A: You will often hear of chartists and technical analysis in the business of spread betting and trading. Chartists are persons who study charts that track the performance of a particular index or share and try to identify patterns and trends which can be used to influence future trading decisions. Technical analysis involves the application of methods designed to measure the changes in the net mood or psychology of the market and then return a prediction pf the possible consequences of that interplay. By analyzing chart patterns, chartists are looking for a compelling reason to initiate a trade or to exit an existing one.
Markets are monitored for subtle shifts in the basic supply-demand equation, and once an 'initial condition' is found that indicates a spot where there is a probable edge, the job simply becomes a matter of setting up an entry trigger, defining initial risk and then learning how to manage a trade properly in response to the market's actions. They typically identify support and resistance levels - a support level being a price which a stock is unlikely to fall into, however should it rupture this level they will sell on the belief that having breached the support level, the stock will continue falling until it reaches the next support point.
Technical analysts (another word for chartists) are less interested in fundamentals like management changes or a company's quarter announcement - they just focus on the price and on how it moves since they believe that prices follow simple patterns and believe that history tends to repeat itself meaning that key price levels of the past may effect how the share price moves in future.
Technical analysis trading works because you're assessing the supply/demand through price. Speculators and hedgers are entering/exiting the market, all of which are watching price to make decisions. That's why it works. Note that technical analysis is taught all over the world and has several professional bodies, The Society of Technical Analysts and the International Federation of Technical Analysts, to name the leading ones.
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A: Technical analysis can be very effective in helping traders plan a trade. It is basically another way to help limit risk and identify sound opportunities, and that's the only real way to make net profit through trading I think. No method is perfect and none works all the time but a decent technician can find a trade that you might take and give you the plan for success or failure of that trade.
Note, however that technical signals still average about 50% win: lose (Warwick University have done a lot of study on this) or it would be a license for us all to connect to a simple trading program, leverage to the sky and rake in our fortunes. The investment banks make sure that can't happen. They have the best mathematicians and algorithm programmers on their side to stop us from winning. What makes all technical analysis work is that it assists us with a disciplined process whereby we can enter and exit trades with the ability to keep the 50% losers smaller than the 50% winners. For instance technical analysis helps me to wean me off the emotional attachment to bad positions, which in fact I find incredibly liberating - it is amazing how much poor timing and then dwelling on a bad result can wear you down each day. It feels great to let go of a bad position...
To further improve on this we trade with positive company fundamentals and main market direction. Although I would add that fundamentals will get you into a trade, but by the time the fundamentals change the opportunity to leave a trade is normally long gone, for which we need charts.
Combine all three and :-)))
A: Market forces dictate price supply and demand. Price is driven by people just like you and me who succumb to the same human emotions of 'hope, greed and fear' as anyone else. Seeing where previous highs and lows have occurred in the past and how the market has behaved when at these levels can give clues as to what might happen next. Traders can formulate a number of strategies using 'what if' scenarios.
If you look carefully at the FTSE chart below you can immediately see that there seems to be considerable resistance to the market going higher above 6750. Based on this information you can see that the market doesn't seem to have the impetus to move above this
particular level. As such, you can deduce that being long (buying) at these sorts of levels is probably too expensive, and that you can probably buy at cheaper levels later. We are not concerned with the whys or hows - it is simply sufficient that there appears to be a barrier at this level. You can also consider short-selling the market at these high levels around 6700 as historically it looks good value to do so.
Resistance: An area to the left of the share where sellers have appeared before.
Resistance is basically a level where traders believe that the stock is overpriced and no one will be looking to buy at or above this point. When a stock is reaching a resistance which is plotted along the peaks of a trade over a given period, we can expect the stock to fall or retrace and perhaps fall to usually a 3rd of the points between the last confirmed low.
So why is it useful? All I can point out to that most share price movements are based on support and resistance, and if you can identify those areas of support and resistance your trading decisions will become better.
I think of resistance as a fence in the Grand National, sometimes a horse may fall and that race is over, or he may refuse at a fence and then jump it the next time, or the horse may jump the fence but fall on landing, or he may sail over the fence and be ready to meet the next fence.
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A resistance level is an area above the current price where selling power overtakes buying power.
Remember there will still be lots of people out there who do not look for support and resistance levels so shares can trade thru these areas, so do not be over strict, also spread bet firms know of these levels and it is in their interest to take out as many stop losses as they can, so the share price can be driven thru these levels only to recover later during the trading day.
Resistance should become support and vice versa, if the Dow is crashing support doesn't help much until it finds a level of support that works.
A:
There are several methods; one of which is to look at a bar chart and check at what price levels - the highs, lows and closing levels appear to be touching the most. This works on any timeframe (be it hourly, daily, weekly, monthly or yearly) and in most instances you will find that a cluster of 'highs' or 'lows' will be crowded in a small price area without any particular price level. In such cases you can consider this area of be a support or resistance zone.
Another method is to look at major price tops or bottoms which represent important resistance and support levels. Price gaps on charts can also be considered as support and resistance areas. It is also quite useful here to draw trendlines and project them to reveal possible future trend line support and resistance points.
