Wave counting and Bollinger Bands

Date: November 22, 2005 15:00GMT 10EST

Expert: Igor Belitsky, Currency Analyst of Fx Currency dealer.com

Topics:
- General Elliot Wave principle.
- Impulse Wave progress and Bollinger Bands rule.
- Correction patterns inside Bollinger Bands.
- Trading System example

Who is Igor Belitsky?
Igor Belitskyis a specialist in applied mathematics and trading systems development. Since 1996 he has been working as a forex market analyst in a Moscow based financial company.

Speech Material:

1. General Elliot Wave principle
According to Elliott Wave theory the market always moves in a sequence of 5 impulse waves in direction of the global trend and then in 3 corrective waves against trend. It is so called 5/3 pattern. In fact it might be more then 5 impulse waves but we always can subdivide them into classic 1-3-5 pattern.

2. Impulse Wave progress and Bollinger Bands rule
We will be using standard Bollinger Bands with period=22 and deviation=1.85. Our rule is very simple: In an up-trend, as long as price continuously touches upper Bollinger Band, impulse wave 3 or 5 is in progress. If the price action touches lower Bollinger Band then correction wave is in progress and next impulse wave to be followed soon. Opposite is true for a down-trend.

Below is example with GBP/USD 240 min chart. Next 1-3-5 impulse pattern started from 1.7900 level. Wave 3 has broken Lower Bollinger Band around 1.7550 and finally hit 1.7325. In order to profit on the wave 3 we had to sell GBP/USD on any bounce from the Lower Band.

Wave 4 was formed as symmetrical triangle pattern. Wave 5 started near Upper Bollinger Band and has broken Lower Band around 1.7370. Best tactics would be selling GBP/USD on small bounces from the Lower Band. Wave 5 total move was from 1.7500 down to 1.7100.

Click image to enlarge

3. Correction patterns inside Bollinger Bands
Corrective waves are often named as A-B-C. There are two standard types of corrective waves: Zig-Zag pattern and flat pattern. But in reality there is large quantity of corrective wave patterns as well as combinations of basic patterns.

Below is example of GBP/USD 240 min chart and composition of correction patterns. The correction phase started after wave 3. It lasted 3 weeks from 12-Aug to 31-Aug 2005 and consisted three patterns: Zig-Zag, Symmetrical Triangle and Expanding Triangle. Nearly one pattern per week.

Click image to enlarge

4. Trading System example
Below is sample automatic trading system. Buy signal is generated every time the price breaks Upper Bollinger Band. Sell signal is generated every time the price breaks Lowe Bollinger Band. This system generally produce more losses then profits if no additional rules is applied. We use it as example of implementation of our rule from section #2.

Click image to enlarge

Session Transcript:

FXstreet moderator (Nov 22, 2005 10:06:30 AM)
Good morning, Good afternoon, god evening and good night to everybody all arounf the world

FXstreet moderator (Nov 22, 2005 10:07:14 AM)
Today I am delighted to welcome back our good friend and guest speaker Igor Bellitsky who is a specialist in applied mathematics and trading systems development. Since 1996 he has been working as a forex market analyst in a Moscow based financial company.

FXstreet moderator (Nov 22, 2005 10:07:23 AM)
Be welcome, Igor

FXstreet moderator (Nov 22, 2005 10:07:32 AM)
and thank you for beign with us today

Igor (Nov 22, 2005 10:07:59 AM)
Dear friends, I am glad as always to be here again to share new trading ideas.

Igor (Nov 22, 2005 10:09:11 AM)
This session is devoted to using Bollinger Bands as perfect tool to build trading systems.

FXstreet moderator (Nov 22, 2005 10:12:04 AM)
thanks Igor

FXstreet moderator (Nov 22, 2005 10:12:29 AM)
Lets begin now with pre Reg questions.

Igor (Nov 22, 2005 10:12:45 AM)
is macd a good indicater? powelleddie

Igor (Nov 22, 2005 10:12:59 AM)
MACD is often used to predict trend direction. MACD is not perfect because it always lagged behind the price.

