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Rule number 3 is based on an alternative application of my BBS or band Break System. BBS was presented October 2011 at the TradersLibrary Trading Forum in Denver, Colorado. The DVD video of the presentation with the user manual and the licensed formulas is now available. More information HERE.
Here the band is not used to create direct buy and sell signals, but rather as an envelope in between which price is moving between the upper and lower boundaries of the band.
There are two alternatives. Either price is close to the upper or lower boundary or price is turning on the averages. In the above figure the first and second and fourth red arrows show a number of selling signals from rule 1, confirmed by rule 3.2 with price turning against the averages.
The first and second green arrow and the third red arrow show buy and sell signals from rule 1 confirmed by rule 3.1, with price close and turning against the lower and upper band boundary.
Rule 4.1 to 4.3 Expecting wave 3 or Conditional wave 2
My new wave count principle, the 1>2<3 wave count, is presented as a separate item.
In the above figure at the bottom of a wave 3 beginning of September price turns up for a correction wave 2 next making a turn down where we would expect a new lower low wave 3. However price turns up again with a higher bottom, making wave 3 invalid. So, we renumber the waves from the bottom up 1 and 2.
We are now expecting an up wave 3. This complies to rule 4.1 After making a first wave 3 top, you can see a further up move with higher highs with more wave 3 tops, and higher lows with wave 2 bottoms.
In the next figure we are expecting a wave 2 correction after a medium term complex move down creating a wave 3. When price turns up beginning of May for a correction wave 2, we comply with rule 4.2 and we expect this wave 2 to turn into a new wave 1 in the opposite direction.
In the figure below we have a rather large wave 3 down. So, we can expect a correction wave large enough to make profit when half of October price turns up for a correction wave 2. We are complying with rule 4.3.
For all the basic techniques, please consult my book “Capturing Profit with Technical Analysis”, published by MarketPlace Books and available HERE