Single Target Forecast
Quite often, after some pullback from the forecast formation point, the price again reaches approximately the level of this point and then reverses.
Thus, a trader may suffer a fairly large drawdown before the price reaches the target. The use of the Single Target Forecast does not allow one to predict the above market behavior.
An example of this kind of a price movement is shown below.
To predict cases of a price reversal in the area of the forecast formation point, an additional target line was developed. This line was called a Minimal Target Line. In turn, the main target line was renamed to the Maximal Target Line. Now the system began to analyze the occurrence of a turning point on the Minimal Target Line and generates a signal to close a position in such cases.
The 2-Targets Forecast still does not allow one to predict a magnitude of the price drawdown.
4-Targets Real-Time Forecast
The price target forecasts are calculated based on historical turning points.
Depending on whether these points belong to the tops or to the bottoms, a forecast of the future top or the future bottom is generated. There are always two opposite forecasts at a time: the upper and the lower price target forecasts.
The use of the Turning Points Identification (TPI) system that can identify turning points in real time, makes possible to generate the price target forecast in real time too. In this case the price target is calculated on both the historical turning points and the current (potential) turning point.
To predict the price movement from a potential turning point (forecast formation point) in both directions and in real time, a 4-Targets Forecast was developed.
As examples below show, the bidirectional forecasts, in addition to the main target, highlighted in bold, and an additional target, indicated by the dashed line (the minimal and maximal targets), also incorporate two opposite targets (minimal and maximal), that is, a forecast of the minimal and maximal position of the opposite turning point. It is
believed that the main target reaching probability is 100%, while the other three target lines serve to model a possible price movement on the way to the main target.
Thus, the bidirectional forecast makes possible to assess the potential drawdown when opening a position in the direction of the main target, or to capitalize on the potential price movement in the direction of the opposite target.
Inclination Angle and
Position of Target Lines
Below are some examples of the 4-Targets Forecasts generated by the system when analyzing price charts of different time frames. As can be seen from the examples, the slope and location of the target lines varies from forecast to forecast.
Typical Price Patterns Within Forecast Area
We tried to systematize all possible variants of price movement from the
potential turning point (forecast formation point), marked with red circle, towards the main target (bold line) within the forecasting area.
This movement varies depending on the chosen forecast formation point.
It can be seen from the examples below that the price sometimes may not reach the main target.
In such cases, there can be two variants of the price movement:
1. The price moves from the forecast formation point to the opposite maximum target line, and then continues its movement.
2. The price moves from the forecast formation point to the opposite maximum target line, reverses, reaches the minimum target line, and then again reverses.
As studies have shown, the reason that the main target is not reached by the price, is a conflict with the forecast at rhe higher time frames.
Validating Forecast Formation Point
Looking for Contradicting Forecasts at Higher Time Frames
To avoid situations when the forecast does not work on a given time frame (when the price does not reach the main target line), an analysis of larger
time frames for the presence of a contradicting forecast is used. In fact, this is the most complicated part of the market
This method helps, to a certain extent, to weed out the wrong forecasts.
Signal Functions of System
In addition to the forecasting function, the system also has signaling functions, namely, the function of
detecting and generating reversal signals which are used as entry/exit signals. As a rule, this function is used
for signaling of the presence of a turning point when the price reaches one of the target lines.
If this takes place, a signal is generated.
This function is provided with the help of the Turning Points Identification System (TPI System).
Forecast Formation Point - Entry Signal
The forecast formation point can serve as a market entry point.
Since the forecast formation point is a potential turning point, the position
should be open towards the forecast of the opposite turning point.
On-Target Signals: Exiting/Entering Trades
Upon reaching any of the target lines, the system analyzes the market for the presence of a reversal signal.
There are always three possible scenarios:
1. A reversal signal occurs at about the forecast formation level.
2. A reversal signal occurs on the opposite minimal target line.
3. A reversal signal occurs on the opposie maximal target line.
Off-Target Signals: Calculating Minor Price Moves Within Forecast Area
The system is also capable of identifying off-target signals. This function allows one to predict minor price moves or price retracements within the forecast area.
In this case, a new forecast is generated at the point of occurrence of the reversal signal.
Trading on Forecasts
In practice, you can trade both on forecasts and on signals. When trading on forecasts, you don’t know if a reversal signal occurred when the price reached one of the target lines.
You also cannot know whether the price will go to the main target line right from the forecast formation point.
Given all of the above, the following trading scenario (one of many) can be proposed.
1. The forecast formation point serves as the market entry point in the direction of the main target line.
In this case, the opposite target lines can be considered as the drawdown lines.
2. In the event of a price drawdown, a trader increases the position when the price reaches each of the drawdown lines.
3. And finally, a trader closes all open positions when the price reaches the main target line.
Of course, this strategy is more suitable for trading on charts of small time frames (5-min.-360-min.).
Trading on Signals
Trading on signals implies opening a position at the forecast formation point in the direction opposite to the main target line, followed by closing the position if a reversal signal occurs when the price reaches one of the opposite target lines. Then a trader opens a new position towards the main target line.