Moreover, once a key support level has been breached, that level is likely to become a key resistance point or zone. Similarly, a major resistance level that is ruptured on the upside will in most cases become a key support level.
Even another way to find out support and resistance areas is to look for major retracements that oppose a current price trend. These moves are sometimes referred to as a correction. For instance, let's assume that a share is solidly trading in an uptrend. The trend started at the 200p price level and the share price rallied to 400p before pausing and pulling back to 300p after which the price rallied even higher. This represents a 50% retracement of the original move from 200p to 400p. The 300p level thus represents a support level so the 50% retracement level proved itself to be a solid support point since prices dropped by 50% and then continued to rally. The same can be said about downtrends and temporary reversals to the upside.
There are a few preset retracement percentages that have been proven to work well at finding support and resistance levels. These are: 33%, 50% and 67%. There are also two other percentage numbers at 38% and 62%; these last are referred to as Fibonacci numbers (Fibonacci was a quant). These 5 numbers are the ones that most technical analysts use to determine support or resistance levels and many of the charting software programmes have these percentages as presets (so all you would have to do would be to locate with your mouse the start of a trend and then point to a high and the percentage retracements will be laid out to the right on a chart).
One other way to determine support and resistance levels is using geometric angles from a certain price point; W.D.Gann, a famous stock trader invented this method while using the same 5 numbers above to calculate his angles (again, most software chart packages will have this preset to allow you to plot angles on charts).
Lastly, support and resistance levels can also depend on 'psychological' price levels which usually consist of round numbers. For instance for the Dow 10,000 would be a psychological level.
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A: This is an average of a chart over a set period of time say 20, 40, 200 days represented as a linear plot on a chart. What happens is that a trader selects a pre-determined number of days to examine, and then totals all of the prices for that time frame. A division of this total by the number of days being analyzed will yield an average. With each day going forward, the first day is subtracted and the new day is added, thus giving a new average. This is done for however many days one chooses to examine. Once the moving averages are calculated, the results are charted on a graph. In a down-trending market the moving average usually remains above the current price, while the reverse is true in an up-trending market. Thus, when the market closes above the moving average it can signal a rising trend which traders often use as a signal to buy.
Moving Averages help you identify trends and can be used with other indicators to show breakouts and trailing stops. For instance on a daily chart the moving average can be about 20 days while on a weekly chart it can be 26 weeks - an experienced trader would think carefully before going against this trend. The 200 day moving average is commonly used by institutions as a confirmation of a long term trend long or short and also to find out key support/resistance levels based on where a stock price is hovering in relation to the moving average. Some analysts use a variation of this theme by placing more emphasis on the current market price, believing that this helps to anticipate trend changes. They calculate a weighted average using a formula that places more value on the more recent prices. This strategy is called a Weighted Moving Average also knowns as the Exponential Moving Avearage (EMA).
A: This is just a case of trying different settings and see what fits the timeframe you want to trade. Long term index trading uses 200x50 or 150x100 - so high numbers. Short term equities could be something like 15 or 20 price crossover. I prefer weighted moving averaged to exponential but this just a personal choice. Best of all if its available is TEMA (triple exponential moving average) which works like a dream when trading candle patterns/reversals. MACD not worth altering.
A: MACD stands for Moving Average Convergence Divergence and is a trend indicator based on the ongoing difference between two moving averages (one long term and another short-term). A MACD can be displayed in the form of a histogram or as a graphic format which highlights the highs and lows and can show whether bulls or bears are in charge of the market (and their strength).
Some ideas about trading MACD (thanks to CHART TRADER)
-> Works better with some shares than others, so look back and see how it has worked previously.
-> Of little use when the share is trading sideways; the moving average will trade sideways and you will get lots of false signals.
-> Could be used to say that I have a lot of profit in this share and the next time the MACD crosses I will exit stage left.
-> So with a stock like ELM if you had been trading with the MACD indicator you would have sold long ago. From the box chart below can see it is trading sideways, still above the previous higher low, so if I was holding this share I would wait and see which way it breaks.
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Below is another example concerning Halma (HLMA). What I see at point A is that the buying support is weakening further and has been for some time and is at the point of breaking down from its rising 9 month uptrend. The last trading statement back in December 2009 was flat with the hint of better things in the second half as a result of cost cutting. But despite a small rise following this the market then started to change. The hint that the price is running out of steam to the long side is in the MACD. Price makes a higher high but the indicator doesn't. Usually, it isn't a good idea to combine CCI with MACD. CCI may give a heads-up the stock is over-sold but the MACD is very negative but it is also a lagging indicator, so a bounce of the trendline is a trade or one can wait for an indicator to signal. The upper line needs to be re-aligned so it joins the tops....that means we haven't got a channel exactly but that doesn't matter.
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A: Technical indicators and charting are by no means a guarantee but you ignore them at your peril. They are equally a valid strategy as any other.
One of the strengths of charting and technical analysis is that it uses an objective set of figures - price activity - which are readily available to everybody interested in the market. How individual traders choose to apply and interpret those techniques is a matter of subjectivity. Just as charts provide a visual representation of the trading activity, indicators can help you visualize the underlying price action, and support and resistance levels resulting from it.
