Excessive Momentum Trading with Trend Filtered ZigZag Indicator

Excessive Momentum Trading with Trend Filtered ZigZag Indicator

By Young Ho Seo

Published: 5 July 2018

Article Version: 1.2 (8 July 2018)

Introduction to Trend Filtered ZigZag Indicator

Trading (or investing) is an applied science. The profit for day trader comes from the good discipline driven by facts and evidence. The profit for systematic trading system comes from the good data analysis driven by facts and evidence. The profit has a high correlation with the science and technology. To access more profits as a trader, you will need an improved discipline and technological advancement allowing us to see what other traders cannot see. Many knowledged traders will highly emphasize that the technology is very important for your trading.

We are very fortunate to put our new Trend Filtered ZigZag indicator forth in the line of the technological advancement. Every trader knows the ZigZag indicator. There are few variations of ZigZag indicators but the difference is very little. They are not the different tools from the standard ZigZag indicator.

Trend Filtered ZigZag indicator is very different one. It was born from my research on equilibrium fractal wave. The way the indicator built is based on the decomposition of trend and fractal wave from the price series, as it is indicated from the Price Pattern Table in my earlier research. Therefore, it is brand new for the time being. It offers many unique amazing features over the standard ZigZag indicator. Anyway, the Trend Filtered ZigZag indicator is free. You can just download from our website for free to test or to trade or to do whatever you like to do.

Link:       http://algotrading-investment.com/portfolio-item/trend-filtered-zigzag-indicator

Introduction to Excessive Momentum Trading

Let us explain how the Trend filtered ZigZag indicator is different from the standard ZigZag indicator. Since it is built in both MetaTrader 4 and MetaTrader 5, you can simply put the indicator into your strategy tester to check how they work. You can even put the standard ZigZag indicator together with the Trend filtered ZigZag to see how these two behaves. According to my own testing, there are two main difference between standard ZigZag indicator and Trend filtered ZigZag indicator. They are very important difference potentially towards your trading strategies.

First main difference is that the Trend filtered ZigZag indicator will allow you to observe the trend and fractal wave in two separate signals. In the standard ZigZag indicator and many variations of it will model just the fractal wave in one piece out of the price series. As a result, when there is a strong trend, the standard ZigZag indicator will just place one peak (or trough) no matter how high or how low the price moves. As you can see from the screenshot below, the Trend filtered ZigZag indicator will move more sensibly in the same situation making more ZigZag points. For your information, both Trend filtered ZigZag indicator and standard ZigZag indicator have the same settings in the screenshot below.

Excessive Momentum Trading S001

Figure 1

This behaviour of the Trend filtered ZigZag indicator will not change the way you trade. However, it will produce the different entry and exit for your trading from using the standard ZigZag indicator. Therefore, you would expect the different profit level too. From my understanding, you can apply all the trading strategies to the Trend filtered ZigZag indicator, which you were using for the standard ZigZag indicator. For example, Harmonic pattern trading, Elliott Wave trading, simple Fibonacci retracement trading and many more can be applied to the Trend filtered ZigZag indicator.

The second main difference is that you can observe excessive momentum (or excessive trend) with the Trend Filtered ZigZag indicator. This is probably something very new to the capabilities of the typical ZigZag indicator. Typically, ZigZag indicator will always place peak at the highest level and trough at the lowest level. This is not the case for the Trend Filtered ZigZag indicator. If there were excessive momentum (or excessive trend) in the market, then the trend filtered ZigZag indicator would recognize it and it would no longer react on the excessive momentum. This behaviour of the Trend Filtered ZigZag indicator will help you to identify the excessive momentum in the market. For your information, Trend filtered ZigZag indicator is one of very few tools which you can study the effective of excessive momentum in the financial market. Now let us take some example of what is excessive momentum (excessive trend) in the market. Below screenshot shows the example excessive momentum where the bearish momentum slipped away leaving us another trough (T’) to consider as the turning point except the trough (T) marked by Trend filtered ZigZag indicator. This is the case of bearish momentum.

Excessive Momentum Trading S002

Figure 2

Of course, we can have the example for the case of bullish momentum to help your understanding on the concept of excessive momentum.

Excessive Momentum Trading S003

Figure 3

Then why these excessive momentums might exists in the market? This excessive momentum might be the psychology of the crowd behaviour telling the potential future market direction. We can have two alternative explanation for the excessive momentum. Firstly, the excessive momentum could be caused by some irrational price reaction on previous momentum (i.e. like the late comers buying stocks after the stock have gone up too much).  If they are just the irrational reaction, then the price will be reverted back again. In this scenario, we would take the trading opportunity in the reversal direction (i.e. opposite direction) to the excessive momentum detected.

Secondly, the excessive momentum could be caused by strong belief of the crowd that the price will continue to go in the same direction, however, the supply could not support for its demand initially, so price had to go down first before going up.

If the excessive momentum is based on the strong belief of the crowd, then we will likely to chase the market in the same direction with the crowd. However, we need to observe if the supply meets the demand. In this scenario, we would take the trading opportunity based on the continuation of the trend. We will take the trading entry in the same direction of the excessive momentum detected.

Before we define the trading strategies based on above two ideas, we will explain the anatomy of the excessive momentum trading first. When we first detect the excessive momentum for our trading, we define the starting point of the excessive momentum as C. From the point C, when we observe the largest excessive momentum, we define the point of the largest excessive momentum as C’. Simply speaking the point C is either peak or trough in our ZigZag indicator whereas the C’ is the corresponding excessive peak or trough. Likewise, we can define the point A and B for the two previous ZigZag points before the point C. we can define the point D for the next ZigZag point after the point C. A’, B’, C’ and D’ are simply the excessive points corresponding to the point A, B, C and D points.

