Blau specifically mentions in his book, the use of the Ergodic Candlestick Oscillator is one of the best indicators for day trading. It is a double smoothed oscillator based on a Candle stick index, a type of momentum index. The math is beyond me, but after years of use I can tell you it is a very accurate indicator. I prefer its use on the Euro and ES, along with the SMI.
The next chart shows an 8000 volume ES chart with the Blau SMI in Sub Chart 2 and the ECO in Sub Chart 3. The reading of the ECO is so close to the SMI with such little and subtle differences here one might question whether it is necessary to use both. There is clear Convergence drawn with yellow lines.
In the next chart below, one can see there is a discrepancy. Price went up and the ECO peaks did also shown with yellow lines. On the SMI as seen with a purple line, the peaks showed dropping indicating a slight Divergence. This says one
104 should be careful. Sure enough price turned down. So, when they are not in
agreement I wait for definite alignment of the indicators. They did align and
showed a reversal marked in the orange rectangle. The 3 and 5 EMAs turned down and crossed the 15 EMA. The Histograms dropped below the Signal Lines and if other tools said OK one could possibly have taken a short Countertrend Trade here.
The next example below shows conflict also, but this time the Divergence is seen in the ECO in Sub Chart 3. One tool out of synch is enough to prevent me from taking a trade. In this chart the trend was up, but price dropped giving a Pullback seen in the blue box. One would expect the trend to resume and continue upwards.
The price peak moved up, and the corresponding peaks of the SMI moved up saying a possible upwards continuation. These peaks are drawn with yellow lines.
The ECO in Sub Chart 3 however, shows the peaks dropping. This is Divergence, which says price may drop. Sure enough it did. This doesn’t necessarily mean price will reverse, but it does say the uptrend continuation may not happen. One should stand aside and wait for the indicators to align.
105 This awareness of this conflict can keep one out of bad trades, alert one for a
reversal in a good trade and helps choose an exit as well. I hope one can now see two Blau indicators are more meaningful.
Below is an example of Divergence as seen on a color coded chart. If one had taken a long entry at the green arrow, one would expect price to reach the level of a previous high at red arrow and moreover to continue upward! With Divergence, marked with yellow lines, one should look for price to fall.
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Gann Swing Chartist
The Swing Highs and Lows are important Alert Levels. They will be discussed thoroughly in the chapter on Entries. They act as Attractors / Support - Resistance.
If one has trouble seeing these Swing Alert Levels, then using the Gann Swing Chartist could be a big help. It does an excellent job of marking, but not
predicting important Swings. It is important to use them on volume charts as well as time charts. The Chartist automatically changes color when a major swing is taken out, and a new momentum begins. As with any indicator, it is not infallible, but none the less very helpful. It does add some clutter to the chart, so it is a personal choice whether to use it or not. For some it is extremely helpful. I use them on all my charts! I have used pink and light blue for the colors, to delineate from the candle stick colors. Pink is for short swings, and blue for long swings.
A conservative trader would only take shorts with the trend when the color is pink and only go long with the trend when the color is blue. There are exceptions, and that will be addressed later. The color by itself does not say enter long or enter short. It is a just a tool to help make a trading decision. Remember, trading is an art and requires multiple indicators and periodicity charts that cumulatively help a trader to make a trading decision.
Using the various tools seen in this manual one can make a decision which way and where price will probably go. There is much discussion elsewhere in the manual to help one decide when it is possible to take a counter trend trade.
In the ES chart example below, one can see I have 3 swings minimum. This helps to determine the immediate momentum to detect early trend change, and when a Countertrend Trade might be taken. If one were only watching the previous one or two swings, and relying on the color one might miss a trading opportunity. Three swings is the bare minimum, having more allows one to see the big picture of a trend day, etc. So, one may have to adjust the number of bars seen on the chart. This is done simply by clicking and dragging on the chart right or left.
Conversely, if there are too many swings, the chart is cluttered and EMA lines might not be separated enough. One might do the same dragging, reducing the number of bars on the chart.
Note the line color only changes when a prior swing is taken out and a new pivot point is established. On the far left at the orange arrow, there was a Pivot High seen with the pink line moving up and then down. This was followed by a Pivot Low at the white arrow. The pink line dropped, and then bounced moving up. The
108 pink line changed to blue only when a new Pivot High was established and a down move began. This is marked with a gray arrow. The blue color change didn’t say an uptrend had begun. We need Higher Highs and Higher Lows to confirm a trend.
One can see next the momentum crossed a prior Swing Low resuming the down momentum. The color would not have changed back to pink until the next pivot was established which is seen on the bottom far right.
In summary: the Gann Swing Chartist is a tool to help establish Swing Highs and lows. It helps to establish a trend by seeing Higher Highs and Higher Lows for an uptrend, and Lower Lows and Lower Highs for a downtrend. The color by itself doesn’t establish an entry or a trend. It is a tool to help make those decisions.
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