Practical Trading with Equilibrium Fractal Wave (EFW) Channel
Trading with the EFW channel is almost identical to the support and resistance trading. The main trading principle is that we are betting on the potential size of the equilibrium fractal wave. If the equilibrium fractal wave does not extend, the price will make the reversal movement. If the equilibrium fractal wave extends due to any surprise in the market, then the price will likely to show the breakout movement. To catch either reversal or breakout move, we can apply the threshold approach again from the concept of support and resistance trading in the previous chapter as shown in Figure 3-17 and Figure 3-18. Figure 3-17 shows the trading setup for the bearish turning point. Figure 3-18 shows the trading setup for the strong bullish momentum with the upwards EFW Channel. Trader can use the proportional approach to execute buy and sell. Since we are dealing with angle, it is much easier to use the proportional approach. To calculate the trigger level for buy and sell, we can use the same formula as before:
Y Buy = Proportion (%) x Y Height and
Y Sell = Proportion (%) x Y Height, where Y Height = the height of the channel and Proportion is fraction of the height of the channel expressed in percentage.
Some proportions you can use include 20% and 30% for your trigger level. You can even use greater proportion like 50% if you wish. The upper and lower channel lines can be used as the minimum stop loss level. To avoid the tight stop loss, you should always have the greater stop loss size than the minimum stop loss level. You can set the take profit according to your preferred rewards/risk level. With the EFW channel, it is possible to achieve Reward/Risk ratio greater than 3. We also show some trading examples in Figure 3-19, 2-20, 2-21 and 2-22.
Figure 3-17: EFW Upwards Channel trading setup for the bearish turning point.
Figure 3-18: EFW Upwards Channel trading setup for strong bullish momentum.
Figure 3-19: EFW Upwards channel sell trading setup on EURUSD D1 timeframe.
Figure 3-20: EFW Upwards channel buy trading setup on EURUSD H4 timeframe.
Figure 3-21: EFW Downwards channel buy trading setup on EURUSD D1 timeframe.
Figure 3-22: EFW Downwards channel sell trading setup on EURUSD D1 timeframe.
Some More Tips about Fractal Wave Channel
Using a Fractal Wave Channel in Forex trading involves applying the broader idea of fractals and wave analysis to identify and trade within price channels. This approach focuses on the fractal nature of market movements and the identification of wave patterns.
Key Concepts of Fractal Wave Channel
1. Understanding Market Fractality
- Fractals in Nature: In the context of trading, fractals refer to the self-similar patterns that repeat at different scales within the market. These patterns can be seen on various timeframes and reflect the underlying market structure.
- Wave Patterns: Price movements are composed of waves that can be analyzed at different levels or degrees. These waves are fractal in nature, meaning smaller waves are part of larger waves, and this repetition can be exploited to identify trends and trading opportunities.
2. Identifying Wave Patterns
- Impulse Waves: Strong directional movements that typically consist of five sub-waves. These indicate the direction of the primary trend.
- Corrective Waves: Counter-trend movements usually composed of three sub-waves. They represent pauses or corrections within the overall trend.
- Connecting Waves: By identifying key turning points in these waves, traders can create channels that represent the boundaries of price movement.
3. Drawing the Fractal Wave Channel
- Step 1: Identify Key Highs and Lows: Look for significant turning points in the market where price changes direction, forming peaks (highs) and troughs (lows). These points will help in constructing the channel.
- Step 2: Connect Peaks and Troughs: Draw a line connecting the significant peaks (for the upper channel) and a line connecting the significant troughs (for the lower channel). This forms the Fractal Wave Channel.
- Step 3: Extend the Channel: Project these lines forward to form a channel within which you expect the price to oscillate.
4. Using the Fractal Wave Channel for Trading
- Trend Following: Trade in the direction of the channel. In an ascending channel, consider buying near the lower boundary and selling near the upper boundary. In a descending channel, consider selling near the upper boundary and buying near the lower boundary.
- Channel Breakouts: Watch for price movements that break through the channel boundaries. A breakout above the upper boundary in an uptrend or below the lower boundary in a downtrend may signal a continuation of the trend, providing a trading opportunity.
- Channel Reversals: If the price fails to sustain a breakout and moves back into the channel, it could indicate a false breakout, and traders might consider trading in the opposite direction.
5. Incorporating Additional Analysis
- Multi-Timeframe Analysis: Look at the Fractal Wave Channel on multiple timeframes. A channel that is visible on both the daily and hourly charts, for example, might carry more significance.
- Support and Resistance: Use the channel boundaries as dynamic support and resistance levels. These levels can help in placing stop-loss orders and setting take-profit targets.
- Pattern Recognition: Identify common price patterns, like head and shoulders or double tops, within the context of the Fractal Wave Channel. These patterns can provide additional clues about potential market direction.
6. Practical Example: Trading the Fractal Wave Channel on EUR/USD
- Identify Significant Turning Points: On a 4-hour chart, identify the recent significant highs and lows where the price reversed direction.
- Draw the Channel: Connect these points to create the Fractal Wave Channel. Ensure the lines are extended to anticipate future price movements within the channel.
- Analyze the Market Structure: Determine whether the channel is ascending, descending, or horizontal.
- Trading Strategy:
- Trend Following: Enter long trades near the lower boundary in an ascending channel, with a stop-loss below the channel and a target near the upper boundary.
- Breakout Strategy: If the price breaks above the upper boundary of the channel with strong momentum, consider entering a long position, targeting an extension beyond the channel.
- Reversal Strategy: If the price repeatedly fails to break the channel and shows signs of reversing, consider entering a trade in the opposite direction.
- Risk Management: Use the channel boundaries to set stop-loss levels just outside the channel and take-profit levels at the opposite channel line.
Conclusion
The Fractal Wave Channel in Forex trading is a versatile tool that leverages the fractal nature of market movements. By identifying key turning points, drawing channels, and analyzing price action within these channels, traders can effectively identify trends, anticipate breakouts, and manage risk. This approach requires careful observation and an understanding of wave patterns, but it can offer valuable insights into market dynamics and enhance trading performance.
About this Article
This article is the part taken from the draft version of the Book: Scientific Guide To Price Action and Pattern Trading (Wisdom of Trend, Cycle, and Fractal Wave). This article is only draft and it will be not updated to the completed version on the release of the book. However, this article will serve you to gather the important knowledge in financial trading. This article is also recommended to read before using Price Breakout Pattern Scanner, Advanced Price Pattern Scanner, Elliott Wave Trend, EFW Analytics and Harmonic Pattern Plus, which is available for MetaTrader 4 and MetaTrader 5 platform.
Below is the landing page for Price Breakout Pattern Scanner, Advanced Price Pattern Scanner, Elliott Wave Trend, EFW Analytics and Harmonic Pattern Plus. All these products are also available from www.mql5.com too.
https://algotrading-investment.com/portfolio-item/price-breakout-pattern-scanner/
https://algotrading-investment.com/portfolio-item/advanced-price-pattern-scanner/
https://algotrading-investment.com/portfolio-item/elliott-wave-trend/
https://algotrading-investment.com/portfolio-item/equilibrium-fractal-wave-analytics/
https://algotrading-investment.com/portfolio-item/harmonic-pattern-plus/
Related Products