Monday, November 19, 2007

Using Entropy to detect turning points


Let's have a look at Entropy to detect/confirm turning points. We have 3 interesting different pivot situations here.

On Pivot 1, Entropy reaches a peak. LEntBin below confirms it is a significant peak (Bin = 4). Knowing we have this turnaround on a strong MM resistance level, we can happily go short.

On Pivot 2, we have a trough in Entropy. One could the same way as on Pivot 1 just go long, yet the Entropy bottom is not very 'deep' so one might want to take a chance (and be right this time), but one should generally wait for confirmation on crossover for safety.

Before Pivot 3, we have a peak in Entropy and incidently a weakening of MTFS (white line crossing over), which both preempt the next swing when accumulated energy finally dissipates. In this case, using Entropy peak is way too early, and waiting for crossover is way too late. One must only be prepared, and use the bar colour, the swing, and MM levels to confirm pivot. The MM level here was the well-known stall level ahead of the strong 2250 resistance level.