It's not rocket science either as most indicators are based on 'price' and 'volume'.
Just understand that a particular setup that works when the market is trending will probably not work so well when it is not.
If you want to be in the market all the time, then you have to have a setup for each type of market condition, and recognise when market conditions change.
Depending on the timeframe used, a stock can be in an uptrend on one, downtrend on another and range trading on yet another - so you may have to use timeframe analysis to decide if or not to take a trade.
If you find a setup that you have "faith" in - remember that the setup will occur across ALL timeframes - the higher the timeframe used - the easier it is to trade (less noise, giving clearer signals), the lower the timeframe, the more "expert" you have to be to make use of it.
If you can't make money trading say a weekly chart - then don't even consider trading a lower timeframe.
It takes a lot of experience to be consistently profitable using a daily chart (anyone telling you differently is only kidding themselves).
Indicators work, EW works, pattern trading works...etc. Don't be put off by other people's opinions - they are only opinions - as is this message.
Do realise, however, that as a rule of thumb price based indicators lag price action. Can you base today's buying/selling on last week's data? Another problem with them is that they try to pick tops and bottoms (oscillators). You will get killed if the trend is strong (i.e. someting staying in oversold territory for months) or when its chopping. Do learn to read price action, volume, trend lines and maybe some other stuff.
At the end of the day, indicators, EW etc are just tools, in the hands of a good tradesman... Technical analysis tools such as the SMA/EMA used to spot trends and provide you with a moving stop loss when combined with indicators (MACD, RSI, Momentum) can show sentiment of the market and likely direction.
There are many technical indicators you can follow - they work in combination but one of the most important ones is the 'Volume Indicator'. If the price is rising but the volume is diving, or vice versa, then you might want to consider stopping your position (safest) or reversing it completely.
Some indicators such as moving averages, work best in trending markets where the security is moving either higher or lower. Oscillators, on the other hand, such as stochastic, are best suited to a more range-boundor or choppy trading environment..
Also there is nothing wrong in trading from say, the monthly or weekly charts!! - there is serious money to be made there for comparatively less work , and it gives you a life outside of trading.
When market conditions become more favourable, I'll probably include trading from the monthly or weekly charts, easy to trade. Trading from the longer term charts is a much more relaxed style of trading, but still offers a very good potential return!
Longer timeframe trading cuts the stress/excitement level drastically and allows you to refine your setups without undue stress, Once you have refined your setups and gained trading experience you might want to consider trading a lower time frame, you will have the opportunity of more trades to choose from, which ultimately should result in a larger $ return each year.
For what it's worth, I use both indicators and price/volume/time analysis - and indicators play an important role in my trading although I don't rely purely on indicators for an entry or exit trigger but use them to confirm my overall bias. This is because even indicators can be wrong sometimes and while they may work for a time, when the market shifts, strategies built upon indicators alone will begin to fail unless major adjustments are made.
For me, one of the most important aspect of trading, from a technical analysis point of view - is understanding the various forms of Support/Resistance levels and the use of multi-timeframes coupled with pure price and volume action.
And be your own man - do not take anything you read or hear as gospel - check it out first.
And since you mentioned placing trades in different sectors - an understanding of inter-market and sector relationships may help as well.
The best advice for the inexperienced has to be control risk and preserve capital...Just don't give up - there's money to be made in the market when the conditions are correct.
Hope this helps.
A: I think people get afraid of technical analysis because there's always someone round the next corner with another idea/ setting etc..., and it can be very 'trying' trying to figure out who is right.
It will come up as a relief for those starting from scratch to know that there are many professional traders who have proven results over the years without using many indicators. In fact, there are some traders who just use one single indicator to trade (for instance CCI or 200 moving average), while others may use a combination of simple indicators and techniques.
The trouble with indicators is that there are too many of them and a number are just duplicates of each other. Just to mention a few -: Relative strength index, Bollinger Bands, Head and Shoulders, Double Tops and Bottoms, Trendlines, Candlesticks, MACD, Moving Averages, Momentum, Support and Resistance, Coppock, Breakout, Average True Range, Accumulation index, Fibonacci levels and Pivot Points...you could of course also go the exotic route and have Gann's square of nine, Murray Math or even Pryapoint or Grid lines using square root of price...phew there's just an awful lot...
No doubt an increasing number of traders are learning about technical indicators and will use them to make trading decisions. Indeed some people will spend hours and hours trying to find that holy grail combination of indicators that will help them find the road to fortune. The fact is that no technical analysis tool by itself will give you reliable buy or sell signals. There is no magic blackbox and the fact is there are few indicators more appealing than a simple plain price and volume chart. Sure, some other indicators coupled with these might give you a heads up where something might happen but the price action with a bit of volume analysis will tell you what is happening. Combining this with discipline and adequate trading capital has been the road to success for many traders.
Jim Slater's Zulu principle can be applied to technical analysis - just set out to know a lot about a little and accept that there's lots more out there that you're not gonna know. Once I accepted that, the analysis paralysis disappeared and I could see the wood for the trees. I will always look at something new but only from someone who has convinced me they are making money using whatever it is. No proof, no look...makes life so much simpler.
