The Importance of the Maximum Extension

BarroMetrics Views: The Importance of the Maximum Extension

A reply to a number of e-mail queries: what is the importance of the Maximum Extension in my approach?

The Maximum Extension (see Nature of  Trends) is a price filter that provides advance warning of a change in trend from a sideways mode to a directional breakout. Those that have read the Nature of Trends know that the Maximum Extension is the greater of:

  1. Ten percent of the range of the most recent impulse swing (provided it is at least impulse means)  added (in an uptrend, reverse for downtrend) to the end of the impulse (10% of XA added to A) or
  2. Twenty percent of the range of the boundaries of congestion added to the end of the upper boundary of congestion (in an uptrend, reverse for downtrend) (20% of CD added to C in Figure 1)

In Figure 1 I show the AUDUSD with a 5-day swing (weekly trend). The bar for Fri Sept 4 is incorrect, the AUDUSD closed at .8550.

I’ll use Figure 1 to illustrate my use of the Maximum Extension. The AUDUSD was in a 5-day sideways mode beginning at ‘A’ (Aug 4). There was a high probability of it forming a HorizontalTerminal (see AUD/USD Setup?). But starting Friday we saw a possible breakout with last night’s bar being a bullish directional close. The question therefore arises: has the ADUS broken sufficiently above ‘C’ to say that the Horizontal Terminal idea can now be abandoned.

To answer this question definitively I use a time filter Joseph Hart’s calls a “Whole Point Count (WPC)”. In this case we would need to see 3 consecutive bars at or above ‘C’ (.8477) for a WPC to have occurred. The Maximum Extension provides an early warning that a WPC will most likely form: if I were to see acceptance beyond the Maximum Extension (.8555), I’d take the view that the Horizontal Terminal idea can be abandoned i.e. even if the market returns below the Primary Sell Zone of ‘ABCD’, I would not treat the pattern as a Horizontal Terminal.

What constitutes  ‘acceptance’ in the case of a breakout? I need to see 2 consecutive closes beyond the Maximum Extension and one of those closes must be a bullish directional close i.e. the open must be no higher than in the bottom third of the range, and the close no lower than in the top third of the range.

So, in the case of the AUDUSD, since we saw a directional bar yesterday, we need see only a close above .8555 today to have acceptance.

2009-09-08-blog-adus-5d.jpg

FIGURE 1 AUDUSD 5-day

2 thoughts on “The Importance of the Maximum Extension”

  1. Hi Ray Re; extensions of 10% range and 20% congestion,is there a correlation to std.deviations? For example,could 10% of range be expressed as a +/- 3 std dv.? Is that how you arrived at using the figures of 10% & 20%? cheers baz

  2. Hi Baz

    Thanks for a great question.

    No correlation. The 10% and 20% were created via computer grunt power.

    We just tested setups over a 15 period over different types of trend structures to see what breakouts would turn out to ‘false’ and what turned out to be ‘true’.

    Generally 10% and 20% pretty much overlap.

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