Tom Joseph Proprietary Elliott Wave Oscillator Breaking Band

The following interview with Tom Joseph explains more on how Elliott Wave theory and his system work.

Q Since Elliott Wave is so subjective, have you ever thought of using other technical analysis theories or techniques?

A 1 agree Elliott Wave is a very subjective form of analysis. However there are certain sections of the Elliott wave patterns that can be identified easily. During the formation of these patterns, 90 out of 100 Elliott Wave experts will agree with the count. In other words, if you focus only on this portion of the Elliott wave analysis that is crystal clear, then it is perhaps the best system out there.

QYour system would therefore require you to wait for confirmation of a signal before you take a trade. But wouldn't most people try to anticipate the waves?

A Confirmation of a trade is very important. Even during these easily predictable patterns, you still have to wait for physical confirmation from the markets. Physical confirmation can be obtained from trend channels or by using parabolic trailing stops. Whatever techniques you use, the market has to give you confirmation that the Elliott Pattern is intact and then and only then would you take the trade.

A lot of traders will say 'Oh my god! If I have to wait for the market to turn around before I make a trade, 1 am going to miss out on a lot of the profits.' They are wrong. From my analysis, by waiting for a confirmation, you are only giving up 8% of the potential move. And by giving up 8% of the potential move, you are increasing the accuracy of your trade.

^^ How much can accuracy be increased by doing this?

A If you focus on the Wave 3, the pullback in Wave 4 and the subsequent ** new high in Wave 5, along with some of the proprietary indicators that I have designed, the accuracy range can be pushed higher upward of 65% to 75% depending on how long you have been working at it.

How would that compare with most other systems?

If you take any of the futures or stock magazines, you will see articles written every month on a brand new technical analysis system. If you look at these really complicated systems it's amazing that most of them are only generating 48 to 50% accuracy. I'm not saying this is bad, but with 50% accuracy you will need an excellent money management system to break even.

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Have you ever thought of using fundamentals?

Fundamentals don't change every day. What most traders want is to see some action in the short term. Active traders are not investing to make money in 10 years. Active traders speculate for the short term. We want to see results today, tomorrow or next week. Fundamental analysis is not going to make a major difference on a day to day basis.

If you are an intra-day or short term trader, you simply have to use technical analysis, which uses the price to create a mathematical mode! for you. You cannot use fundamentals for day to day trading.

QHow different is the software now from when it was first available in 1986?

A The major difference is the fact that we are now a subsidiary of eSignal, one of the world's leading real time data providers in the industry. We now offer the best data delivery system combined with the best technical analysis software providing our users a single source for both data, charting and technical analysis. In addition by combining the vast resources now available from eSignal we are able to improve the software and provide the customer with unsurpassed technology.

The second difference is the numerous proprietary studies we have created since 1986 to help with Elliott Wave analysis. For example, we can identify a Wave 3 by measuring the trend (using XTL), measure the Wave 4 decline using the PTI, the Wave 4 Channels and the 5-35 Oscillator. During the Wave 5 rally, we use the MOB to identify the price projection. Additionally, we created some new entry and exit techniques.

The biggest improvement to Advanced GET is the scanner which monitors the entire Stock market and identifies every stock that is in a Wave 3, Wave 4 or Wave 5. This entails less time analyzing the market and more time to conccntrate on the trade. The Advanced GET scanner is web browser based

Do users need some Elliott Wave background before using your program?

It's a double-edged sword, our feeling is if you are an Elliott novice you're much better off. Our program focuses on the 30% of the time that you actually make money. If you have a deep understanding of Elliott Wave theory, it will take time before you are convinced to look at just easily identifiable wave patterns.

Most Elliott Wave users are so focused on labeling the counts correctly that they forget to find the trades that make money. Some traders are so adamant about labeling everything, that they pour over 15

wave count strategies at a time. I'm not sure how they find time to trade. The user has to decide if they want to be wave counters or traders.

^^ So how can a typical user get the most out of the software?

A I will answer that question in a slightly roundabout way by using the risk/ruin equation. The risk/ruin equation takes your account size into consideration and the amount of risk you take on each trade to calculate how soon one can deplete their account with bad trades.

Two factors make a difference in this equation: the percentage of accuracy in the trading system, i.e. for each 100 trades you take, what percentage of the time is the trade profitable? The second factor is the profit to loss ratio - in other words, every time you gain, how much did you gain and every time you lose, how much did you lose? For example, if you win $500.00 on a winning trade and you lose $500.00 on a losing trade, your profit to loss ratio is ONE ($500/$500).

