Domination Wave Theory is not Elliot Wave Theory. Waves are counted on the smoothed or double-smoothed oscillating indicator rather than on the market. From peak to valley on the indicator’s waves constitute one leg.

The Beginning of Domination Waves

These waves and their respective legs are of definite value in predicting near-term future direction of a market.

Wave is a move up and down in an undulating motion. Wave is derived from the Middle English word waven, which means, to fluctuate.

The MACD, like any other smoothed, or double-smoothed, oscillating indicator, travels in waves, like the market.

In order to have another part of a wave pattern, another leg, the oscillating indicator must actually change direction from up to down, or from down to up on the close of a bar. Even if the change in direction is minute, the change in direction counts.

How to Determine the Start of a New Leg on a Wave

There are 4 ways to determine the start of a new leg on an oscillating indicator wave on a chart:

1. Weakness Divergence. (You have seen divergences already on this site.)

4. If a leg 2 moves beyond the beginning of a “leg 1”, it is automatically now the beginning of a new leg 1.

Necessary Characteristics of Domination Wave Patterns

These necessary characteristics are on the smoothed indicator, not on the market.

When the beginning of a new leg 1 on a chart is on the top side (market to move lower in price), then the end of leg 1/start of leg 2 must be lower than start of leg 1. The end of leg 2 / start of leg 3 must be higher than the end of leg 2 / start of leg 3 and lower than the beginning of the leg 1 on that chart. The end of leg 3 must be lower than the end of leg 1.

If the beginning of a new leg 1 on a chart is on the bottom side (market to move higher in price), then the end of leg 1 / start of leg 2 must be higher than the start of the leg. The end of leg 2 must be lower than the start of leg 2 and higher than the beginning of leg 1. The end of leg 3 must be higher than the end of leg 1.

Leg 1 is a move in a direction. (Thrust) (Strength in that direction)

Leg 2 is a re-alignment period (retracement of the move of Leg 1). (Weakness in that direction.)

Leg 3 is another move in the direction of Leg 1. More certain Thrust. (Confident Strength in that direction)

“Wave Mapping“, which will be covered in much more detail as this series of Domination Wave lessons progresses, is ONLY applying the above over and over on different time frames.

The smoothed oscillating indicator will either move straight to a signal pattern (fractal), or give three or more legs. When there is a new end of one leg / start of the next leg on a chart, two charts smaller will give you four parts 99% of the time. The one exception to this is with large, quick, vicious thrusts that produce a series of what are called “slide charts”, which you will learn more about in line-ups and time-synchs in the Inner Sanctum.

There is still a LOT more coming on Domination Wave Theory. I just want to lay down the groundwork before really digging in and explaining each concept on Domination Wave Theory given above.

If you have any questions or comments, please leave them. I will answer as soon as I can.

Have a phenomenal trading day, and prepare for some mind-blowing revelations on Domination Waves.

A Wave is a move up and down in an undulating motion. Wave is derived from the Middle English word waven, which means, to fluctuate.

The MACD, like other oscillating indicators travels in waves, like the market. In order to have another part of a wave pattern, the MACD must actually change direction from up to down, or from down to up on the close of a bar. Even if the change in direction is minute, the change in direction counts.

There are 4 ways to determine the end of a motion in a direction to end the last leg and to begin the Leg 1 on a MACD wave on a chart:

1. MACD weakness divergence
2. Last actual curve on the next larger chart, use that market peak and the immediate curve on the current chart as a beginning of the Leg 1 on “this” chart.
3. Leg 3 (or 5) automatically becomes the start of a Leg 1 until the market proves it otherwise.
4. If a Leg 2 moves beyond a start of a Leg 1, it is automatically now a new start of a new Leg 1.

If Leg 1 start on the MACD is on the top side, then Leg 2 start must be lower than the Leg 1 start. The Leg 3 start must be higher than the start of Leg 2 and lower than the start of Leg 1. The end of Leg 3 on the MACD wave must be lower than the end of Leg 2.

If the start of Leg 1 is on the bottom side, then the start of Leg 2 must be higher than Leg 1’s start on the MACD. The start of Leg 3 must be lower than the start of Leg 2 and higher than the start of Leg 1. The end of Leg 3 must be higher than the end of Leg 1.

1. Leg 1 is a move in a direction. (Thrust) (Strength in that direction)
2. Leg 2 is a re-alignment period (retracement of the move from Leg 1). (Weakness in that direction.)
3. Leg 3 is another move in the direction of Leg 1. More certain Thrust. (Strength in that direction)

Market Mapping is ONLY applying the above over and over on different time frames.

The MACD will either move straight to a signal, or give three more legs. When there is a new leg on a chart, one or two charts smaller will give you three legs. The one exception to this is with large, quick, vicious thrusts that produce a series of what are called “slide charts”, which you will learn more about in line-ups and “time synchs”.

