• : Prashant Shah
Price Projections

“OPPORTUNITY NEVER TO BE LOST. BUY BUY BUY XXXX AND FORGET. NO NEED OF SL. JUST ENJOY THE TREND AND BECOME MILLIONAIRE. EARN DAILY WITH OUR EXPERTS RECOMMENDATIONS. CALL: XXX”

Sounds familiar? You may have received this type of messages. Now a days when I open a video in Youtube, I am invariably forced to watch such quick-rich advertisements for a few seconds before I can skip the ad. It is a difficult time to spend, they irritate me. But they will remain there because it is a kind of Ponzi scheme and there will always be people falling for this.

Usually when you meet a trader or investor, the obvious discussion would be on the market trend. I often jokingly say that after Kem cho? (How are you?), most asked question in Gujarati is Su lage che? (How do you see the market?) :). You are expected to talk about levels and targets.  

Most frank and correct opinion on this question was by Mr. Morgan. When he was asked, “Where do you see market is heading at? He said, “I can only say it will fluctuate”.

No one knows it for sure. It may be easy for Mr. Morgan to say he does not know; it may not be easy for others. Because it would mean your knowledge on the market is poor. From a trading perspective, you need a flexible idea about trend and levels. Sharing a view is perfectly fine. The language people use to prove themselves may turn out to be misleading and dangerous for the innocent people.  

When I began studying market analysis, I had a dream of being a perfectionist who can precisely say what is going to happen next and exactly till when. When markets are falling, I must have already sold everything and shorted heavily. I must be over leveraged long before market starts going up!

I tried many things to achieve it but the dream of becoming Nostradamus costed heavy. I realized when I saw brilliant guys also fail in their views easily and hit ratio of very successful traders and investors is moderate. There lies the key to successful trading. Objectivity, discipline, and risk management.

Exit

People keep looking for opportunity to Enter the trades. But what is most important is the Exit. Refer earlier chapter on Four-line patterns, the back-testing result of patterns varied based on the exit method. If you recall, entry methods were same but we were experimenting with exit methods.
Many people do not realise that exit method is one of the most important aspect and its not really easy to adapt to a exit method. If you happen to exit early, and price continues to move in your direction, this would foster the feeling of resentment and revenge trading. On the other hand, if you happen to hold on to the position for too long, you may end up surrendering a lot of potential gains. This will result in a feeling of resentment.

Broadly, there are two ways of exiting the trade:

 
  • Ride the trend with a trailing stop-loss
  • Exit based on some criteria – profit booking
There are Pros and Cons of both approaches mentioned above. I am not getting into details here because it is a vast topic. For better risk-reward ratio in trading, riding the move is essential. But it is easier said than done. People need a reference level or target price to exit trades, especially derivative traders. Markets are range bound for most of the time and a systematic method to book profits is essential in such instances. It is also important when people are trading in a large universe of stocks. A logical method to determine stop-loss will help calculate the initial risk. Similarly, a logical and consistent method to calculate price projection or targets would help us decide the reward in the trade. This would help the trader calculate the risk-reward ratio for the trade.

Projection

People use different methods to calculate the targets. Height or width of the pattern, Fibonacci ratios, Harmonic patterns and Elliot waves are a few commonly used approaches to calculate targets. Previous pivotal points can be used for targets as well.  Vertical and Horizontal counts are popular concepts in P&F charting method. I have introduced Extensions in Renko charts. These are the method of measuring the extension from swings using the unique properties of those charts.

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There is an interesting technique of plotting them on the Line-break charts as well when trades are planned based on the objective Line-break patterns.


The major advantage of plotting timeless charting is the objectivity they provide, and we can use it for projecting the moves. These are the price projections based on the different types of the price structures presented in different charting techniques.

But price gives opportunity in a move to form small patterns that gives us idea about targets. We use triangles and flags like patterns in two dimensional charts to project such extensions.

Line break charts are combination of lines that gives us idea about the price structure. There are three types of projection methods in these charts that gives us idea about the strength of the breakout. Let us discuss them.

Four-line Projection


We discussed the Four-line patterns in the 3rd chapter. Below are the bullish four-line price patterns.

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Opposite of above are bearish four-line patterns. They show us the price pattern hidden in the data behind consolidating bars.

We can project the depth of these four-line patterns and calculate the projection.

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We can calculate two projection levels from each pattern. It can be like target 1 and target 2. Idea is to check the possibility of price moving after the breakout from a particular price pattern.

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First projection is equal to depth of the pattern. Upon breakout, it is expected for the price to move at least equal to depth of the pattern. Second target can be bit higher, around 1.5x of the depth of the pattern. We can also use the popular Fib ratio of 1.618 here.

Hence, if depth of the pattern is x, first projection calculation is 1x and second is 1.618x.

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Check below image.