From my experience, if your profit to loss ratio is less than ONE, you really should be classified as novice trader. And with that factor, the risk of ruin equation will guarantee that you will blow out your account (deplete it to zero).

The difference between a novice trader and a professional trader is the profit to loss ratio, the professional trader is 2 tol or higher. A professional trader will win $1000.00 and when he takes a loss it will only be $500.00. The Elliott Wave approach of easily identifiable wave patterns is expected to generate a profit to loss ratio of 2 tol or greater. Experienced Advanced GET users have reported profit to loss ratios of 4 tol.

My advice is "if your profit to loss ratio is one or less over the last year, you really are a novice trader, this means the odds are against you and between slippage and commissions, you are going to blow out your account. To remedy this you will need to begin using a system or develop a trading strategy that generates more than a 1 to 1 profit to loss ratio. It doesn't have to be Advanced GET, just as long as you can generate 2 tol or better profit to loss ratio.

^^ How about new traders?

I'd like to make several comments - first, trading is not a science, it's an art! You can read all the books you want or buy a superior software like Advanced GET, but you're not going to become a successful trader overnight. There's a lot of experience that goes into becoming a successful trader. Which means you will pay your dues, it doesn't matter who you are. Before you become a successful trader, you are going to pay your dues. So you have to be very careful at the preliminary stages and avoid risking all your investment capital. Make sure you trade perhaps 100 shares at a time or trade one future contract at a time, until two things happen:

First, you have to increase your trading accuracy to around 60% or higher. That means at the end of every 100 trades at least 60 of them should have produced winning profits for you.

Secondly, make sure your profit to loss ratio is greater than ON'E. Simply, every time you win you make more of a profit than when you lose. The actual profit to loss ratio has to be greater than one. As long as you are at the one or less range, consider yourself as a novice trader and limit your dollar investment. For a novice trader (profit to loss ratio is less than 1), the probability of loss is extremely large and therefore investing small amounts of money will prevent a financial wipe out.

When you consistently increase your accuracy and profit to loss ratio to greater than one, you will climb to a level known as a professional trader. This will become the measurement that will guide you on a daily basis. Again, take the last ten, twenty or whatever number of trades and find out where your profit to loss ratio is. When you are secure in knowing that your profit to loss ratio is consistently greater than one, you are ready to commit more resources to your trading.

QYou mentioned earlier that a system with just 50% accuracy can be improved with money management. What do you mean by that?

A Mathematically this is possible, money management is a huge factor. You will need a good trading system, but the impact of money management to your bottom line should not be ignored. Some traders have great money management skills but poor techniques and others are just the opposite. You need to find a happy medium, again, I will digress to the profit to loss ratio. When you consistently trade with a higher profit to loss, you will find that you have a good system and you have excellent money management skills, as well.

Example: Assume you have $1000.00 to invest into the market, initially invest or commit only $100 to your trading account. Use 10 percent of your liquid worth to trade, this goal will assist you in moving from the status of novice to a professional trader. If you can't move yourself into the professional status, you have only blown 10 percent of your liquid worth. If that happens, change your trading strategy and or money management and try again! Eventually you will get to where your percentage of accuracy is more than 60% and your profit to loss ratio is greater than 1. Once you have achieved this level you are now ready to move into the professional trader status.

If you maintain that level of success, then it's time to commit more funds into the market. If you can't achieve the professional trader status and you risk all your trading money, simple mathematics and probabilities will work against you and the sad but inevitable conclusion is to "blow your account out."

What is your favorite indicator?

The 5-35 Oscillator 1 created it in 1979. It has maintained its performance despite all the changes in the market place. I used it initially to trade the commodity and futures markets and then switched to stocks. We used to trade on a daily basis and now we trade on a one minute basis, using it.

Which markets work best for Advanced GET?

The beauty of Advanced GET is that it can be used across all markets, unlike other trading systems. Advanced GET uses one parameter set for every market in the world and also uses the same set of parameters for all time frames, whether it is monthly, weekly, daily, or five minutes. You don't change the approach, you use the same technique across every sector of the market. In other words, you are not curve-fitting. If you start changing parameters for different markets and for different time frames, you are just curve-fitting.

You mentioned about different time frames. How would that fit into your trading strategy?

The most successful traders will always use a higher time frame to confirm a lower time frame. For example if the daily action is in a strong trend up, then you go to the 60 minute chart and trade in the direction of the daily chart. If you don't, then you are trading against the bigger trend. It is very important to monitor time frames and make sure the larger time frame agrees with the direction of your trade.

