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หวัข้อ..การวเิคราะห์ทางเทคนิคเชิงประยุกต์
บรรยายโดย..คณุคณฆสั จิรเสวีนุประพนัธ์วิทยากร TSI
หวัขอ้บรรยาย
• CHAPTER 1: Price Rule
• CHAPTER 2: Bullish / Bearish /
Wait and see signalsWait and see signals
• CHAPTER 3: Volume Analysis ,Quality
Volume
• CHAPTER 4: Simple Moving Average
Disclaimerข้อมลูต่างๆ ที2นําเสนอในหลกัสตูรนี6 จดัทาํขึ6นโดยใช้ข้อมลูที2ได้รบัการเผยแพร่ต่อสาธารณะนํามาพิจารณาและศึกษาโดยยึดตาม
หลกัวิชาการก่อนจดัทาํเป็นหลกัสตูรมิได้มีเจตนาที2จะนําไปสู่การชี6นําในการลงทนุแต่อย่างใด
หวัขอ้บรรยาย
• CHAPTER 5: Fibonacci
• CHAPTER 6: Pitchfork
• CHAPTER 7: Bollinger Bands /ADX / Bollinger Bands /ADX /
Momentum/ RSI / OBV / MACD
• CHAPTER 8: Investor Sentiment Cycle
Disclaimerข้อมลูต่างๆ ที2นําเสนอในหลกัสตูรนี6 จดัทาํขึ6นโดยใช้ข้อมลูที2ได้รบัการเผยแพร่ต่อสาธารณะนํามาพิจารณาและศึกษาโดยยึดตาม
หลกัวิชาการก่อนจดัทาํเป็นหลกัสตูรมิได้มีเจตนาที2จะนําไปสู่การชี6นําในการลงทนุแต่อย่างใด
CHAPTER 1
Price RulePrice Rule
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Price rule principles Price rule principles
1. When random buying or selling occurs in the ordinary course of business, price charts show random patterns. When there is a persistent weighting of pressure to ward either buying or selling., price charts also reflect this fact. One footprint in the san says nothing. When a pattern of footprints starts to point the way start looking for evidence that the trail may continue. Put another way, you want to buy strength and to sell weakness, but only when the probabilities favor continuation of either the strength or the weakness.
2. A close at the extremity of a bar’s range suggest that the stock is likely to continue in the direction of the strong close. This is particularly so when there are several consecutive strong closes in the same direction.
3. Ideally, a price rule signal should be in force on the monthly and the weekly chart before buying or selling a stock. buying or selling a stock.
4. A price rule signal must occur on the daily chart to buy or sell a stock. *** Completion of a price rule on the monthly or weekly chart delivers a signal in its ownright, but this signal must be confirmed by a price rule signal on the daily chart.
5. It is important to act on a price rule signal as soon as it occurs. The best signals lead toprice immediately following through. If you wait for more confirmation, it is almost certainthat you will end up trading at a worse price. The risk of a retracement usually increasesas the stock moves away from a price rule signal. Confirmations can sometimes be too much of a good thing once a stock starts moving. *** After completion of a buy signal, you can often buy at a lower price. However, the signals that let you do so are often the one that fail. The best signals often lead to a profit right away. In the long run, it pays to act as soon as a strong price rule occurs.
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Conditions for all price rules Conditions for all price rules
1. To complete a price rule, the final bar has a close in the top 25 percent of the bar’s range for a buy signal or the bottom 25 percent for a sell signal.
2. A price rule may take longer to complete than the minimum specified time. Thus it could take four of five bars, rather than three, to complete a three bar close rule (Rule1.) it could also take until the fourth or fifth bar to obtain a close in the top or bottom 25 percent of the bar’s range, thereby completing the signal.
3. When price closes in the middle of the range, the result is neutral. Assume the same closing designation as for the previous bar. same closing designation as for the previous bar.
4. When a emerging pattern is violated, start counting again at the beginning of the formation with a new bay.
5. When a price signal is completed (and other indicators confirm taking action), buy or sell right away. Do not chase entries unless there is a new signal.
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PRICE RULE PRICE RULE
1.1. The threeThe three--bar closes rule. bar closes rule. A buy signal occurs on completion of two consecutive bars in which price closes in the upper half of the range and the next bar closes in the top 25 percent of its range. A sell signal is the reverse.