Igor (Nov 22, 2005 10:13:28 AM)
But it is true for every trend-following indicator.

Igor (Nov 22, 2005 10:13:46 AM)
What time window you think is for elliot wave ananlisys? 1hr? or 10 min...? Its adjust to intraday trade? Thanks a lots. hernan.hauri

Igor (Nov 22, 2005 10:14:34 AM)
I use 60 min + 4 hours + Daily time scales

Igor (Nov 22, 2005 10:15:14 AM)
I am confused about the meaning of deviation? If you have a set of BB?s 20/2 and then a second set 20/ 3 std. deviations - what is the difference if 95% of action occurs within the first band - how does that quantify? Basically confused about a deviation. Thanks leeforrest

Igor (Nov 22, 2005 10:16:38 AM)
I just use 1.85 standard deviations

Igor (Nov 22, 2005 10:17:36 AM)
If you set 1.0 the price will be breaking through both bands too often

Igor (Nov 22, 2005 10:18:10 AM)
and many of this breaks will be false break-outs

Igor (Nov 22, 2005 10:21:19 AM)
Now I am ready to answer your live questions.

FXstreet moderator (Nov 22, 2005 10:21:36 AM)
thanks Igor

FXstreet moderator (Nov 22, 2005 10:21:48 AM)
Please post your questions now and Igor will attempt to answer as many as possible.
js (Nov 22, 2005 10:23:31 AM)
short term and longer term where do you see price for USD/CHF and Gbp/USD going

Igor (Nov 22, 2005 10:24:40 AM)
For USD/CHF see our today's Forex Chart Analysis by FX-Dealer

FXstreet moderator (Nov 22, 2005 10:25:52 AM)
here you have the link for the excellent report that Igor publishes on daily basis:

FXstreet moderator (Nov 22, 2005 10:25:52 AM)
http://www.fxstreet.com/nou/content/102410/content.asp?menu=technicalanalysis

Igor (Nov 22, 2005 10:26:32 AM)
For GBPUSD see our chart images for today's session: wave 5 now in progress. We have sold GBPUSD from 1.7218 and got +90 points with our members.

bonnie (Nov 22, 2005 10:27:05 AM)
Do Bollinger Bands work equally well in all time frames ?

Igor (Nov 22, 2005 10:28:10 AM)
There is no difference between time scale. All depends on your trading system.

Igor (Nov 22, 2005 10:30:25 AM)
We often use BOB as signal triggers based on trend direction. For example we define trend direction based on 4 hours chart and enter trades based on Bollinger Bands on 60 min chart.

robert (Nov 22, 2005 10:31:46 AM)
hello goodafternoon, does this trading strategy work for all (majors) currency pair or only for specific ones? thnx

Igor (Nov 22, 2005 10:33:43 AM)
Every trading system should be tested on as many pairs as possible. Please note: we do not offer here ready-to-use trading strategy. It should be developed farther to be really profitable.

robert (Nov 22, 2005 10:34:27 AM)
what do you think of RSI on euro/dollar?

Igor (Nov 22, 2005 10:35:48 AM)
RSI can only be used as one component of complete trading system. RSI is not working alone.

Igor (Nov 22, 2005 10:37:01 AM)
If use standard oversold/overbought levels strategy it produces profits only in range-bound market.

Igor (Nov 22, 2005 10:38:05 AM)
For trending market you need additional trading rules and trend-filter is most important here.

JSB (Nov 22, 2005 10:39:53 AM)
Igor what are some of the "additional rules" to enhance this system?

Igor (Nov 22, 2005 10:41:26 AM)
Basically, trading system consists signal triggers to produce many trading signals. Those signals should be filtered with some filters and trend direction indicators.

Igor (Nov 22, 2005 10:43:27 AM)
If you ask for additional rules for trading system from today's session then you should distinguish wave 3 and wave 5

Igor (Nov 22, 2005 10:45:39 AM)
If you find perfect algorithm to do that you will become very rich man. And I don't think you will agree to share your algorithm with other people :-)

Boykie (Nov 22, 2005 10:46:07 AM)
Is there an indicator for Elliott Waves?