You can use it in two ways: First, if the bigger trend is not in your favor you are not going to trade at all. Secondly, if the bigger trend is in favor of the smaller time frame you are trading, then you need to add more contracts.

What areas are you researching to develop the software and your trading further?

Our biggest interest was to find a scanning methodology that will scan the market based on the techniques and indicators in Advanced GET, filter the market and automatically find the trade. This will allow the user to spend 100% of his time refining his entry and exit and improving his skills, instead of spending most of his time analyzing the market and finding the trade.

We have a browser based product {Advanced GET scanner) that can scan the stock market on a real time basis. Our goal is to improve on it and make it more feasible and automated.

In your view, why do systems fail? Do they fail, or is it more often a failure of the user?

I don't think you can single out either the system or the user, it's always a combination. Trading the market is not a science, it's more an art. In another words, you need to be able to adapt.

Let me give you an analogy - ice fishing. This trader went ice fishing and he cut a hole into the ice so that he can fish underneath. As he is cutting the hole, there is a loud voice that says "there's no fish underneath the ice." The trader kept ignoring the repeated warnings (as most traders do) and continued to fish through the ice. Finally, he gave up. He looked up above, where he heard the voice and said "God, is that you?" And the voice says "No. This is the skating rink operator."

The moral of the joke is you can't take every trade blindly or use every technique that comes your way. You have to analyze the market to see if a trading opportunity actually exists. Then you will need to decide if the profit to loss ratio for this trade is favorable. You will need to adapt and know when to use it and when not to use it. Just because you see ice, there is no guarantee there will be fish underneath it.

Dynamic Trader - Dynamic Traders Group

In 1986, Robert Miner began teaching other traders the methodology he had developed based on the dynamics of time, price, and pattern. He also published a newsletter; wrote extensively for magazines and newspapers; and spoke at conferences in the US, Europe, and the Pacific Rim.

In 1993, using his Dynamic Trader methodology, he won first prize in the annual Robbins Trading Company Real Money World Cup Championship of Futures Trading. He then went on to develop and release the first version of his trading software - Dynamic Trader - in 1997. That same year, he was named "Market Guru of the Year" by Supertraders Almanac.

Two years later his book Dynamic Trading - Dynamic Concepts in Time, Price ami Pattern Analysis with Practical Strategies for Traders and Investors (Traders Press, Inc.) was published. It won the accolade of the 1999 Trading Book of the Year.

The software is bundled together with the Dynamic Trader Trading Course. Miner believes that it is as important to educate traders as it is to provide market forecasts and recommendations. The Dynamic Trader Package costs $1,700 plus an additional $400 for the real-time version. Data costs are extra.

According to Miner, Dynamic Trader is a blend of Gann, Elliott, and Fibonacci. The systems are used together to determine the three dimensions of market activity: time, price, and pattern. And when all three coincide, the market is poised for a change. Hence, the Dynamic Trader analysis techniques of time, price, and pattern are leading indicators that are used to project trend and counter-trend targets and reversals.

Miner started studying Gann and Elliott in the mid-1980s, and wrote a home study course on Gann analysis and trading techniques in the late 1980s. It was Gann that led him to cycles; his focus on patterns came from Elliott. They are closely related and according to Miner, the Dynamic Trader package incorporates the practical aspects of Gann and Elliot, as well as more traditional technical analysis.

Miner wrote: 'The objective of Elliott Wave analysis for traders and investors is to identify specific set-ups based on patterns that have a high probability outcome and a specific market activity that will invalidate the anticipated outcome!"

As for Fibonacci, Miner believes that Ralph Elliott was the first to apply these ratios and number counts to the financial markets. In his coursewrork, Robert provides the Fibonacci ratios that are unique to each Elliott wave and suggests how they can be used to determine the price objective of the current wave. Price projections are done in three ways: price retracement - measuring what the pullback is likely to be; alternate price projection - using other waves of similar structure to determine the price objective of the current wave; and price expansion - projecting forward movements after retracements.

Just as Fibonacci ratios are used to project price objectives, they can also be used to project time objectives. The reasoning behind this is that if time and price are the effects of the same cause, the same techniques used for price analysis should be applicable to time analysis.

The interaction of time and cyclical patterns is complex. Other than calendar cycles, there are physical cycles (fixed static cycles and dynamic cycles representing growth, evolution, and expansion), anniversary dates, and time counts. Miner also shows that there are relationships between Fibonacci number sequences, Gann's square of nine and 144, and anniversary dates. He also teaches which numbers are important and which are not.

