S&P 500 IndexEducation
Wave exhaustion
The main purpose of analyzing waves is to understand when the current wave is exhausted aka overextended aka overbought aka oversold.
What is every1 seem to miss is that exhaustion is not based exclusively on "price gone too far", but also on "too much time passed" and "not much volume was traded" as well. That's one of the main reasons why your comparative analysis, divergences on so called "indicators" do not work properly. It simply can't. These methods do not gain time & volume information from the data.
When you analyze order flow on any resolution, be it 1 minute, 5 years or tick chart, you're interested in 2 waves: current wave and *the very last (previous) wave in the same direction.
* including the imaginary waves
Don't forget to turn in log scale when it's needed!
You compare these 2 as the current wave develops and keep updating the answer to the binary question, "which of these two waves is weaker". Strength of a wave = it's ability to continue. Every wave starts strong and goes weaker and weaker, the factors are:
1) Time. Horizontal size of a wave (in bars), more time (more bars) - weaker;
2) Range. Vertical size of a wave, higher range - weaker;
3) Volume, or inferred volume. You sum up all the volume within a wave, or sum up all the bar sizes within a wave. Less volume - weaker.*
* in order not to sum up anything within a wave yourself, here you can turn in volume/range bars and simply count em.
And from that moment it's like "Best of 3" comparison.
1) Time. Wave A 10 bars, wave B 5 bars. Wave B is stronger;
2) Range. Wave A 546 points, wave B 890 points. Wave A is stronger;
3) Volume. Wave A 10k, wave wave B 8k. Wave A is stronger;
So at that point, wave A was stronger = wave B was weaker.
This will be giving you a binary answer which wave is weaker. When the current wave becomes weaker than the last wave in the same direction, current wave is considered exhausted.
P.S.: wave start in time (first bar of the wave) is the level origin itself or the first bar that touched a level if we talked about a new wave starting from an already positioned level, or about a wave started after clearing a positioned level.
The more you'll think about the more it'll make sense. An example. Remember seeing fast price jumps? After some, the price reverses very fast and goes back, after others prices continues in the direction of the jump. In most of the cases the current wave (the jump) gets exhausted in terms of price, but not exhausted in terms of time (the jump was very fast). So in terrms of time and price both waves are 50/50. What is different is volume. If the current wave (the jump) had a huge volume, overall it's still not exhausted, hence it continues. Sounds familiar? Sounds logical?
Just the last simple and obvious thing, in most cases you won't need to calculate sum volumes/ranges, usually at the moment of analysis the current wave is already longer and higher than the previous one in the same direction, hence the current wave is already exhausted.
Yessir
What is every1 seem to miss is that exhaustion is not based exclusively on "price gone too far", but also on "too much time passed" and "not much volume was traded" as well. That's one of the main reasons why your comparative analysis, divergences on so called "indicators" do not work properly. It simply can't. These methods do not gain time & volume information from the data.
When you analyze order flow on any resolution, be it 1 minute, 5 years or tick chart, you're interested in 2 waves: current wave and *the very last (previous) wave in the same direction.
* including the imaginary waves
Don't forget to turn in log scale when it's needed!
You compare these 2 as the current wave develops and keep updating the answer to the binary question, "which of these two waves is weaker". Strength of a wave = it's ability to continue. Every wave starts strong and goes weaker and weaker, the factors are:
1) Time. Horizontal size of a wave (in bars), more time (more bars) - weaker;
2) Range. Vertical size of a wave, higher range - weaker;
3) Volume, or inferred volume. You sum up all the volume within a wave, or sum up all the bar sizes within a wave. Less volume - weaker.*
* in order not to sum up anything within a wave yourself, here you can turn in volume/range bars and simply count em.
And from that moment it's like "Best of 3" comparison.
1) Time. Wave A 10 bars, wave B 5 bars. Wave B is stronger;
2) Range. Wave A 546 points, wave B 890 points. Wave A is stronger;
3) Volume. Wave A 10k, wave wave B 8k. Wave A is stronger;
So at that point, wave A was stronger = wave B was weaker.
This will be giving you a binary answer which wave is weaker. When the current wave becomes weaker than the last wave in the same direction, current wave is considered exhausted.
P.S.: wave start in time (first bar of the wave) is the level origin itself or the first bar that touched a level if we talked about a new wave starting from an already positioned level, or about a wave started after clearing a positioned level.
The more you'll think about the more it'll make sense. An example. Remember seeing fast price jumps? After some, the price reverses very fast and goes back, after others prices continues in the direction of the jump. In most of the cases the current wave (the jump) gets exhausted in terms of price, but not exhausted in terms of time (the jump was very fast). So in terrms of time and price both waves are 50/50. What is different is volume. If the current wave (the jump) had a huge volume, overall it's still not exhausted, hence it continues. Sounds familiar? Sounds logical?
Just the last simple and obvious thing, in most cases you won't need to calculate sum volumes/ranges, usually at the moment of analysis the current wave is already longer and higher than the previous one in the same direction, hence the current wave is already exhausted.
Yessir
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