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1. Overview on Price Patterns in the Financial Market

Many traders are using patterns to trade on Forex, Stocks, and Futures market every day. Patterns are the scientific evidence and record of underlying dynamics of the financial market. The value of the price patterns to the Scientific and Trading Community is much more than just profitability. With the increased interest in price patterns for every day trading, there is a need for comprehensive and scientific pattern framework. At the same time, the pattern framework must be easy enough for average trader or average people to understand. The purpose of this article is to provide the convenient and intuitive pattern framework to overcome the limitation of existing pattern framework. We will show you short but comprehensive pattern framework, which can be used to create a detailed analysis in forex and stock market trading.

2. Why Do We Need New Pattern Framework for day trading?

Firstly, price patterns in the financial market are not bounded by 4, 5 or 6 points only. The price patterns can have 10 or 15 points also or even more. They can come in various shape and in various complexity. For the time being, the community do not have intuitive and flexible pattern notation to adapt these new and more complex patterns for the future use. Most of them assume the fixed points for their patterns. For example, Elliott Wave theory uses the 12345 or ABC notation. For example, Wave .12345 and Wave .ABC patterns respectively consists of six points and four points. Likewise, Carny (1998) and Pesavento and Shapiro (1997) used XABCD notation for harmonic patterns. Many harmonic patterns consist of 4 to 6 points using XABCD notation. Either the XABCD notation or the 12345 notation is limited to describe patterns that are more complex.

Secondly, price patterns are not bounded by Fibonacci ratios only. The price patterns can come from the domain of non-Fibonacci ratios as we have shown using EFW Index Distribution. We can definitely tell the Fibonacci ratio are good starting point but we have seen that price patterns can be tuned outside the Fibonacci ratio for better profitability. For example, a profitable pattern can possess 1 or 2 Fibonacci ratios but rest of ratios can be filled with non-Fibonacci ratios. We never know about this possibility.

Thirdly, as we have shown, the basic building block of the Fractal geometry is triangle in the financial market. The building block of the 12345, ABC and XABCD notation is the line instead of the triangle. I personally believe that pattern framework, using triangle building block, will provide the shortcut to many scientific discovery and to improved trading strategies.

Based on these three reasons, we introduce new flexible pattern framework with good expandability for the scientific purpose and trading use. Since our pattern framework uses the triangle as the building block, we call our new pattern framework as X3. Of course, the entire purpose of creating this new X3 pattern framework is to have the “Quantum Leap” in our scientific knowledge on the financial market and the crowd behaviour. As a result, this will help us to predict the financial market better.

3. How the X3 Pattern Framework is different from other Approaches

Before, many pattern frameworks including Elliott Wave theory or Harmonic Pattern and others used the points and lines to describe the patterns. In our new framework, we use a triangle to describe the patterns to provide the shortcut to understand them. We found that using triangle gives an unlimited flexibility to describe any simple and complex patterns with the shortest possible description. Meaning of X3 is the triangle, which is made up from 3 points. Another important point is that the X3 notation makes the extensive use of retracement ratio and expansion ratio. The retracement and expansion ratios are commonly used by Fibonacci trader and swing trader. Hence, X3 pattern framework is really the natural evolution of trading language based on what traders have built in the past. As you read this article, you would pick up all the essential elements of price pattern structure without too much hassle if you have at least studied any swing trading or Fibonacci trading methods.