His trading course covers the following topics:

• Market dimensions

• Dynamic price analysis

• Dynamic time analysis

• Pattern and Elliott wave

• Practical application of indicators

• Reversal signals and trading strategies

• Stop loss placement and adjustment

• Statistical analysis of trends

• Dynamic indicators

• Chart analysis

• Trading guidelines

• Developing a trading plan

• Practical option strategies.

The software puts all the concepts into one easy to use and view package as shown in Figure 6.10.

Figure 6.10 Dynamic Trader software

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There is both a real-time and end-of-dav version, and the program supports most popular data formats.

Users can either use the default price projection template or include their own ratios. Projections can be made based on bar highs, lows or closes, or even by price range or percentage change as shown in Figure 6.11.

A unique price analysis feature is the Price Rhythm Zone projections. Price Rhvthm Zones project the relatively broad price /ones for the next change in trend based on the recent market cycles (Figure 6,12).

These price targets provide the trader with the minimum and maximum price targets for any degree of trend based on the actual, recent price cycles. The Price Rhythm Zone targets give the trader the patience and discipline to wait for the high-probability price /.one when trend change should be made. The Dynamic Price Projections will pinpoint the narrow range price zones within these broad price targets where the trend should terminate.

Similar to price projections, time projections also narrow the target time zones for a high probability change of trend; for example, the Time Rhythm Zone projections work the same way as the Price Rhythm Zone projections. There are several Dynamic Time Projection routines and reports available. These include Fib Time Lines (Figure 6.13), Trend Vibration, Dynamic Time Projections Report, Fib Time Blitz Report, and the Custom Time Projection Report.

Figure 6.11 Dynamic Trader end-of-vvave price projections


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Figure 6.13 Fib Time Lines

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The most powerful signals are when time, price and pattern coincide as shown in Figure 6.14 on the SPX. This signifies that a change of trend is all but inevitable, and there is the high-probability trend reversal trade.

For those preferring to pore over reports, the software comes with Dynamic Time Projection Reports and a Chart Histogram. This is a useful and easy reference when you are trying to see where various projections cluster together. The higher the number of projections clustering around a specific date, the higher the probability of a trend change.

Another unique routine in Dynamic Trader is the Wave Band Time/Price target zones shown in Figure 6.15. With one click, the minimum, typical and maximum time and price target zones will display as a target box on any chart. If the market reaches the Wave Band box, there is a very high probability for a trend change.

One of the useful reports is the Anniversary date report. This report compiles the relevant statistics of prior anniversary dates, such as the number of trend changes, the number of highs and lows, and so on. As trading is a probability game, you would avoid a position that had a low probability of occurrences in the past. Take the example of Figure 6.16. The months of August and January have the highest frequency month for trend change for bonds and, more importantly, the trend changes in January have been highs. Hence, the probability of an important low in January is very low and you would not anticipate a significant low in January.

Figure 6.14 Time, price and pattern coincidences for trend change

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Other time-based analysis includes Time Bands Projections (to identify short-term highs and lows) and reports that compare swings between two different time periods.

One feature of the software is that the program does not provide automatic Elliott Wave counts. While Elliott Wave forms the basis of one part of the analysis, it is not necessary to make the final trading decision. Dynamic Trader does not include an automated Elliott Wave count routine because Milner found after years of testing, that any Elliott Wave count algorithm forces a wave count when none may be dearly defined or of practical trading value. The Dynamic Trader Trading Course that is included with the software has a comprehensive study of practical Elliott Wave trading strategies.

According to Miner, a market is only unfolding in a tradable Elliott Wave pattern 50% of the time. Hence, to force an automatic wave count at all times would be providing misleading information half the time. The trading course teaches the trader how to recognize whether a market is in clearly defined Elliott Wave position or not. If it is, then the end-of-wave time and price projection routines are applied to identify the probable targets to complete the trend or counter-trend.

Dynamic Trader includes a Daily Trade Scanner that can scan any portfolio of data files for the most reliable trade setup conditions, and provide the entry and stop loss price triggers, trend reversal, and trend continuation signals. Several of the trade setups (Figure 6.17) used in the scanner can be found in two books: Street Smarts by Conners and Raschke (M. Gordon Publishing, 1996) and Hit and Rim Trading by Jeff Cooper (M. Gordon Publishing, 1996).

Figure 6.16 Trading and probability

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Figure 6.16 Trading and probability

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