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.

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