Filtered Waves – 21st century

(Back to the Basics)

Bloomberg, Nov. 2007

Copyright © 1996 – 2007 Linda

Raschke and LBRGroup Inc.
All Rights Reserved.

Copyright Notices
• This presentation is copyrighted:
© 1996 – 2007 LBRGroup / Linda Raschke.
All Rights Reserved.

• Certain chart images are copyrighted © by Aspen Research Group.

• Certain chart images are copyrighted © by Tradestation

Technologies.

• Certain chart images are copyrighted © by CQG.

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

2
 Filtered Waves – Basic Theory
Arthur Merrill, 1977
• Arthur Merrill’s filtered waves used a percentage of price movement
(5%) to filter out the noise. His work was important because he
dedicated a whole book to the concept of classifying patterns by the
wave structure.
• Gann was probably the most popular predecessor of swing charting.
• Welles Wilder documented the use of ATR (Average True Range)
functions to quantify swings as opposed to percent functions. This
was applied to a system called the Volatility stop and reverse
system.
• Merrill’s work was far more comprehensive, in that not only did he
classify previous market structures, he also developed classic
actuarial tables, or probability grids, to measure the median %
increase/decrease and duration of bull and bear markets.

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

3

Wave Structure

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

4
 Market Structure as measured by Swings

Waves eliminate “noise” and thus make is easier to determine TREND

Additionally, the absolute support and resistance are one more way
of adding structure. While Art Merrill used a percent function, we use
an ATR function. A new Up Wave starts when price moves 3 ATRs
up from the lowest low or lowest close over 15-period look-back. A
new Down wave starts when price moves 3 ATR’s down from the
highest high or highest close over 15-period look back period.

Once market swings have been quantified, relationships, turning points,

and trend can once again be classified, counted, examined and
expressed in numbers. We can start to build a probability grid,
evaluating trade management strategies.

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

5

MER – waves define structure and trade opportunity. Some wave patterns lead to small wins, some have
above average odds of a bigger win.

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

6
 BNI – Wave structure is one of the primary basis of a trade.

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

7

NEM - trading opportunities based off wave structure. Trend trade, Power Buy, Trend Scalp, Failure
Test up, Failure Test down, Breakout coil (trend reversal), Trend Scalp

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

8
Wave Structure – Dollar in an up trend

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

9

Waves structure still shows uptrend

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

10
 Uptrend still intact, volatility contracting

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

11

Trend Reversal Down when “Power Buy” fails

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

12
Up waves are now shorting opportunities

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

13

The first trend reversal up

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

14
 Trend Reversal from up to down again – Weekly chart

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

15

The trend in 30-year yields reversed on the daily charts at the end of 2005.

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

16
 Dow – 5 minute, 3/10 oscillator supports the structure in the waves.

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

17

Swing Exercise Weekly Dollar Index: Trend reversal from Up to Down. (note:
momentum oscillators can be misleading )

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

18
 Failure test after downtrend, reversal back to uptrend

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

19

A failed bear flag is the same as a failure test or failure swing. The reversal
point is what we call a U- turn Buy

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

20
 Yield chart – extreme example of reaction up in downtrend. Despite the sharp
swing up, the wave structure for rates remained in a steady downtrend in 2004.

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

21

How can structure aid in identifying the sweet spots in the data?
Trailing stops only degraded any edge extracted from
relatively simple rules. There are no combination targets
and stops, even with the use of one filter, where it is
more profitable to trail a stop then playing for a small
win. However, when using two time frames, there are
“sweet spots’” in the data that do lead to bigger wins or a
higher then average expectation of greater trendiness.

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

22
 “Sweet spot” with detail on short time frame

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

23

Trend reversal on hourlies precedes trend reversal on higher time frame.

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

24
Comparison of different structural points – small target versus large target

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

25

Japan Index – Trend reversal is a Process!

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

26
Russell 2000 – Weekly Chart

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

27

Russell 2000 – Daily chart

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

28
 SP 500 – Weekly Chart

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

29

DJ Transport Index – Weekly Chart

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

30
DJ Transport Index – Daily Chart

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

31

DJ Utilities Index – Weekly Chart

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

32
 Brazil – Daily Chart

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

33

FXI – Daily Chart

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

34
Japan Index – Weekly Chart

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

35

Weekly Dollar Index

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

36
 Dollar Index – Daily Chart

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

37

Dollar Index – Hourly Chart

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

38
Goldman Sachs Spot Index - Weekly

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

39

GSI – Daily chart

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

40
GSI – Daily chart with more data

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

41

Hourly chart of Crude

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

42
 Hourly chart of Gold

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

43

Copper – Weekly Continuation

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

44
Copper Intraday – detail of failed A B C

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

45

Wheat - Daily

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

46
 Wheat – hourly chart

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

47

SP E mini 3600 tick chart – “structure”

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

48
SP E mini 800 tick chart – “structure”

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

49

SP E mini 800 tick chart – resolution!

Copyright (c) LBRGroup 1996-2006. All Rights Reserved.

50