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For example (SYNTEC)For example (SYNTEC)
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22. The . The reversal rule reversal rule
Shorten the proving time from three bars to two when either of the two bars is a reversal-closing price, key, or high/low reversal.
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For example (NMG)For example (NMG)
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For example (LH)For example (LH)
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33. The . The gap rule gap rule
Shorten the proving time from three bars to two when a gap occurs.
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For example (HANA) For example (HANA)
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For example (THAI)For example (THAI)
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44. The . The island rule. island rule. Shorten the proving time to one bar when a island occurs. It is not necessary for closing price(s) within an island to be in the top or bottom of the rage. An island may consist of one bar or many. However the more time taken to form an island and the more symmetrical the gapping, the more likely it is that price has reached an important turning point and will continue in the direction of the new gapping. Islands often indicate absolute exhaustion of the previous trend.
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For example (TTA)For example (TTA)
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For example (KBANK)For example (KBANK)
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55a. The a. The LindahlLindahl buy rule.buy rule.Within nine bars from the bar of the low for the formation:
1. Price must exceed the high of the bottom bar for the formation: (b) must take out the high of (a)
2. Price must then take out the low of the preceding bar: (d) must take out the low of (c) .
3. To buy price must take out the high of the preceding bay and close above the preceding bar’s close and the current bar’s opening price (e).
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For example For example (PLE) PLE) <<BUY SIGNALBUY SIGNAL>>
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55b. The b. The LindahlLindahl sell rulesell rule
1. Price must exceed the low of the top bar for the formation: (b) must take out the low of (a).
2. Price must then take out the high of the preceding bar: (d) must take out the high of (c ).
3. To sell, price must take out the low of the preceding bar and close below the preceding bar’s close and the current bar’s opening price (e)
This formation may be completed in as few as three brs or as many as eight, depending on the number of intervening bars that do not contribute to development of the formation.
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For example (AJP)For example (AJP)
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66. The . The trend continuation rule trend continuation rule Shorten the proving time to one bar when there is a single reversal bar in the direction of an established and unmistakable trend. A clear and unmistakable trend requires the 25 and 40 bar moving averages to confirm the direction on the monthly, weekly, and daily charts.
It is psychologically difficult to chase a rapidly moving stock. This price rule provides the mechanism for buying with both a manageable top loss and a high probability of making a profit right away.This price rule may also be used when other indicators suggest that a consolidation within a clearly established trend is ending.
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For example (MLINK) For example (MLINK)
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77. The . The Trend reversal rule. Trend reversal rule.
Trade with the direction of a single, very big reversal bar, even though the
trend appears to be in the opposite direction. Hence the name trend reversal.
This rule is useful for selling an existing position after a buying climax. The probabilities favor using it to buy against the direction of an established trend.
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For example (TGCI) For example (TGCI)
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8. The 8. The double reversal rule. double reversal rule.
Trade on completion of a second reversal bar in the same direction within a period
of six bars or fewer, whether closing price reversals, high/low reversals, or a
combination. Both reversal bars should close in the top or bottom 25 percent, as
appropriate, of the bar’s ranges.
As suggested by the name double reversal, this rule is a double trend continuation (rule 6.)Bouble reversals occur often and are very reliable. They also occur frequently in Lindahlformation (rule 5).
When buying, the signal is much stronger if the second low is higher, and when selling .if the second high is lower – unless the second reversal is exceptionally powerful. The same goes for closes. The second one should ideally be higher when buying and lower when selling. Occasionally, this rule can be completed in as few as two bars. It is very powerful when the second bar completes a double reversal and is also a key reversal bar.
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For example (DCC)For example (DCC)
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Moving averages: Use with price rules
When monthly, weekly, and daily moving averages for a specific stock show
the same direction, the probabilities favor continuation of the major trend. When
a stock trades at or near the rising moving averages, the time may be very
favorable to buy (or to sell in a bear market). The risk is low relative to the
potential reward.
When looking for a new upturn in a stock, it is generally better to wait
until both price and the moving averages show signs of developing an upward until both price and the moving averages show signs of developing an upward
rounding pattern. Getting in on the ground floor is a mug’s game. Too many
elevators remain interminably stuck at the ground floor or, worse, fall to the
basement. An upward rounding pattern generally allows plenty of time to climb
on board.