See the coming video on the MACD wave, which covers everything in this section.

And as always, feel free to ask questions, leave comments or add value to a discussion here.

Have a truly phenomenal weekend!

Before the Forex markets opened up today, I did a quick (and incomplete) run-through of more indicators than just the MACD. Included was also the ADX (Average Directional Index) and the ATR (Average True Range) and they were sort of covered a little quickly and with some wave stuff in there, too. Here’s the video (it’s about 9 minutes 29 seconds)…

So some quick stuff that was gone over in the video, however incomplete it is in the vid…

I’m changing gears here on this training. The Forex Challenge on Facebook, which ends October 31, 2008 for this match, and me being challenged, and starting off over $85K behind the leader, calls for a time efficiency step. Hence, this change.

What I’ll be doing is going over charts at least 3X per week for you. Maybe not in the same currency pair, but with the same indicators: MACD, ADX and ATR.

The MACD is there for spotting divergence patterns. The ADX is another strength/weakness tool, though not used like the MACD because it’s not an oscillating indicator. The ATR, which I’ll have to cover separately down the line, is not used at all in reading the charts, but for trade sizing.

The odd thing is here I won’t be using much trade sizing until I overtake the leader, assuming that I can.

ADX Basics

The Average Directional Index, ADX, shows strength in a move or trend, or weakness in the move or trend. When the market makes a move and the ADX decreases, that’s a weak move in that market on that chart.

When the market makes a move and ADX increases, that’s a strong move in that market on that chart. It’s a sign of strength on that chart only, and is basically useless unless accompanied by other signals.

It gets better later down the line, but really start understanding that little bit now. Ask your questions and I’ll answer those questions, or respond to comments, as I can.

ATR Basics

The Average True Range, or ATR, is only used by me to determine trade size. In other words, I divide my account, under actual trading circumstances with real money, into “units”. The “unit” represents, say, 1% of my trading account.

In the EUR/USD or the GBP/USD one pip is $10, so that makes it pretty easy. The ATR acts as a “volatility normalization” tool. The more volatile a market is, or the bigger the chart is, the higher the ATR will be. The smaller the volatility in the market, or the smaller the chart, the lower will be the ATR, developed by Wells Wilder, by the way.

So I basically divide my max risk for the trade by 10 and that gives me how many pips I can risk. I MUST risk that number of pips or less to be able to enter. There’s a lot more to it, but that’s the basics.

AND of course, the MACD (and histogram) give me divergence patterns that I want to see so I know the market is talking to me.

In Summary…

So, quickly here, we have the GBP/USD appearing before the markets opened for the night (yes, this is Sunday) as if there was still strength in upward moves. While there was one divergence pattern saying the market could come down, that one pattern was poisoned by a very strong ADX (the double-high, to be covered another time) in the wrong place.

A little bit was covered on the waves, but those will really have to be covered over the course of a week or two down the road. The ATR did not show that the market wanted to relax much because the volatility was decreasing, rather than increasing on the chart discussed. And I’ve got to get this posted…

If you have any questions or comments or criticisms, I’m open. I’ll answer, respond, or belittle you as required. LOL

And don’t try using this stuff in your own forex trading until you have successfully managed a paper trading account with it over sufficient time to know if you CAN use it profitably. Got it? If you try, and you have not successfully managed your own paper trading account with the info on this site, guess what? Yep, I guarantee that you will lose money. (Okay, I could make that guarantee and be right for like 97% of Forex traders, right?)

Anyway, have a phenomenally fantastic week in trading. More tomorrow! See you then.

No pics or video today. Just the rules. Keep in mind that you have to be using an oscillating indicator to use divergences. Examples of oscillating indicators are MACD, Smoothed RSI, Smoothed ROC (Rate of Change), Slow Stochastic… And you must have the ability to look at multiple time frames. We won’t be using add-ons in this basic model. Those are for another time.

The purpose of this is to give you a simple, basic trading system that you can practice managing on paper.

I won’t here get into the risk management or money management aspects, but will on another post. Just pretend it’s one lot and your account is big enough to take the loss from peak to valley, or valley to peak of the trade. (I use 2/3% account as unit size - yeah, I’m a chicken, but I never risk more than 2% on any position, so…)

0. Peaks and valleys are found on the largest weakness chart in the sequence, just below the smallest future strength chart. If you’re on the 60 minute chart, the next smaller chart is the 20-minute or 15 minute. The next bigger chart is the 3 or 4 hour chart, where one bar represents the price action of a 3 or 4 hour period.

1. See if there exists larger chart future strength divergence, combined with at least 2 smaller chart past weakness divergences that say the market looks like it wants to reverse recent price direction. On the larger chart, the trend direction must be the same direction as the trade. (If you don’t know what I said for this rule, go back to an earlier video in this series.)

