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Having trouble viewing this email? view email in browser window An Indicator to Show Here is an indicator that makes it easy for you to see when the market is most likely to begin a trend move, or stop a trend move, or go into the congestion of a trading range.
As you know from the last few lessons there are price cycles as to how a stock or commodity moves. One of these cycles is based on the notion that prices go from small ranges to large ranges. We can see this cycle better if we develop an indicator, such as the one I'm explaining in this lesson which I call Range Rider. It's really quite a simple indicator. I take the average range of the last two days and divide that by the average range of the last seven days. So I can compare and see when the current average range is small, or large, relative to the recent daily ranges. What this does is give us a very visual picture of when ranges have been contracting or expanding. That's the cycle we are trying to determine. When the index is very high there have been large ranges and we should expect the next part of the cycle to become active. This means we should start to see small ranges. When the indicator is very low it means we have had small ranges, and it is time for the market to trend... time for prices to get out of congestion and start to move.
In the chart above I am showing the world's most widely followed commodity, the S&P E Mini contract. The green line denotes when we have been seeing small ranges, relative to the ranges of the last seven days. The formula is quite simple. Here it is; All I am doing is dividing the average true range of the last two days by the average true range of the last seven days. This allows us to see when there's been a contraction in ranges which of course leads us to expect the coming expansion in daily ranges. Take a moment to look at the instances where I have placed a red vertical line on the above chart and you'll see that what usually follows shortly thereafter is an expansion of daily ranges.
In this next chart (above), this time are looking at Gold. You can see the same thing taking place. The indicator is telling us to expect large ranges when it is below the green line because we have seen a contraction in ranges. All the indicator does is allow us to visually see the cycle of ranges going from large to small. The reason the indicator works is not due to any special mathematics but due to the discovery of the price cycles I have been speaking about in these last few lessons. The cycle is very real and one traders need to fully understand. So let's restate it one more time: Markets cycle from small ranges to large ranges, Markets top out closing at or close to the high of the bar From now on when you look at your charts ask yourself, "what are the current price cycles?" Do that and you almost instantly become a much better trader. Talk to you soon, Larry Williams IMPORTANT: The risk of loss in trading futures, options, cash currencies and other leveraged transaction products can be substantial. Therefore only "risk capital" should be used. Futures, options, cash currencies and other leveraged transaction products are not suitable investments for everyone. The valuation of futures, options, cash currencies and other leveraged transaction products may fluctuate and as a result clients may lose more than the amount originally invested and may also have to pay more later. Consider your financial condition before deciding to invest or trade.
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