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Setting for Moving averages
Most effective for standard use are simple moving averages with setting of 25 and 40 as well as the 200 day moving averages, which closely corresponds to the 40 week moving averages.
Simple moving averages provide slightly longer-term perspective than weighted or exponential moving averages, which give more weight to nearby market action. The 25 and 40 settings are used by many technical analysts, so their effectiveness for potential support or resistance tends to be self-fulfilling. resistance tends to be self-fulfilling.
Using two moving averages of different time periods makes it easier to interpret what is happening . Usually, but not always the one of shorter duration turns before the longer one. Often, the longer-term one resolutely
Maintains its direction while the shorter one wobbles. When there is a conflict, it generally pays to heed the longer moving averages.
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Using moving averages
1. The 25 and 40 month moving averages indicate the direction of the major trend. On the monthly chart, the 25 month and especially the 40 month moving averages can show the same direction for many years. Flat and conflicting moving averages generally indicate a trading range market and a stock to avoid, unless there is pronounced rounding that suggests a possible new trend.
2. The 25 and 40 week moving averages indicate the direction of the intermediate trend. intermediate trend.
3. The 25 and 40 day moving averages indicate the direction of the near term trend.
4. The 200 day moving averages, very nearly equivalent to the 40 week moving average , is widely regarded as a make of break level for a stock.
With so many people watching what happens at this pivotal level its importance is significant. Either you by at an excellent price or, if wrong, you can get out of a stock very soon and with a small loss.
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5. During price corrections the moving averages should act as support or resistance levels, as appropriate, and should also contain price on a closing basis.
Moving averages act as a kind of equilibrium level. Price generally draws away from the moving averages and then comes back to a level at or near them. However long it takes, price and the moving averages generally meet or come close to each other from time to time. When a stock has moved a long way above the moving averages, it may be vulnerable to a retracement. However, moving averages say nothing about when a retracement might occur or how averages say nothing about when a retracement might occur or how far a stock might have to settle back.
6. Generally, signals to buy or sell are particularly powerful when a stock is in a established trend and it has come back to a level at or near the moving averages when they are indicating a strongly trending market.
The most powerful signals tend to occur on the relatively rare occasions when strong stock comes back to its monthly moving averages. More frequent but timely and rewarding signals also tend to occur when a stock comes back to the weekly moving averages.
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7. A price rule occurring with one or more of its bars touching a rising moving average often delivers an unbeatable combination of timeliness to buy or sell, along with moderate risk.
8. Moving averages show the approximate speed of a stock’s advance or decline. When considering a stock with a well established uptrend, it is helpful to get a rough idea what its annual rate of climb has been in the past. If all goes equally well in the future., the stock may in the past. If all goes equally well in the future., the stock may continue to go up at approximately the same rate. When looking at a stock’s rate of climb, you can generally see how important it is to buy when it is timely to do so. It is generally of much less use to look at the rate of decline in a bear market, because declining stocks sometimes do so in sudden plunges, and even those appearing to decline relentlessly can change their behavior at any time.
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Set index (Set index (25 25 and and 40 40 month simple moving averages)month simple moving averages)
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SCC (Monthly chart)SCC (Monthly chart)
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SCBSCB
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PAPPAP
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BGH (Weekly Chart = SMA 25/40 Week)
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TRUE (Daily chart)
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CHAPTER 2
Bullish / Bearish / Bullish / Bearish /
Wait and see signals
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Bullish signals: Daily bullish candlesticksBullish signals: Daily bullish candlesticks
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Candlesticks A and B, with the longest bodies are the most bullish, and candlesticks C and D are “regularly” bullish. The E pattern doesn’t seem to be that bullish because of the long shadow. A long shadow is a distinct sign of failure. In the case of a lower shadow for a bullish day, it means that it failed on the downside: From the open it went down, thus forming initially a bearish day, but it then mounted a solid rebound and closed in positive territory. This pattern is very bullish. is very bullish.
Candlestick F is not so bullish because its upper shadow tells you that it failed to hold on to its initial gains by the closing time. Candlestick G is fairly neutral on its own, it surely marks a bullish period, but the small size of the body and of the shadow doesn’t of bullish candlesticks.
