Pattern. Price. Time. That is the essence of the TradingFives Method. The philosophical foundation of the Method lies in the belief that a stock chart is more than a mosaic of unrelated, random events. Although not well understood, we all at least recognize the existence of cycles and patterns in other expressions of social behavior. Entire generations have been characterized according to the social mood that dominated their young adult years. Terms like "Hippie" and "Yuppie" and "Generation X" carry with them a description of the national culture of a particular period of time. Robert Prechter of Elliott Wave International fame has written several fascinating articles (and several books) about the apparent relationship of the financial markets to a myriad of cultural events.

Elliott Wave analysis is probably the best known, most credible technique for discovering repeatable and recognizable patterns in the price movements of financial markets. With only a few inviolable rules and a handful of guidelines Elliott Wave analysis has withstood the rigors of more than 60 years of daily scrutiny in the toughest game on earth - the US stock market.

The TradingFives Method is not synonymous with Elliott Wave analysis as some people made it out to be in our early days. Elliott Wave has been an important leg of the Pattern-Price-Time triad since we came online in 1999 but it is not the only factor, and perhaps it is not even the most important. Elliott Wave is a widely known technique for describing market swings in almost any time frame. A high to low swing takes on a particular persona when it is labeled as a "C" wave or "Wave 3." The very act of using a distinctive Elliott Wave label to describe a swing conveys a substantial amount of information about what happened in the past and what may happen in the future. The markets are always in motion. For any Elliott Wave count favored by the analyst there are probably three or more equally likely alternatives, some with similar and others with conflicting expected outcomes.

Key to successfully integrating Elliot Wave into the TradingFives Method is the understanding that the way a particular swing is labeled is only fractionally as important as interpreting at what price and time zones the underlying swing may terminate. Another way of expressing the same thought is that it does not matter, for example, if a swing is labeled as a zig-zag, or a double zig-zag, or a double three, or any of the other corrective combinations if any of them complete an acceptable Elliott Wave pattern within an independently established price and time zone. This is a difficult concept to accept for most Elliott Wave purists that focus entirely on finding the "right" description rather than on the similarities in the price and time zones the different descriptions suggest that the swing may end.

How are price and time zones established "independently"? Market swings are almost always related to each other in both price and time by certain Fibonacci ratios. A low to high swing that moved 100 points in 100 days, for illustration only, may be followed with a high to low swing that moves 62 points in 62 days. There are three specific techniques for projecting these Fibonacci relationships and a companion series of typical ratios to apply for both price and time.

We publish our own ebooks on using the Square of Nine and Hurst's unique contribution because our application of the information is unique, and because it's just too expensive to outfit a library of Gann and Hurst material when the core information is already known. There are not many, if any at all, "secrets" about trading the markets. The entire universe of data is there in plain view for all of us to see. Sometimes it takes a little help to put it together and transform data into information and knowledge.

The TradingFives Method requires that the analyst use all the techniques and consider all the typical relationships between the forecast swing and several of the preceding swings to see at what price levels and within what time zones these calculations tend to cluster together. Not always, but more often than mere chance would allow, one of these price and time clusters will turn out to be the exact point at which the forecast swing will reverse direction.

Only after establishing price and time zones from the raw market data, Elliott Wave counts are overlaid on the chart and typical price and time wave relationships are matched up with the raw data clusters. A high probability scenario results when clusters pack together, particularly when the clusters were derived from different degree swings and time frames.

You don't have to predict the future to make money in the market - only recognize it when it's here. What event tells us that the future is here? First, we wait for the stock or index we're following to move into one of the price and time zones that has already been established, well ahead of time, as a high probability turning point. We check for (a) price and time squares, (b) the completion of a Hurst projection, and (c) a technically complete Elliott Wave pattern. We then use what we call the "Trigger Bars" to signal that something unusual for this time has occurred in the market...the last bit of evidence that a trend reversal has probably occurred.

At this stage the analyst must become a trader and a money manager. What's the initial stop loss? How much will I risk if the trend doesn't reverse as suspected? Is the risk of entry more than my trading plan allows?

While gaining an understanding of the "big picture" is important, whopper returns on capital are most possible by maximizing profits on short term trades. The laws of compounding are as inviolate as the laws of physics. While the Method could be applied to day trading, we often look ahead a bit longer - 4 to 12 days duration roughly. For short term trading we key off our proprietary adaptation of J.H. Hurst's displaced moving averages supported with Square of Nine techniques.

© 1999-2005 Trading Fives Trading Co.