Igor (Nov 22, 2005 10:47:56 AM)
Many companies have been developing indicators to count elliot waves and build them with their software. I don't know perfect indicator to do this task.

LCC (Nov 22, 2005 10:51:54 AM)
How do you successfully spot in which corrective/impulse wave trend you are at. One person's 3 wave could be someone else's B trend for instance

Igor (Nov 22, 2005 10:54:28 AM)
For example, some wave is to be wave 3 or wave C. If this wave is moving in direction of large trend then we call this wave as wave 3.

Igor (Nov 22, 2005 10:55:06 AM)
We are always use large trend direction to count waves.

JSB (Nov 22, 2005 10:57:58 AM)
Can the beginning of new impluse wave typically be seen with large 4 hour bar moving across the bollinger band midline as in ur example from Wave IV to V?

Igor (Nov 22, 2005 10:59:57 AM)
It cannot be used as way to indicate the start of wave 5. There are multiple cross-overs of the middle BOB line up and down inside correction phase when wave 4 is in progress.

Igor (Nov 22, 2005 11:02:47 AM)
But in some situations this method works fine.

gamegirl (Nov 22, 2005 11:05:38 AM)
For intra-day trading, what time charts are best?

Igor (Nov 22, 2005 11:06:21 AM)
I think 30 minutes chart with trend based on 4 hours chart will be enough.

gamegirl (Nov 22, 2005 11:08:22 AM)
If you do you RSI, is either EMA or SMA better than the other? Or different for diff applications?

Igor (Nov 22, 2005 11:08:38 AM)
I prefer simple RSI

Igor (Nov 22, 2005 11:09:00 AM)
not exponential

jw (Nov 22, 2005 11:10:55 AM)
Why do you use 22/1.85, and not standard 20/2. Thanks, jw

Igor (Nov 22, 2005 11:12:22 AM)
There is no large difference between them. The answer is: in some sources 22/1.85 was called to be standard few years ago :-)

FXstreet moderator (Nov 22, 2005 11:13:07 AM)
LAS QUESTION

goldfish (Nov 22, 2005 11:13:26 AM)
can you use crossover of middle line of bollinger bands to go short or long for intraday trades?

Igor (Nov 22, 2005 11:14:44 AM)
Yes this system can produce profits. But your signals should always follow to direction of the larger scale trend.

FXstreet moderator (Nov 22, 2005 11:16:15 AM)
If your question was not answered during the course of this chat, please contact Igor

FXstreet moderator (Nov 22, 2005 11:16:26 AM)
info@forexdealer.net

FXstreet moderator (Nov 22, 2005 11:16:35 AM)
thank you so much for your participation, Igor

Igor (Nov 22, 2005 11:17:07 AM)
Thank you for this session and good questions. Good luck.

FXstreet moderator (Nov 22, 2005 11:18:06 AM)
Thanks, I hope to have you back very soon

FXstreet moderator (Nov 22, 2005 11:18:13 AM)
I cannot stress how important feedback is for the continued success of our Live Q&A sessions. In the past month, and the coming month watch out for new speakers as well as the regular and ever popular speakers. In order for us to continue providing informative and educational Q&A Sessions, feedback is vital. Please feel free to post feedback about today's session, topic ideas, & suggestions. We would appreciate this very much. I will be logged on for a while. claire@fxstreet.com

FXstreet moderator (Nov 22, 2005 11:18:19 AM)
Apologies all as of November the 1st the transcript will only be available for premium users. What is premium? Click here to read more: http://www.fxstreet.com/premium/premium.asp

Comments

[Paul R Hynd]

Igor - I just love your technique of using Bolly Bands to help map out Elliott Wave patterns - this is very powerful stuff. Together with Fibo retracements / projections, this should make it much easier to identify Elliott Wave components with some degree of certainty. I've tried it out on GBP/USD for the last week, and it works perfectly. Thanks so much for this ! Best regards, Paul