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Bearish signals : Daily bearish candlesticks Bearish signals : Daily bearish candlesticks
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Let’s take a look now at the bearish, or filled, candlesticks where the closing price is lower than the opening price. The longer the body (see A and B), the more bearish the signal. In general, a long bearish body with small or no shadows is the weakest.
In the diagram, C and D are also very weak, as is E. The medium size bearish body in E has a long upper shadow, which means that stock was originally bullish, rising from the open: however, at some point during the day the market changed its view and sold off the stock, reversing the day the market changed its view and sold off the stock, reversing the original gains and closing with losses.
The F pattern is not too bearish because its long lower shadow shows the stock closed well of its worst price on the day. Finally, the medium size bearish body of G, with tiny upper and lower shadows, retains the weakness bias, but also invites caution because the signal may become murky.
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“Wait and see“Wait and see” ” signalssignals
HaramiHarami Candlestick Candlestick
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The harami, or inside candlestick, is a short range that follows a long
candlestick. This tiny candlestick’s range is confined to the previous day’s
body. The harami candlestick looks like the mirror image of the engulfing
candlestick because the surrounding range occurs first. The two
consecutive ranges might have opposite directions, but it does not
matter whether they are up or down days.
However , when the second day’s range is a doji candlestick (diagrams C However , when the second day’s range is a doji candlestick (diagrams C
and D), theharami candlestick is called a haramiyose candlestick. If it
occurs at an extreme level, this pattern is more likely to generate a
reversal signal. It is possible to see several consecutive harami patterns
developing within the range of a long candlestick.
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Hoshi Candlestick Hoshi Candlestick
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The Hoshi or star, candlestick is essentially identical in nature, if not in looks, with the harami candlestick. It consists of a tiny body that open and close the following day outside the original body, since it is unable to close this overnight gap. The presence of price gaps makes the hoshiclose this overnight gap. The presence of price gaps makes the hoshipattern germane to stocks and futures.
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KenukiKenuki CandlesticksCandlesticks
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The kenuki, or tweezers, candlesticks refer to consecutive candlesticks that have matching highs or lows. The direction of the tweezes to irrelevant, which means they can both be bullish or bearish, or they can be mixed.
In a rising market, kenuki matching tops occur when their highs match. Based only upon this, you don’t have a strong direction to follow. The neutral outlook shifts to a reversal bias when two other criteria are met: The formation occurs after an extended move, and the second kenuki provides special additional information.
In diagram B, both tweezers are bullish, and second one is unable to make a higher high. This pattern suggests a possible bearish reversal. A stronger higher high. This pattern suggests a possible bearish reversal. A stronger bearish reversal bias is shown in diagram C. The second tweezer in this case is a doji . this type of price activity is an even more graphic example of a reversal. The Japanese call this formation kenukiyosesen. The only potential downside is if the tweezers do not appear at the top of the trend.
Diagram D, the second tweezer is a bearish opening marubozu that closes below the middle range of the previous da bullish candlestick. This second day tweezer looks quite a lot like the bearish dark cloud cover selling signal, although it does not open above.
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Diagram A, Depending on the direction and price structure of the second tweezer, this wait- and-see formation may forecast a bullish reversal when it appears at extreme lows.
Diagram B you see two bearish candlesticks where the second day opened within the range of the first day’s body, a rather undecided move. Despite the attempt to break further on the downside, the second candlestick fails at the same low. This failure is forecasting the bottom of the downtrend, and it should trigger a rebound.
Diagram C, shows a doji line as the second day of the tweezers Diagram C, shows a doji line as the second day of the tweezers bottoms. If it occurs at the bottom of the downtrend, the pattern suggests a bullish reversal.
The last type of tweezers bottoms variation, diagram D, consists of a bearish candlestick followed by a bullish candlestick that opened at the previous low and closed about halfway through the body of the first candlestick. This pattern mimics the look and the meaning of the bullish reversal piercing line. The only difference is that the piercing lines open below the low of the first day.
