In this second part of a seven article series in S&C magazine, find out about the 1-2-3 Wave Count system that's part of the indicator rules for a swing trading strategy IRSTS.
In Figure 1 you see an example of a zigzag between the lowest low and highest high levels at the turning points. The minimum change required in this example is the sum of a 3% price change and a three-period ATR multiplied by a factor of 1.5. I call this zigzag indicator "SVEHLZZperc" and use NinjaTrader's NinjaScript to implement it. I keep the last lowest low value in parameter ll and the last highest high value in parameter hh. I need to store the bar position of this highest high or lowest low value. To do this, I use the last highest bar lhb and last lowest bar llb as the parameters.
Volatility in the zigzag
To profit from price volatility in the zigzag, I use Wilder's ATR to create a volatility factor based on a lookback period and multiplication factor. You can draw the zigzag on a fixed high-low percentage swing, or on the ATR volatility, or on a combination of percentage swings and price volatility. The HLPivot parameter is influenced by either the zigzag percentage used, or by the ATR period and factor, or by both the percent and ATR settings. If the ATR factor is set to zero, then the percent setting will be taken into account. If the zigzag percent is set to zero, the volatility setting will be used.
The basic count
The 1-2-3 wave count is based on a limited number of rules: Any up or down move consists of a minimum of three waves 99% of the time. The 1-2-3 waves are fractal: every wave can be made up of a lower-degree 1-2-3 wave and belongs to a higher-degree wave.
The move starts with a wave 1
Wave 2 is a correction wave smaller than wave 1
Wave 3 continues the move beyond the top (bottom) of wave 1.
A smaller wave 2 correction will be a Fibonacci retracement between 23.6% and 50%. Larger corrections retrace up to a 76.4% Fibonacci retracement level (Figure 3). A retracement beyond 76.4% should be considered a warning signal. It suggests that price may continue past the 100% retracement, and if this were to happen, it would change the count. A wave 2 retracement remains valid as long as it does not retrace more than 100% of wave 1. ..................... Read more in the full June article....
Sylvain Vervoort http://stocata.org/