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Peak Trough Analysis on Forex and Stock Market Trading
Peak trough analysis is a term coined in finance to describe the price patterns developed by the price action experienced by all securities like Forex and Stock market. Prices never move in straight lines, whether in an uptrend or a downtrend. As long as the price continuously rises and falls, we can utilize the fractal wave in our price analysis. After extensive price rise, the price must fall to realize the overvaluation of the price. Likewise, after extensive price fall, the price must rise to realize the undervaluation of the price. This price mechanism builds the complex zigzag path of the price movement in the financial market. Most of price data in the Forex and Stock market tend to follow this. Therefore, price pattern analysis are often heavily used to predict the price movement. Prior to apply these price patterns in the scientific way, the peak trough transformation is required. Peak trough transformation is the mathematical techniques to identify the peak and trough in turn to visualize the fractal wave in the price series. Some mathematical and technical analysis can be used as the peak trough transformation. This was explained in detail in the book: Scientific Guide to Price Action and Pattern Trading (Young Ho Seo, 2017). For example, the ZigZag indicator and the Renko chart is the popular peak trough transforming tools used by the trading community. In addition, Benoit Mandelbrot used the mathematical interpolation to explain the fractal wave in the price series. Since the mathematical interpolation is not popular among the trading community, we will focus on the ZigZag indicator and the Renko chart.
The ZigZag indicator and the Renko chart can be used to “peak trough transform” the price series. However, there are some important difference. For example, in the Renko chart, time is compressed as price gets transformed. The degree of time compression depends on the brick height chosen in the chart. This is not the case for the ZigZag indicator. In the ZigZag indicator, the price is only transformed while there is no change in time. Therefore, some traders prefer to use the ZigZag indicator while some others prefer to use the Renko chart. In this book, we recommend using the ZigZag indicator as we have seen that both price and time play an important role in the market prediction. Hence, we will stick with the ZigZag indicator. You will also find using the ZigZag indicator is straightforward and easy. For further understanding on the peak trough transformation, we can compare the Fourier transform and the Peak Trough transform in analogy. Fourier transform is heavily used in the cycle analysis. It extracts the cyclic features like wavelength and amplitude from price series. The techniques are useful for the data type in the second, third and fourth column in the price pattern table. On the other hands, the peak trough transform is heavily used in the geometric pattern analysis. This technique is useful for the data type in the fifth column in the price pattern table. You can tell both Fourier transform and Peak Trough transform as the sort of exploratory analysis performed before the main analysis. When we apply the peak trough transformation to the price series, we will be ready to perform the fractal wave analysis in our chart. The fractal wave analysis for our trading include the following methods.
• Horizontal support and resistance
• Diagonal support and resistance (i.e. trend lines)
• Triangle pattern
• Rising wedge and falling wedge patterns
• Supply demand zone analysis
• Fibonacci analysis
• Harmonic Pattern
• Elliott Wave Theory
• Gann’s methods
• Point and Figure Chart
• X3 Chart Pattern
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Self -Training Book 1
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