The ICWR phenomenon

Regardless of how strong a long-term market trend is, the market never moves only in the direction of the long-term trend – there are always minor movements against the long- term market trend. These deviations usually don’t last very long and after them the market moves again in the direction of the long-term trend.

The major market movements in the direction of the long-term market trend are called impulsive waves and the minor market movements against the long-term market trend are called corrective waves.

The picture below shows a snapshot of a EUR/USD candlestick chart. Although the market shows both upward and downward market movements it can be easily recognized that the long-term market trend is clearly bearish as between 07:00 AM and 11:00 AM the price failed around 140 pips (from 1.3500 to 1.3360 , that is 1.3500 - 1.3360 = 0.0140 = 140 pips). The waves (1), (3) and (5) are the impulsive waves; the waves (2) and (4) are the corrective ones.

Our main observation, until now disregarded by all traders in their trading strategies,is that when putting into relationship the height of a corrective wave and the height of the prior impulsive wave, the corrective wave tends to retrace the prior impulsive wave in Fibonacci ratios. Frequent relationships are 25%, 38%, 50%, 61% and 75%. Up to now we will refer to this effect as the Impulsive/Corrective Wave Retracement (ICWR) phenomenon. For example in the picture below the corrective wave (2) retraces the impulsive wave (1) in the Fibonacci ratio of 0.382.

The ICWR phenomenon is a typical self-similarity effect of a complex system. For all kind of complex systems in nature as social, chemical or physical systems such self- similarity effects can be found. Self-similarity is a fundamental property of self-organized complex systems and is a matter of recent intense investigation by physicists andmathematicians.

We have used the phenomenon described above as a starting point to develop a completely original and until now unpublished trading strategy that combines basic principles of Elliot Wave theory together with well-known properties of Fibonacci ratios. The result is amazing, as you will soon find out. We have named the strategy “Impulsive/Corrective Wave Retracement (ICWR) Trading Rules”.

Before going into the details of our strategy we will introduce it to you by showing you a simplified, shortened version and in the later chapters you will be shown how to put it to use and immediately start taking advantage of it. Our strategy gives the best possible entry as well as exit moment. In the example below we will show you only the part that is usually neglected by most of the trading strategies currently in use – how to find out the best moment to exit the trade. For the purpose of making the example easier to follow we will assume that we have already found the best moment to enter the trade.

While going through the trading example below you will realize that the part of our strategy related with the exit signal follows the fundamental trading rule “cutthe losses short and let the profits run” - in a way that was never accomplished before.

And, why is this fundamental trading rule so important?

Because not letting the profits run will make your trading unprofitable in the long run: two losses of 50 pips followed by a win of 80 pips results in a net loss of 20 pips. In contrast two losses of 50 pips followed by a win of 250 pips, reachable with our strategy, results in a net win of 150 pips! I’m sure you get the point.

Continue to Example part 1

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