Excessive Momentum Trading S004

Figure 4

The ability to observe the excessive momentum can change the way you trade with ZigZag indicator. We will provide the two trading strategies according to our two trading ideas. First strategy will be based on the reversal scenario. We will trade in the opposite direction to the detected excessive momentum. Second strategy will be based on the continuation scenario. We will trade in the same direction to the detected excessive momentum.

In the reversal scenario, we believe that excessive momentum are caused by the irrational price action. Therefore, the price will reverse after the later comers completed their transaction.

You can follow the three steps for your trading to trade:

  1. Wait until you detect Excessive momentum from the Trend Filtered ZigZag indicator
  2. Measure the Fibonacci retracement from A to B
  3. Use any of the Fibonacci ratios for the potential turning point prediction.
  4. Trade at Point C’

The popular Fibonacci ratios like 0.382, 0.500, 0.618, 0.782 and 1.000, 1.272, 1.618, 2.000, 2.618, 3.000 and 3.618 are the good choice. In the screenshot below, we have chosen 2.000 because the ratio 2.000 was the next Fibonacci ratio we can target after 1.618. It is very similar to the traditional Fibonacci ratio trading.

Excessive Momentum Trading S005

Figure 5

In your trading setup, the point A’ or B’ might be present or might not be present. When A’ or B’ are present, then you might take the Fibonacci ratios from the widest combination of A to B, A’ to B and A to B’. For example, if you have the point A’ but not B’, then you can measure the ratio from A’ to B as shown in the screenshot below. In the screenshot below, the turning point was made at the ratio 1.618. If both A’ and B’ are present, then you can measure the ratio from A’ to B’ because A’ and B’ will provide the widest distance between two points.

Excessive Momentum Trading S006

Figure 6

We have shown you how to trade with the reversal (turning point) opportunity in brief. Now we will show you how to trade the continuation opportunity. In the continuation trading, we will wait until the supply meets the demands. The way we trade is the same as in our reversal trading. However, we will take our trade at the point D (or D’). Here are the few steps for your trading.

  1. Wait until you detect Excessive momentum from the Trend Filtered ZigZag indicator
  2. Measure the Fibonacci retracement from B to C
  3. Use any of the Fibonacci ratios for the potential turning point prediction.
  4. Trade at Point D (or D’)

Excessive Momentum Trading S007

Figure 7

Here is another trading example for trading at Point D’ instead of D.

Excessive Momentum Trading S008

Figure 8

As you can see, the excessive momentum trading is the brand new trading strategy first introduced in this article but it makes a lot of sense why we have to trade at the excessive momentum area. Then you might want to know the benefits of trading around the excessive momentum zone. There are many benefits but I can outline three of them here:

  • Firstly, the excessive momentum zone is where the psychology of crowd can be measured most directly. Therefore, the knolwedged traders like us can make the accurate trading decision around this excessive momentum zone.
  • Secondly, the excessive momentum trading will narrow down many possibilities of traditional Fibonacci ratio trading to few good possibilities. For our trading, few good choices are better than too many average choices.
  • Thirdly, we will not experience the expansion around our ZigZag point. In the traditional ZigZag point trading, we always suffer from the expansion of ZigZag indicator after new high or new low arrives. This makes us difficult to track the price level picked up for our trading. When the ZigZag point are overwritten for new high or new low, we have to rewrite our ratio calculation and the ZigZag indicator itself will be deformed horribly around our trading point. In the excessive momentum trading, we do not have to worry about the expansion because all our ZigZag points before the excessive Point C’ are fixed. In our chart, the point A, B and C will always stay to indicate your trading entries without change. We are concerning out trading from the point C.

To trade with excessive momentum, do not forget to download the Trend Filtered ZigZag indicator. Trend filtered ZigZag indicator is free tool anyone can use. Here is the download link for the Trend filtered ZigZag indicator.

Link:       http://algotrading-investment.com/portfolio-item/trend-filtered-zigzag-indicator

Can we improve the excessive momentum trading further? Yes, we can improve its accuracy. Just as if you will need some secondary confirmation for your Fibonacci trading, you can add some secondary confirmation techniques on top of the trading strategies, which I provided in this article. If you want to dig deeper on the profitable trading strategies, I will recommend reading our book about Equilibrium Fractal Wave and Price Patterns (Financial Trading with Five Regularities of Nature: Scientific Guide to Price Action and Pattern Trading). This book will provide you the good trading education.

This book will help you to understand the concrete concept and practical application behind the equilibrium fractal wave and price patterns. In the book, you will find one unified trading framework, which can explain over 95% of trading strategies used by the trading community. In fact, the excessive momentum idea is just one small extension of equilibrium fractal wave and the price pattern table in the book. At the same time, we have many powerful trading systems to conquer the complex market behaviour. Many professional trader loves these tools. Please check out these trading systems:

 

Please note that the invention of Trend Filtered ZigZag indicator and Excessive Momentum Trading were born from the research done by Young Ho Seo. All the copyright and intellectual property right of the Trend Filtered ZigZag indicator belongs to Young Ho Seo. The Trend filtered ZigZag indicator (i.e. this version) is free tool. Therefore, you can use this tool for your trading freely without limitation. If you have a business idea using this tool, then you can contact Young Ho Seo for the open discussion (FinancialEngineerPro21@gmail.com).

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s