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Calculation of Bullish Four-line projection:

High of the pattern = 9111.90

Low of the pattern = 7610.25

Depth of the pattern = 1501.65

First Projection = High of the pattern + Depth of the pattern

9111.90 + 1501.65 = 10613.55

Second Projection = High of the pattern + (1.618 * Depth of the pattern)

9111.90 + (1501.65 * 1.618) = 11541.57

Projection

Calculation of Bearish Four-line projection:

High of the pattern = 12352.30

Low of the pattern = 11661.80

Depth of the pattern = 690.50

First Projection = Low of the pattern - Depth of the pattern

11661.80 - 690.50 = 10971.30  

Second Projection = Low of the pattern - (1.618 * Depth of the pattern)

11661.80 - (690.50 * 1.618) = 10544.57

Bullish projection gets failed if price falls below the lowest line of the bullish pattern, or highest line of the bearish pattern.

Below is a chart of ACC showing the Four-line projection from the bullish trend reversal pattern.

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Below is a same chart of ACC showing four-line projection from various reversal patterns.


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These projection methods are applicable to all four-line reversal patterns.

It shows us the extent of the price move after the reversal pattern.

Projections which are met by the price are achieved projections. The projections which are yet to be achieved but not failed should be handy reference point for traders.

This is the method of projecting price from four line patterns we discussed in the chapter on Patterns hence the method is mainly applicable only to three line break charts.


Now, with every four-line pattern we have a projection levels to refer. Let us understand other types of projection before discussing more about them from trading perspective.

Single Line Projection

A line is drawn by connecting two prices. We discussed about length of lines and number of days to understand what kind of information they provide. At times, multiple bars are accumulated in a single line and even the single line is a useful price pattern.

For example, wide line shows a strong momentum or breakout after the phase of accumulation or distribution. They can be projected as well using the same calculation.
Hence, it makes sense to project targets from the single lines as well.

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Difference between the prices in bullish line is projected upwards and difference in prices of bearish line is projected downwards. As discussed earlier, first projection is 1x and second projection is 1.618x. Price going below the bearish line or above the high of bullish line negates the projection.

Rules of plotting four-line projection are objective. But it is difficult to decide which single line to be projected. To make it simple and objective, they can be plotted from Wide lines and Significant lines.
 
  • Wide lines: Wide lines suggest a strong momentum or accumulation, distribution. Continuation wide lines can be projected. W4 or W7, or relatively wide lines can be projected.
  • Significant lines: Significant lines are the ones producing breakout from important pattern. A line crossing multiple high or lows, important trend line breakout or a range breakout are qualified for the projection.

A wide line with higher number of days indicates the pattern of accumulation or distribution. Though it is a single line projection, the projection from such lines is a meaningful tool.
Below is a chart of Reliance showing the Line-break projections.

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In the above chart, ‘A’ are four-line projections plotted from reversal patterns. ‘B’ are single-line projection plotted from continuation lines.

Single line projection would typically be a continuation projection when reversal value is three. They are extremely useful when different reversal values are used. We will soon discuss more about that.

Multiple Lines Projection

There are important accumulation and distribution patterns that can occur over multiple lines. They can be projected on the Line-break chart as well.


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For the calculation, length of entire pattern is counted and projected. Projected upwards for bullish pattern breakout and downwards for bearish breakout. First projection is 1x and second projection is 1.618x.

Deciding the horizontal pattern is a subjective matter. It can be plotted from:
 
  • Horizontal pattern that includes larger number of lines
  • Patterns with V, M and W like shapes.
  • Head and shoulder, broader rounding patterns, broader expanding patterns, triangles etc patterns
  • The pattern of accumulation or distribution

This type of projection plotted from important patterns can give us idea about overall potential. Once it is plotted, price breakouts in the direction of the projection or four-line and single-line projections in between can be traded.

When we apply the projection technique it remains valid on the chart unless negated. Negation happens when price goes be lowest low of the pattern that calculated the upside target. Same way negation the downside projection happens when price trade above highest high of the pattern that projected the count.

Below is a chart of Nifty bank showing the multi-line projection,


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It is plotted from a ‘W’ kind of pattern where large line overcomes trend of previous multiple bearish lines. The pattern seems useful hence projected upwards.


Below is a same chart seen later.

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Bearish multi-line projection in the above chart is plotted from a bearish pattern which looks like large rounding top distribution pattern.

Below is a BAJAJFINSV chart showing the Line-break projections.

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A is multi-line bearish projection from a horizontal pattern triggered bearish breakout with wide line. B and C are bearish single line projection from continuation wide lines. D is a bullish Multi-line projection from pattern reversed with wide line after forming lower low. E is a continuation single line that negated the bearish count plotted from C.

Multiline projection technique is particularly useful when reversal value such as 1 and 2 are used. We will discuss more about that in respective chapters.

So, we have Single line, Four line and Multi-line projection techniques available on the Line-break charts. I have mentioned the guidelines. They can be practiced for calculating risk-reward and analysing open reference areas for price. Indicators can be used for trend identification.

Now that there are projection methods in P&F charts, Renko charts and Line-break charts, the next logical question could be which is better. The logic and the way of using them is a bit different. I believe all these methods are independently tradeable. They offer unique and objective patterns, stop-loss, method of trailing the trend and targets as well.

All the concepts that we have discussed here is our original work. Plotting of projection, creating systems, back-testing etc is a possible in TradePoint.

We will discuss more about projections using indicators and on different reversal values.
Before signing off, sharing some old charts marked with trend lines, and projections.

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Next chapter will be updated soon.