong about that. Because of this, it puts me to sleep when people talk about set-ups, methods or some bollox they think they have noticed on a chart. If you think you found something on a chart, assume that you haven't.

 

[zupcon]

If you think you found something on a chart, assume that you haven't.

better still do whatever it takes to PROVE you havent

This still has to be the funniest chart formation ever posted !
http://bigpicture.typepad.com/comments/files/black_swan.gif

 

[hwsteele]

Some people are just happy all the time!

 

[montmorencyt2w]

Thanks for the support.

First I will say my definition for an "important" top or bottom is the highest high or the lowest low of the last 44 bars. I like the number 44 thats why I use it. really it seems to work with anything over about 20 to 25 bars or so. Any less than that and the third move starts suffering.

As far as a strong move that part is more art than science at this point for me.
To start with look for two bars that don't overlap much. Then a retracement should be close behind. After that the third move comes and it could be stronger or weaker than the first move.

Maybe that (quantifying what counts as a strong move) can be made into a bit more of a "science" in due course, as you get more observations. I hope that something comes of this, and that it makes you lots of money, and confounds the naysayers. :clap:


I think the important thing would be that, even if it develops into a more "scientific" system, that it retains its essential simplicity and is a practical proposition for an ordinary trader.

From what little I have read of Gann, he seems to have mixed in a lot of nonsense with the good stuff, partly as a joke, and partly to confuse the enemy. So maybe you want to bring in phases of the moon, signs of the zodiac, and hidden shapes in the candle|bar formations along the way, and that sort of thing. Has anyone used the periodic table of the elements yet? (You can have that suggestion for free ).