So, when you have time, go and look at your portfolio on a simple chart with the 100 day moving average on it. Then report back on whether that indicator would have worked in getting you out at a point which would have made sense. If it doesn't then we'll move onto something else. Simple is better and I find there's no one tool which does the lot. Each tool is a voice adding to the sentiment, and if most of the voices are saying the same thing, that's as good as you get.
Modern life has introduced a new problem - that of information overload. It is very easy to expend all your efforts on researching indicators and trading systems and making it all way too complicated. In fact, what you really need is to keep it dead simple, such that you see your way forward.
Let's call the 'information overload' problem the 'cheddar cheese syndrome'... Have you ever looked at the varieties of pre-packed cheeses available at Tesco for instance? Take away the few exotics and you are basically left with cheddar cheese - plenty of flavours but still cheddar cheese. Last time I looked I counted more than 25 types (sad I know) - and that's only cheddar cheese, not trading indicators.
What I found with learning to trade is that you have to go through the overload process before you get the realisation that you must simplify everything. Even then, the computer and its inherent power is always pushing you to make it overly complex. Although I have a proper trading plan I found (and still do) it very useful to jot down the essence of my trading rules and philosophy on a postcard (suppose it would have been the back of a fag packet in the old days). If you can't do that then I believe it's not clear in your mind.
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In the above example we have a classic example of keeping your analysis simple.
Here, we only asked two key questions: 1) Is it trending - Yes/No? 2) What is the direction of the trend - Up, Down or sideways?
Up - look to buy it,
Down - look to sell it,
Sideways - do nothing
Next, look for support and resistance areas, trend lines and make a decision.
We have a candle chart of the FTSE100 and two lines on it - a simple horizontal support and resistance line and a simple trend line. However from these two lines we were presented with at least 5 diff erent trading opportunities. All would have been buying opportunities with only one of them failing. In each case except one, a buy order with a stop loss below the sloping trend line would have yielded a profit.
A: No, in fact there are some big money traders (managing in excess $10M accounts) out there who rely mainly on gut feel whilst others use very simple charts yet are still hugely successful.
For the rest of us who aren't so fortunate I'd say it is best to stick to a few signals and also to try to choose the signals that suit your personality. It is okay to only follow one or two signals or indicators but it is important to get to know them thoroughly. You only get confused and mixed signals using multiple signals. For instance I know one trader who uses MACD and spots things most of us wouldn't see. I do the same with CCI. Even another trader mainly uses point and figure while quite a few FTSE index traders use stochastic. You can make money on any of them. Even moving averages - look for the bigger picture as the moving average snakes across the chart it makes more than just turning points. It also forms cycles with higher highs or lower highs and higher lows or lower lows. You've got to fully understand whatever indicator you decide on and stick with it. They all work up to a point and none are best in all market conditions. Flexibility is needed. You have to find what's working today and even more important what works for you.
A: Volume refers to the number of shares being traded in a trading session - it can either be represented in thousands or tens of thousands. Be aware that some charts will display negative volume (i.e. volume that was actually sold to close positions) whereas other charting software will only show very limited information as they they only show positive volume within the charts. Volume is a good indication as to where the price is going. If you have rising volume which is positive in nature, then traders are pushing the stock and there are more investors buying in. But if the stock was negative and/or increased over each day of trading, then traders are not managing to push the stock and investors are exiting. This is especially so if it continues for an extended period of time.
A: If you are looking to trade on price reversals you could try using an oscillator to show oversold or overbought scenarios -:
An example would be using Bollinger Bands, RSI, or Stochastics.
Suppose you are looking for the price to reverse as it drops down near a key resistance point. You would use an oscillator and only enter the trade if the oscillator shows oversold.
For Bollinger Bands, this would mean the price is near the lower band.
For RSI, this would mean RSI is below 30.
For stochastics, this would mean stochastics is below 20.
Moreover, check to see if there are multiple levels of support between your entry point and stop, and check to see if the price can climb after entry without hitting much resistance.
A: Personally my favourites are moving averages; but you should also take a look at the breakout of significant highs/lows in the longer time frames.
A: You can use Welles Wilder's ADX as a filter for trending/sideways markets. Welles Wilder recommends to buy or sell markets which have an ADX higher than 25 and hold positions while it's above 20.
A: Answer by Henry; a technical analysis expert.
1 min, 5 min or 10 min chart makes really makes little difference. What you read about noise on 1 min chart is not true. The issue is about what settings you have on your indicator for any particular time frame. If you use a macd with a 26 period setting you will get a lot more trades than if you set it with 60 period. The 60 period will keep you in a slow rising long trend for longer compared to the 26 period setting. On a fast rising short trend with a pull back the 26 will give you a profit while the 60 period will give you a loss. That applies to any time frame. On slow rising trend days a 1 min chart may give a profit on a larger period indicator setting while a 5 or 10 min chart will give no profit.
Likewise with multiple indicators. A macd + RSI will give you a higher probability of a win but the wins will be smaller than the lower probability wins if you use macd without RSI. As win rate goes up, win points goes down. The bottom line is that nothing works all the time and most things balance out over the long term to about 50/50.
