**Each and Every 7th Wave...**

**Technical notes regarding
Turning Points Analyzer**

The recent addition to ** Timing Solution** - Turning Points
Analyzer module - released a lot of discussion with users of the program. This small
article is an attempt to answer some questions and comment some notes that I
have received.

First of all, I would like to share with one unexpected observation. Working with high probability histograms, I always had a vague feeling that this activity is somehow connected with my 20 years of scientific work in the Institute of Nuclear Research (Russian Academy of Sciences, http://www.inr.ac.ru). It was a feeling that I have seen it already somewhere.

Finally, I have found why. The understanding came to me one day. Looking at high
probability diagrams in * Timing Solution* that reveal possible turning points
(like this):

I have figured out that they have a strong resemblance to Spectral Lines which can be observed at physical experiments:

These are universal things. These bright vertical lines are subject of
interest for physicists and chemical scientists as they can be explained by
quantum energy levels for electrons in the atom (the Niels Bohr's discovery, 1913).
If these levels help scientists to develop and confirm their theories regarding
the chemical structure of stars far away, they might help traders to make their
money. At least, it gives some ground to traders' obsession with ideas like
Fibonacci levels and different types of waves. Sure, there is a lot of work to
do on testing and confirming these theories. In ** Timing Solution**,
the bright red zones on high probability diagrams give us an idea where the next price reverse
point might occur.

So, back to traders' needs.

Working with Turning Points Analyzer, the most
important thing is to understand ** what wave is most informative**.

Let say that we are looking for the end of some uptrend movement. In other words,
we need to figure out what will be the
height of **BC** up swing (the examples are for corn prices, 1949 - 2006):

The simplest variant is to obtain the height of the upward **BC** swing
using the height of the previous **AB** downward swing. This is the closest wave,
and it should be definitely considered.

The high probability diagram shows that for this sample of data we should pay
our attention to the price
level corresponding to the proportion between the upward BC swing and the
downward **AB** swing equal to 1.16 (it is the brightest red line on the high
probability diagram and the highest sharp peak):

The interesting issue is that the market sometimes has longer memory. Sometimes the distant swing has strong impact as well:

In this example, we analyze each 7th wave. In other words, we analyze proportions between
upward **BC** swing and 7th downward swing **A7-B7 **(7 swings back). The
statistics shows that this pair provides valuable information for corn:

The histogram shows that we have a cluster around 1. It means that the height of BC upward swing is often equal to the height of downtrend 7th wave back. Other levels are 1.9 and 0.8. I don't know why the corn remember his 7th wave. But I have some guess...

** Timing Solution** allows to do this research in a moment. You can
check yourself any informative
waves. The waves are defined here (

I recommend to check all waves. Each financial instrument has its own informative waves and its unique spectral lines picture.

One more observation. Sometimes the "quiet" zones on high probability diagram can be useful for a trader as well:

The white zones indicate that there are no turning points here, and the price will continue its trend movement.

One very important issue is the risk management. For example, if you would like to make you trading decision based on 1.16 level turning point:

you need to remember that we talk here about the *probability*. There is
a high probability that the turning point will occur there. However, besides the
cluster in the region 1.16, there are many other levels where the trend has
changed before, and these points are distributed almost randomly. You need to
keep these "dark horses" in your mind, otherwise they can ruin any
smart trading strategy.

It is interesting to see how phenomenological theories (such as Elliott Waves and Fibonacci levels and any other level or wave idea) become connected to solid mathematical grounds nowadays. It is true that only backtesting can provide statistical base for these (and any) ideas. And it is also true that we need phenomenological models (based on some observations). Statistics gives the solid ground while Phenomenology gives understanding. Together they work.

March 1, 2006

Sergey Tarassov

Toronto, Canada