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According to his observations, a trending market moves in a five-three wave pattern, where the first five waves, originally called “cardinal waves” and later on “motive waves”, move in the direction of the larger trend. Following the completion of the five waves in one direction, a larger corrective move takes place in three consecutive waves. Letters are used instead of numbers to track this correction. The three waves forming the “corrective” pattern(labelled a,b and c) are also sometimes called the “threes”.
Candlestick charts have been around for many years. The patterns that form on the charts help a trader decide which way they want to take their trade. One popular style that we want to share with you is about trading based upon what you see on these charts. Wick Trading is what we like to call this particular method. The reason for this is because candlestick lengths and wicks tell stories. We use these stories to try and determine what the future outcome will be. Trades are determined based on the price action on the screen in front of you.
The indicator consists of five lines: The kijun-sen, tenkan-sen, senkou span A, senkou span B and chickou span. Fig. 11.05(a) is a candle stick price chart of the AUD/USD together with an Ichimoku Kinko Hyo chart. The Ichimoku Cloud is of paramount importance here. When the price is between the upper and lower levels of the cloud, i.e. inside the cloud, it is not recommended that the trader should enter into a new trade. When the price breaks out from the top of the cloud, such as was the case at point A in Fig. 11.05(a), this confirms that an uptrend is underway. This is a good point to enter into a long CFD trade.
Therefore, the key is to locate the beginning phases of each cycle, so you can take advantage of the information obtained from the study of the distributions. One of the existing methods to locate those phases would be the study of the price ROC (Rate of Change). Next, we will describe this tool and also the way to interpret it. Study of the Rate of Change in Prices The ROC, as the name suggests, shows the difference between the current price and the price given over a period of time, oscillating around zero depending on the direction taken by the price of the asset. The interesting thing about this relies on the fact that, when a relevant change in the price movement occurs, the value of the exchange rate soars automatically. We consider that a new time cycle has started.