What makes the real difference is four fold. I would say in the following order. Having correct money management, having the psychological ability to ride out the loosing periods of several trades, having the discipline to stick to the strategy and having a strategy where winners are run larger than the losers. Imo the time frame and what indicator to use are of relative little importance other than the greater the time frame, the greater the drawdown on losing trades - which is another psychological issue.
A: The indicators you mention will give you around a 50/50 hit rate. Your system seems very dependent on moving averages - why do feel they are so important seeing that you have already established the trend before referring to the moving averages? In my opinion this is where the 'human eye' approach can never be bettered by mechanical/rule based systems. How about, once you have established the trend, you manually calculate what constitutes 'an average pull back within that trend' by manually assessing the pull backs which occurred before it? Some people might use fibonacci for this.
Another idea is to look for 'areas' of price action which you can mark up as important. Historically markets 'react' time and time again at the same areas. Using volume studies can help here as well. These areas simply constitute points which you could use to set up entry points and indeed exits out of the market. The idea being that you know very quickly if you are in a bad trade. So, for instance, suppose instrument ABC is in a consolidation after a short uptrend. Your chart shows you that $38.50 was good support on the way down 6 months ago but finally gave way causing the market to fall lower. The chances are that you will find that the same price will cause 'a reaction' on the way up. This presents you with an opportunity. If you place your trade near to $38.50 (long or short) you will know pretty quickly if the trade is a good one. The key in this game is to keep losses small. You'll be surprised in this game how one or two decent trades will make up for 10 small losses provided you accept that you will be wrong more than you are right and hence will develop a 'hard nosed' approach for cutting those bad trades more quickly. Money management aside; most people who fail in trading do so because they have an insane ability to run losses whilst cutting winners. In fact, surprisingly if you were to sit in front of a screen showing two winners and two losers, most people would cut the winners first and hang onto the losing trades in the hope that the losses would turn around. People also keep larger than needed stops because they feel that it will keep them in positions longer - they want 'bang for their buck' so to speak. People also place stops and just let them get hit despite the fact that they see price action that negates the original basis of their trade.
Also, remember that some indicators won't work some of the time on the same market and others which work in this market may fail in different market conditions. Whatever you choose has to work consistently and you need to follow your system meticulously, otherwise you will only get random results. And keep in mind that no two people will see / interpret a chart in the exactly the same way. You can try, say 4 or 5 indicators and when you get confirmation with 4 out of 5 or 3 out of 4 you could try the trade. Be consistent. Understanding the workings of moving averages implies recognising their limitations and help you identify false moves. At the end of the day there is no get rich quick scheme, it is all a learning curve that will hopefully one day end in riches!
To conclude, the problems with most indicators (for instance moving averages and relative strength index) is that they don't have an edge and only look to work in hindsight once you have adjusted the length or the timeframe to tune into the indicator in question. By that time everybody sees the same thing and low and behold those settings don't work anymore. Much of this 'need for indicators' is psychological. Human nature being what it is makes us come into the markets with certain beliefs and fears. Just like when we learn to swim we look to grab onto arm bands and bits of foam which we 'believe' will help keep us keep afloat and aid our swimming. Your search for a blend of indicators is indicative of the same 'self preservation' belief structures but the best research you can do is to study your own trading mistakes!
A: Correlation is a measurement of the interdependence of the price of a given share compared to an index or share. In ShareScope, this defaults to the FTSE 100.
The value lies between 1 and -1. 1 means that the price is totally in step with the index or share. If a share has a high correlation, say over 0.6, it means it is more likely to be marked up (or down) just because the index or share moves up (or down).
To add this indicator, go to the Graph context menu, highlight the Add indicator menu item, and select the indicator from the list which appears in a sub-menu. This will bring up a dialog box, in which you can select your settings.
A correlation column can also be added to the list screen. The column displays correlation to the FTSE 100 over the period for all price data held in ShareScope. The indicator, however, can have its period and comparison index or share adjusted.
A: This is a technical analysis tool which is designed to gauge the strength of a particular trend. It does this by comparing the latest closing price to that of a trading range over a period of time. It works on the basis that when a trend has been established, prices tend to close near the high and when the trend is falling, prices close near the low. A stochastic can thus be used as a signal to either confirm a decision or a warning to beware.
A: These are basically two parallel lines drawn to the moving average, one aboe and one below designed to show up to 90% to 95% of the underlying action. Channels helps a trader time his entry points and reduces the risk of taking the right trade and being stopped out only to see the market temporarily retracing (assuming you go long) only for the market to continue its upward trend. They are useful in illustrating the price range of a share and provide a snapshot of the average market bullishness/bearishness. Should prices move out of the range, it can suggest market euphoria or a picture of doom and gloom. In such circumstances it is wise not to follow the crowd or if the vertical distance between the two channel lines is large enough, one can even consider a higher risk contra-trend trade.
