Having trouble viewing this email? view email in browser window Chart Reading #3: Developing an Indicator to Monitor the Price Cycle In the past two lessons we have looked at a natural cycle in price patterns to learn how markets really top and bottom. In this lesson will use this idea to create a most helpful indicator.    A quick review is in order... What we have seen so far is that markets top and start to decline once they have been closing on the high of the day (or whatever bar timeframe you use). Prices bottom when they have been closing at or near the low of the day. That is a universal truism of all markets and all timeframes. Knowing that is helpful. But wouldn't it be nice if we had an indicator that could crisply and clearly show us when this price cycle was at its most likely peaks and lows? There is such an indicator. It is one I created many years ago. Let me explain it, first of all, and then I will show you some examples. The following indicator which, as you will see, when it is in the high zone typically portends prices are going to decline, and when it is in the low zone it is saying prices will rally. There is no magic to this indicator. It is simply this; I have taken the average of the range, from the close to the low of the last X number of days and divided that into the total range of the last X number of days. What this shows is the percentage of time the ratio of closes to the range. By doing this we have normalized the indicator if you'd like. Here's the formula: (MovingAvg (Close - Low , VAR1) / Avg True Range (VAR1)) * 100 This is written in the Genesis code. But if you're a Trade Station user or user of another software, you should be able to quickly program this for yourself. In mathematical terms, you are taking an X Bar Moving Average of the Close minus the Low and dividing it by the Average True Range of X Bars. Then take that result and multiply it by 100.  X is your variable (ie VAR1 in Genesis). Our first chart is a monthly one of the Dollar Index. As you can see when the blue line gets into the zone above the red line. It is time for a decline. By the same token, when we've dipped below the green line and close at or near the low of the monthly ranges, it is time for a buy. Now let's take a look at a weekly chart. And finally let's look at a daily chart. Just for fun. I am showing the next chart which is a chart of the Shanghai Index, on a daily basis, that trades in China. What we see is the exact same thing. We have been seeing is that we have an indicator that tells us when we are most likely in a buy zone or a sell zone. I have used 22 days of data in all of these examples. You can play with this number of days or bars to fit the time frame of the market you are trading. In my courses I teach how to determine what the actual time cycle is. Then you can combine the time cycle with the price cycle. I think you get the idea. By and large, the 22 day time frame will help you establish the most likely time an individual stock or commodity will start a significant rally or selloff. I hope you've enjoyed this part of the series, but there's more to come in the next lessons. You have learned about the natural price cycle that creates tops and bottoms. I want to next show you the price cycle that tells us when the market is most apt to go into a trading range or begin to trend. If you are ready to begin following the markets, you can see these lessons in application on my weekly "Larry TV" market commentaries. Click here for more information: http://www.ireallytrade.com/TVStation/LarryTV.html   Until out next lesson, good luck and good trading. 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. © Copyright 2012 LnL Publishing, LLC. All Rights Reserved.

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