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Sakata’s method and candle formations Sakata’s method and candle formations
Sakata’s method
Sakata’s method, as originated and used by Honma for basic chart analysis, deals with the basic yin (inn) and yang (yoh) candle line along with two additional lines. The concept is centered around the number 3. The number 3 appears often in traditional analysis as well as a Japanese charting techniques. Sakata’s method is a technique of chart analysis using the number 3 at different points and times in the market. Sakata’s method can be summarized as:
SAN-ZAN (THREE MOUNTAINS)
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SAN-ZAN (THREE MOUNTAINS)
Three mountains forms a line the makes a major top in the market. This similar to the traditional western triple top formation in which the price rises and falls three times, forming a top. This formation is also similar to the Three Buddha Top (san-son) formation, which is the equivalent of the traditional head and shoulders formation. It comes from the positioning of three Buddhist images lined up, with a large Buddha in the center and a smaller one on each side. San-Zan also includes the typical western triple top where three upmoves are made with comparable corrections that follow. The three tops may be the same height or may be trending in one direction, most probably down.
Figure 1
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Figure 2
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SAN-SEN (THREE RIVERS)
Three Rivers is the opposite of Three Mountains. It is often used like the traditional triple bottom or inverted head and shoulders bottom, but this not necessarily correct. The Three Rivers method is based on the theory of using three lines to forecast the turning point of the market. This can be seen in a number of bullish candle patterns using three lines, such as the Morning star and Three White Soldiers. In Japanese literature, the Morning star is often called the Three Rivers Morning Star in reference to
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Morning star is often called the Three Rivers Morning Star in reference to this Sakata Method.
Figure 3
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Figure 4
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This method uses gaps in price action as a means to time entry and exit points in the market. The saying goes that after a market bottom, sell on the third gap. The first gap (ku) demonstrates the appearance of new buying with great force. The second gap represents additional buying and possible some covering by the sophisticated bears. The third gap is the result of short covering by the reluctant bears and any delayed market orders for buying. Here, on the third gap, Sakata’s method
SAN-KU (THREE GAPS)
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market orders for buying. Here, on the third gap, Sakata’s method recommends selling because of the conflict of orders and the possibility of reaching overbought conditions too soon. This same technique works in reverse for a downward gap in the market after a top. The Japanese term for filing a gap is anaume. Gaps (ku) are also called windows (mado) by the Japanese.
Figure 5
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Figure 6
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SAN-PAI (THREE SOLDIERS)
San-pai means “Three soldiers who are marching in the same direction” This is typified by the bullish Three white soldiers candle pattern, which indicates a steady rise in the market. This steady type of price rise shows promise as a major move to the upside. Sakata’s method also shows how this pattern deteriorates and shows weakness in the market rise. The first variation of the three white soldiers pattern is the advanced black pattern, which is quite similar, except that the second and third white days have long upper shadows. The second variation of the three white
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days have long upper shadows. The second variation of the three white soldiers pattern is the Deliberation (stalled) pattern, which also has a long upper shadow on the second day. However, the third day is a Spinning Top, and most likely a star. This suggests that a turnaround in the market is near.
Other patterns that make the san-pai method are the Three Black Crows and the identical Three Crows patterns. Each of these candle patterns is bearish and indicates a weak market.
Figure 7
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Figure 8
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SAN-PON (THREE METHODS)
San-pon means “a rest or cease-fire in market action” A popular saying “buy, sell, and rest.” Most traditional books on market psychology and trading suggest taking a break from the markets. This is necessary for many reasons, not the least of which is to get a perspective on the market while not having any money involved. San –pon involves the continuation patterns called the Rising Three methods and the Falling Three methods.
The Rising and Falling Three methods continuation patterns are resting
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The Rising and Falling Three methods continuation patterns are resting patterns. The trend of the market is not broken, only pausing while preparing for another advance or decline.
Sakata’s Method is intended to present a clear and confident way of looking at charts Often Sakata’s Method is presented along with the following simple philosophy.
1. In an up or down market, prices will continue to move in the established direction. This fact was instrumental in the development of candle pattern identification with a computer.
2. It takes more force to cause a market to rise that to cause it to fall. This is related directly to the traditional saying that a market can fall due to its own weight.
3. Market prices sometimes just stop moving completely. This refers to lateral trading, a time for all but the most nimble traders to stand
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lateral trading, a time for all but the most nimble traders to stand aside.