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Even within longer term trends there are likely to be corrections which will test the main trend line and thus one can even draw steeper sloping, shorter trendlines that can be drawn within the major channel. A break of these minor lines can mean that a trend reversal or a breakout is likely which will open new trading opportunities. Timing is important here as capturing a move from one equilibrium state to another is key to making quick profitable trades. Such breakouts usually happen when a share moves up through a level of previous strong resistance (or down through support) and these moves usually come with a considerable increase in volume reflecting increased demand as other market participants see the opportunity and dive in. That resistance or support might follow from the neckline of a top or bottom turning point pattern, a trendline or even a moving average, all of which can considered to having been influencing the market and then all of a sudden they are unable to restrain the share price.
A: A simple line chart usually shows the closing price for an instrument. A more powerful chart can be drawn using candlesticks which will show both open and closing price. The 'wicks' also indicate the trading range. Unlike bar charts, candles are colour coded in a certain way; a (white/blue/green) candle represents a higher closing relative to the opening of the particular period (an 'up' candle). A red or black candle represents a lower closing relative to the opening of a particular period (a 'down' candle).
The top and bottom of each candlestick indicate the high and the low for the period in question, while the solid body represents the
movement from the opening to the closing of that period, with red being a fall and green being an increase.
One of the most popular ways of using the candlestick chart is to identify a strong trend in the market. A line of candlesticks that move upwards from left to right with successive higher highs indicates a rising trend. Conversely, a line that moves downwards as it goes across the chart with a stream of lower lows marks a falling trend.
You may have heard the expression 'the trend is your friend'. This means that if a market is in a strong uptrend you're generally safe to bet on the assumption that prices will continue to rise. Conversely, if a market is in a strong down-trend that shows no sign of coming to an end, assuming that it will keep falling makes sense.
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So do candlestick patterns work? In a nutshell candlestick patterns do work. But not in isolation and they do not work all of the time. I would never base my trading decision on just a candlestick formation, although it is always useful knowing what they are, as when certain patters occur around points of support /resistance it can give you a clue as to what is going on.
Certainly they not just 'mysticism'. They are footprints of price action, showing you where the price was during the time period in question. Also, inspecting a candlestick can get you a real sense of the fight going on between bulls and bears minute by minute.
Seeing candlesticks constrict, getting smaller and smaller one after the other (inside bars), is a brilliant sign, as is the doji. You can almost guarantee that when the price breaks through one side or other of these candlesticks it will keep going for long enough to take a little profit.
So, in answer to your question...use of support and resistance lines with 'certain' (not all) candlestick patterns, I personally find them very useful.
A: Reply from Stu Whisson; The Fibonacci is useful for identifying retracements and to estimate where the price direction. Fibonacci are based on eighths of the range you select and will usually show three lines within the middle of the top of bottom of the chart. For some bizarre mathematical reason, retracements and gains do tend to follow the 3 main Fibonacci levels the main one being 50%. For example, if we have a stock trending heavily and is starting to fall. We can take the Fibonacci tool and drag it from the top of the trend to the bottom where the stock last consolidated. The tool will show us where we can expect certain levels of recovery - these are usually also confirmed by noting that other previous points of recovery may have happened at the same price range, further strengthening the Fibonacci level. Therefore, you can set a target based on the Fibonacci level. Fibonacci tools work over any range large or small.
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OK, here's the theory: the Wall Street index is very correlated to the movement of some currency pairs (intraday) during the USA trading session and can be of value. However, you need to remember that stocks (of which the index is constituted of) and forex (which it affects) is that except during times of extreme high momemtum times which are usually on the FIRST day of a trend reversal the Dow (and forex) REVERSES direction at specific times of the day.
Normally with stocks, if Wall Street crosses up over its past day close it will continue moving up till 11.30 - noon, EST, at which time it will drop and start back up again at about 2pm, EST and make the second run up to a higher high where it will close.
Forex studies have shown that some currencies follow the same pattern, closing at 5pm, EST, at which time the trend reverses direction, selling off until the Japanese market and then reverses trend at 12.00 (mid-night), EST as it prepares for the interaction of the Asian and European markets.
Some pairs work in the same direction as the DOW, while other currency pairs work in opposite direction, but the reversal times for any direction are usually the same - follow it on your charts and it will help you tremendously since being long in the market when the market reverses at NOON can lead to large draw downs, although your trend direction may very well be correct, and after midnight your trade will come in. You can prevent that, if you wish, by making sure you use a shorter timeframe and closing your trades before NOON or 5PM, EST.
However keep in mind that if you're trading the H1 or longer timeframes, you can get out at the reversal times, trade the opposite direction on the reversal, and then go back to your original direction for the MIDNIGHT reversal, or otherwise you can simply remain on the long trade and realise that the price will be dropping from 5PM until MIDNIGHT - or you can use both, and hold your long position with its drawdowns, and open a hedge SHORT position, which incidentally nulls out your margin decreases, and then close your short before MIDNIGHT!
A: This is considered by many traders to be one of the most reliable analytical tool available and is becoming increasingly popular among traders as an indicator of a sizeable market reversal. The pattern is developed from three rounded bottom formations situated such that the middle one is higher than the other two, both of which are sitting at approximately the same level. The resulting configuration resembles a person's head and shoulders. The formation indicates the end of an up-trend in the market; while the reverse head-and-shoulder formation indicates the end of a down trend.