2. If not, there is no order placed.

3. If so, choose the closest peak (if future strength direction is up) or valley (if future strength direction is lower), and set a stop just beyond the peak or valley. If long, be sure to add in the spread for the currency pair, too. The stop for the trade is the opposing directions last peak or valley.

4. When you’re in the trade, and the market moves beyond the next peak, move your stop to just beyond the last opposing peak or valley.

5. Once the market moves farther in your direction, moving past 2 peaks (or valleys, if you’re short) which were made while you have been in the trade, tighten the heck out of your stop, or exit. (Only choice you get.)

And that’s it.

Practice well, and have a phenomenal trading day.

Today we’ll cover what happened with what I was talking about last night and how to really use the divergence patterns in combination with the basic trading model I talked about earlier. Now, really, you can be 55% wrong with this stuff, and with the risk, money and profit management stuff you’ll learn in the coming membership site (yes, there will be free level), you will be able to make 6X the profits you’re likely making, assuming that you’re a profitable trader already.

From the point we ended last night in the video, well look at what happened, what caused the buying and selling patterns that followed, and show you that you would have made a profit, twice - even though the market didn’t move much. Take a few minutes to watch the video below…

I want your comments, questions, and even your suggestions and criticisms on how I can make these videos better for YOU. I already know this stuff, but what I don’t know is what you don’t know, or need explained differently or more clearly, or more specifically.

Remember that the purpose of this site is to train more highly profitable forex traders - and you can learn all this basic stuff as my gift to you. Of course, later on some day, I might develop some sort of a program to teach more advanced principles, but until you know the basics COLD, there’s just no way you can possibly qualify for such a thing. (I’m really picky about who I train and what has to be known before we even start.)

The primary characteristic in successful traders (in any market the public can trade and has sufficient volume) is strict discipline in managing the trading system being used. When the trading system says to trade, you trade. When the system says to add on, you add on. When the trading system says to exit part of the position, or all of the position, you exit. The system says what actions to take. And your job is to know how and when to take those actions.

Remember, also, that the elite traders of the world are also those who have their goals aligned in the proper order of importance: FIRST is to preserve your capital, protect your funds, and SECOND is to profit from trading. You can see how discipline really plays a major role in trading.

How do you get really good at managing a trading system? The same way you get really good at anything: Practice. What’s really cool about practicing managing your trading system today versus 1995 and earlier is the ability to “paper trade” a system.

Another time we will cover how to properly use paper trading to get up to speed on managing your system trading forex. And tomorrow we will cover the rules, specifically, of using the divergence combinations with the basic trading model I talk about in the videos.

Stay great, ask questions, make comments, and have a truly phenomenal trading day!

I’ve been watching the EUR/USD and thought there might be a real time example of a bigger chart strength plus the (multiple) smaller chart weakness. Luckily I was right. The video below shows the possible trade as it’s setting up. It’s not a trade - yet, but it’s here now.

If you have any questions, please ask and I’ll answer as quickly as I can. Any comments - great! Tell me what you want to learn about here, and if I can immediately fit it in, I will. If not, I’ll let you know when it will be scheduled.

The point here is that I want to teach you a basic model of trading, something that is simple, so you can practice managing the system quickly. Paper trading the forex markets is good if you treat the “paper trading” as THE time to learn how to manage the trading system that you’re using. More on that another day.

So the basic concept here is that when you have the bigger chart strength divergence (to go down in the video example) combined with multiple smaller chart weakness (the weakness is in moving higher, so the market looks like it wants to move down, lower) is a great place to use the previous peak take out basic trading model.

The two combine beautifully. The purpose of indicators is to increase the probabilities of your basic trading model in your favor. The divergences do that very well in forex markets - especially combined with the previous peak takeout model.

Any questions? Ask. I’ll answer. Stay great and have a truly phenomenal trading day!

This post on Divergences is VERY concise. Every sentence has actual meaning and use. “Peak” below means either peak (high) or valley (low).

A divergence is a discrepancy between market action and indicator action. There are only two types of divergences:

1. The market moves farther in a direction and the indicator does not move farther in the same direction, and
2. The indicator moves farther in a direction and the market does not move farther in the same direction.

To see a discrepancy, we have to look on the same side of the market and the indicator. So if we look on the top side of one, we must look on the top side of the other. If we look on the bottom side of one, we must look on the bottom side of the other.

The discrepancies can only occur on the top side and the bottom side of the market and indicator.

When we see a discrepancy on the top side, that is a signal that the market could move down.

When we see a discrepancy on the bottom side, that is a signal that the market could move up.