A: Generally when spread traders want an indicator to show them when a move is potentially running out of steam they will use momentum indicators like the MACD or stochastics and look for divergences in momentum. An example of this would be when price makes a lower low but the momentum indicator does not. I would add that some use Fibonacci numbers to predict retracement levels. Note that the most commonly used momentum indicators are the relative-strength index (RSI), the stochastic oscillator, and moving-average convergence/divergence (MACD). The calculations behind indicators may be complex but you don't need to worry about that (just make sure you understand how to interpret the output) as your charting package will do all the work for you.
A: The CCI (Commodity Channel Index) is an indicator employed by technical chartists to analyse whether a) a price is likely to change direction b) if a financial asset is overbought/oversold. To help you predict a price reversal you can compare the direction trendlines for the price and the Commodity Channel Index. Should the direction of the market trend line be different to the direction of the CCI trend line, a price reversal might be on the cards. Having said that, CCI is widely used to check for overbought and oversold conditions. A share is considered overbought when it nears 100% or higher, and oversold when it is -100% or lower.
I'm mostly self taught, trial and error on intraday trading. I seem to remember some good stuff on Barchart.com I think it was > education > CCI (Commoditiy Channel Index Indicator). Don't sign up to any paying web site. The biggest CCI site I'm told is a scam - Woodies CCI. Most text talk of using short periods 5 - 20 but they don't work.
In practice the CCI shows the difference between a share's current price and its average price. So a high value indicates that the current price is much higher than its usual level and a low value shows that the price is far below its usual level. This can therefore be used as an overbought/oversold indicator where typically, readings above +100 imply the share is overbought and a value below -100 implies it is oversold.
For myself a few years ago I found someone on the trade2win BB who used longer periods on RSI so I tried it on CCI and it seemed to find trends. I have stuck with it since and discovered several little quirks on +ive and -ive divergence and a recent one today called hidden divergence. Trend lines, support/resistance and filters for reducing false breaks. Just a case of playing around with the settings as you would with moving averages. Eventually you find settings that suit your individual risk profile. You can also get very similar results with RSI and moving averages. The whole thing is still evolving. I have recently read a blog that claims to have back tested every indicator using Trade Station software. The writer is vastly experienced and found that no indicator would make profits if used as a standalone trading indicator. Learning when not to take a trade is where the money is made imo. I study the losing trades far more than the winners. I then look for things that might have prevented the loss...
Note: CCI (Commodity Channel Index) is a trend following strategy. It will not predict a future trend, only the price breakout does that so CCI must be used in conjunction with a price breakout. Some technical analysts do however use CCI with the premise that an overbought signal precedes an asset price drop, and that an oversold signal precedes a price rise.
Example by experienced chartist Henry: The strategy is three CCI charts for end of day and two CCI charts for intraday. 26 period and 60 period for intraday plus 200 period for end of day. A buy signal is a price breakout with CCI breaking above +100 line. A sell signal is a price breakout with CCI breaking -100 line. A trade closes with a break back over the CCI zero line. Money management; scale in with a position as each CCI chart breaks +100 line and scale out as each CCI breaks zero line. This is especially good for bluechips that can follow a trend on the 200 period chart for several years. Alternatively buy with one larger position and scale out and back in as things progress. The CCi chart works well with trend lines drawn on it and shows up price divergences similar to macd. Its advantage over macd especially intraday is that at the end of the trend the CCI can be used in its original form as an overbought/oversold indicator for trading the ranging market. I have built the strategy around myself so I appreciate that its not for everyone.
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I take partial profit (or loss) as each CCI crosses the zero line. EDIT - whilst the price is trending. When its ranging I hold only one position and close at 7 points above or below the 20 wilder moving average.
Add a position every time the 26 CCI breaks up through +100 would work without emotions:
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Adding on breaks of bigger timeframes should give a similar result, all we're looking for really is trend confirmation, most traders' biggest mistake is that they will not run a trade when it's trending, whereas professional traders not only run it they add to it, although i must add you would want to be confident in your trading before even considering a pyramid trade...
A: William Gann was a stock market trader of the early 1920s. Basing his theories on very old maths and the study of numbers as well as geometry and astrology, he claimed that his market concept cycle theories originated from the Holy Bible! In practice, Gann Theory points out that certain geometric price patterns and angles have special significance that when taken into consideration can predict future price action. He believed that the 'Law of Vibration' drove financial markets; which law forecasts future market price action with a good degree of accuracy. Additionally, Gann believed that the 'Rate of Vibration' of individual securities and futures determines the up and down movements of their prices.
On the other hand Ralph Elliot (an accountant) developed his theories in the 1930s. Elliot stated that market price action tends to follow specific patterns, which technical analysts today refer to as 'Elliot waves'. Ralph went on to publish his views of market action in the book 'The Wave Principle' (1938), and again in a number of articles in Financial World magazine in 1939, and culminated in his final major project, Laws - The Secret of the Universe (1946). Elliot believed that people are rhythmical and their actions and decisions could be forecasted in rhythms, as well. However, opponents argue that the Elliot Wave Principle has no scientific basis and opposes the efficient market theory.
Does this suffice to answer your question? Trying to forecast the stock markets basing oneself on mathematical formulae, natural law or even people's rhythm is akin to attempting to predict individual human behavior on the same theories. My initial opinion is that traders who try to trade on those theories are no more successful than those who trade on Dow Theory or any other theory for that matter...
A: The TED Spread represents the price difference between the three month futures contract for US Treasuries (aka T-bill) and the three month eurodollar futures contract hence the TED.
The TED Spread measures the difference between the yield on the 3-month Treasury Bill (T-bill) and the value of the euro dollar futures contract, which is based on the 3 month LIBOR rate. To calculate the TED Spread, simply subtract the yield on the 3 month T Bill from the value of eurodollar futures contract. For instance, if the value of the euro dollar contract is at 3.75% and the yield on the 3 month T Bill is at 2.25%, the TED spread is 1.50% or 150 basis points.
So what does the TED Spread tell us?
The TED Spread can be used as an indicator of credit risk. This is so because (so far at least) US T-bills are considered risk free while the rate associated with the Eurodollar futures is thought to reflect the credit ratings of corporate borrowers.
As the TED spread increases it indicates that either interbank trust is falling (banks charging each other higher interest rates because of default fears) or investors are crowding to buy T bills because they believe stock markets are faltering. It also confirms that credit markets are not functioning as smoothly as they should.
On the other hand when the TED spread is decreasing, it can signify that banks believe the other banks they are lending to have a lower risk of defaulting on the loans so they are charging a lower interest rate charge to offset this risk or that investors are selling T-bills because they believe their money will perform better in the stock market. i.e. investors have regained their appetite for risk. A decreasing TED spread can also signal potential economic expansion.
The normal range of the TED is below 0.5% and back in September/October 2008 it spiked up to about 5%. Understanding the TED Spread and its significance has to be seen as just one more tool in your trading armoury but as always must be considered in the broader context of the market.
A: The average true range (ATR) measures the volatility of a stock i.e. the ATR is used as an indicator of a market's daily price fluctuations. Although the indicator was originally designed to measure volatility in commodities, it can also be used for stocks and indices. The ATR indicator takes account of gaps in prices unlike other measurements of historical volatility. The true range is founded on either the difference between the peak and trough of a day, the difference between the previous day's peak to the trough and the difference between the previous day's peak to the peak.
When the previous day's lowest point is greater than the day's highs - as in the case of a sharp gap down - the true range will probably be the difference between the previous day's close and the peak. Conversely, when there is a sharp gap higher, the true range will likely be the difference between the previous day's close and the low of the day.
The ATR is just the average of the 'true ranges' over a determined period of days which is usually 2 weeks. As with moving averages, as each day of new data is added, the last calculation is left out. The ATR helps to spot the historic highs and lows where volatility is concerned. A dropping range means that volatility is retreating. A historic low can signal an imminent strong move to the upside while historical highs will lead to lower volatility.
High volatility periods usually occur during sharp swings and strong moves in a stock or index while low ranges happen during periods of quiet trading. Sometimes the ATR indicator is coupled with another indicator referred to as standard deviation to help determine big moves with more accuracy (it can also help determine appropriate stop loss levels).
A: If you are with IG Index it's well worth spending some time experimenting around with their new toy (free of charge to clients, just open an account).
IG's Autochartist is a tool that will scan almost everything for almost any pattern you would wish, either technical analysis or Fibonacci related. The video demo is clear enough. Start with their settings and have a play. Put your own in and have even more fun.
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Some of you will find that IG's Autochartist doesn't do quite everything you need. For example I can't seem to use it to differentiate between overlapping and non-overlapping patterns other than by doing a visual check. Even if this is true, it's a minor price to pay for what is IMO a major improvement in their services provided to traders.
What an amazing resource this is to anyone interested in technical analysis or wanting to learn about it.
You can set up searches in all sorts of combinations, for example:-
High Quality for Every Pattern,
Medium+ Quality for two or more Specific Patterns,
Low+ Quality for just a Single Pattern.
Short term/Long term
Fuzzy/Sharp
Etc., etc. etc...
I have been playing with the filters this morn, and not being too selective with the filters seems to work best for me as I am looking to use it to pick up the "best looking" emerging patterns out of hours that I can then transfer over to my own charts for further study.
Very happy with this as a big part of my trading now is to only trade low risk, high probability trades. This should now shorten the time I spend trying to find them as well as helping me to find a wide range of patterns.
The pattern alerts should be quite useful whilst day trading. You can look at completed examples of a few rare 'perfect' cases. Then lower the quality and see the more frequent but increasingly imperfect ones. The facility to look at patterns that have recently met your own criteria for formation is very useful IMO, as is the one to set visual/audio alarms as they occur.
The ONLY fault I can find with it at the moment is that when you do a general search the results can only be sorted by the time they occurred. Pity you can't do it by Quality, Pattern, Market etc...but I'm sure they will put that right when it has been in use for a while and they get feedback.
Hope that answers some of your questions but feel free to send me queries, comments or concerns at traderATfinancial-spread-betting.com or by filling in the form below :-)
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