When the market moves farther in a direction and the indicator fails to move farther in the same direction, then that is a sign of weakness in the direction that the market moved. So, discrepancy (1) above is a sign of weakness in the direction that the market moved farther in.

When the indicator moves farther in a direction and the market fails to also move farther in the same direction, then that is a sign of strength in the direction such signal says the market could move. So, discrepancy (2) above is a sign of strength in the direction the signal tells us the market could make a move.

Condition one to having a signal is that there be a discrepancy between market action and indicator action. That discrepancy will always be one of the two types above, on the top or bottom.

[NOTE: A signal on a chart is meaningless outside of what is called a “line-up”. Line-ups will be covered later in the training.]

How to Determine if a Divergence Exists

To actually have a signal from a divergence,

1. one must begin at either
   • a market peak or
   • an indicator peak

   farther back in time and move toward present time (to the right on a chart).

2. From that beginning peak one draws a line from the market peak and/or indicator peak to the market’s “now” point at that time if one is drawing on charts that have already occurred.

If one is actively looking for divergence signals in real time, it is impossible to have a market peak in real time “now”.

Reason: a peak, by definition, must be beyond the previous and next bar. Since there is no next bar right now, “now” can never have a peak. Therefore, we must start at a market or indicator peak in the past. That’s condition two – the starting point of a signal must be at a market or indicator peak, and that must be left of where we are drawing to.

The Third Condition to Having a Real Divergence

Condition three to actually having a signal is that over the exact same time period from the starting point (market or indicator peak) to our “now” point, we may not draw the line through either the market action or the indicator action. On the market, the bars representing market action act as a barrier. On the indicator, the indicator line itself acts as the barrier.

When all three conditions are filled, we have a divergence signal.

If all three conditions are not filled, we do not have a signal.

IN SUMMARY: Over the exact same time period on a chart, we may not draw a line through the market or the indicator to get to our “now” point. A discrepancy (1), where the market moves farther in a direction and the indicator does not move farther in the same direction over the same time period, that shows weakness in the direction the market moved farther in.

In a discrepancy (2), where the indicator moves farther in a direction and the market does not move farther in the same direction over the same time period, that shows us strength, or coming strength, in the direction the discrepancy (2) says the market could move. All three conditions must be met to have a signal. If all three conditions are not met, there can be no signal on that chart at that time.

Please note that I have a horrible storm system just a few minutes away from me as I finish the typing. I will have a video for you showing you everything above (and probably even a little more) tomorrow.

Added 2008 June 11:

Sorry I’m not a video expert, but what the heck. I’ll get better with more practice. Leave me comments and questions and I’ll answer you!

Kick it with your own forex trading.

I hope that this helps you. Have a truly phenomenal day!
Russell

Divergences are the “secret fractal” that fractal searchers have been looking for. I’ll explain more about their use in Forex trading in a few moments. A fractal is repeating pattern. That’s the essence. The use of finding a fractal is that fractals allow prediction. Much like calculus allows the prediction of rates of change, and differential equations allow predictions in effects of the differences of rates of change. You don’t have to know calculus or diff-eq to use anything I’ll be writing about - they’re examples.

In case you don’t know what a divergence is in reading charts, I’ll explain that for you. Basically a divergence is a comparison between what the market does and what an oscillating indicator does, and when there is a difference between “point to point” comparative motions. Here’s a sample chart:

Please not that this is for illustration purposes only to show what a divergence is. Notice that we are starting here from a valley on the MACD, and starting on the price bar that is at that valley. (There are definite rules to drawing divergences and they’ll be covered in another post.)

The starting point is always in the past, and we always start in the past and draw our lines toward the present.

Notice that as soon as the market’s price moves below the low of the starting bar, we have a divergence. The entire yellow zone, A, is a divergence zone. In other words, as the market keeps moving lower, the divergence between the market’s price action and the MACD action are not the same. The market moves lower while the MACD does not. That is a “divergence”.

That particular type of divergence, where the market moves farther in a direction while the indicator does not, is often called a “reversal” or “weakness”. I call it “past weakness” when it is accompanied by other price/indicator “divergences” (convergences are also included in the term).

You know what? I’m just going to make a video of the basics of all this for you. I’ll be up just below once I get it made and up (figure about 8 hours, or about 2:00am NYC time - 7:00am London time)

Keep in mind that the info above and in the video are very far from complete. I’ll tell you about the rules for having divergences tomorrow, though it might be late.

By the end of this series of blog posts and lessons in forex trading, you will understand that these divergences are, indeed, the secret fractal - and you might even feel good enough to trade with the info. But that’s up to you.

If you have any questions or comments or additions - PLEASE ask or leave them. Good, bad, doesn’t matter. I want to provide you with what you want to know. I’m not very good at guessing.

Have a truly pheonomenal trading day!
Russell