Sakata’s Method, while focusing on the number 3, also involves the use of broader formations in which numerous candle patterns may exist.
Figure 9
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Figure 10
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Candle formations Candle formations
1. Eight new price line (Shinne Hatte)
This is a formation of continually rising price in the market. After eight new
price highs are set, one should take profit, or at least protect positions with
stops. Action based on 10 new price highs, 12 new price highs, and 13 new
price highs is also mentioned in some literature, but not recommended
here. The previous market action should be taken into consideration before
using this technique.
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using this technique.
Figure 1. Eight new price high (STPI)
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Figure 2 (EVER)
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2. Tweezers (Kennuki)
Tweezers is a relatively simple formation using the components of two or more daily candle lines to determine tops and bottoms. If the high of two days is equal, the formation is called a Tweezer Top. Tween the two days that make up the tweezer formation.Likewise, if the low of two days is equal, it is called a Tweezer Bottom. The high or low of these days may also coincide with the open or close. This means that one day could have a long upper shadow and the next day could be a opening marubozu with the open (also the high) equal to the high of the
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marubozu with the open (also the high) equal to the high of the previous day. The Tweezer top or Tweezer bottom is not limited to just two days. Days of erratic movement could occur between the two days that make up the tweezer formation.
Tweezer tops and Tweezer bottoms are formations that will give short-term support and resistance. The terms support and resistance refer to prices that have previously turned the market. Support is a price base that stops market declines, and resistance is a level of prices that usually halts market rises.
Figure 3. (BTS)
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3. High waves (Tukane Nochial)
The High Waves formation can be seen in the upper shadows on a series of candle lines. After an uptrend, a series of days such as shooting star, Spinning tops, or Gravestone Doji can produce topping tendencies. This failure to close higher shows a loss of direction and can indicate a reversal in market direction. An Advance Black pattern could also be a beginning of a high waves formation.
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Figure 4 (ECF)
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4. Tower top and Tower bottom (Ohtenjyou)
Tower tops and Tower bottoms are made by long days that slowly change color and indicate a possible reversal. Tower bottoms occur when the market is in a downtrend, along with many long black days, but not necessarily setting significantly lower prices as in the Three Black Crows pattern. These long black days eventually become white days, and even though a turnaround isn’t obvious, new closing highs are eventually made. There is nothing to say that an occasional short
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are eventually made. There is nothing to say that an occasional short day cannot be part of this reversal pattern. These short days usually happen during the transition from black o white days. Of course the Tower top is the exact opposite. The term Tower refers to the long days that help define this pattern.
Figure 5 (UV)
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Figure 6 (NMG)
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5. Fry pan bottom (Nabezoko)
The Fry pan bottom is similar to the Tower bottom, except that the days are all small or short body days. The bottom formation is rounded and the colors are not as important. After a number of days of slowly rounding out the bottom, a gap is made with a white day. This confirms the reversal and an uptrend should begin. The name is derived from the scooping bottom of a frying pan with a long handle.
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Dumpling Top is the counterpart of the Fry pan bottom formation. It is a rounded top similar to the rounded top in traditional technical jargon. The downtrend is confirmed by a gap to a back body. If the black dyafter the gap is a Belt Hold line, the ability of this formation to predict future price movement is even better.
Figure 7 (SGP)
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Figure 8 (ROBINS)
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6. High price gapping play and Low price gapping play (Bohtoh and
Bohraku)
High and Low price gapping plays are the Japanese equivalents of breakouts. As prices begin to consolidate near a support or resistance level, the indecision in the market becomes greater as time goes by. Once this range is broken, market direction is quickly resumed. If the breakout is caused by a gap in the same direction as the prices were trending before the consolidation, a further move in that direction is certain. Because of the subjective nature of these formations. Basically they are the same as
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the subjective nature of these formations. Basically they are the same as the Rising and Falling Three Methods and the Mat Hold, except that no clear arrangement of candlesticks can be used to define them.
Figure 9 (MJD)
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Figure 10 (PTL)
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CHAPTER 3
Volume AnalysisVolume Analysis
Quality Volume
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CHAPTER 4
Simple Moving Average Simple Moving Average
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Simple Moving Average
The Simple Moving Average is arguably the most popular technical analysis tool used by traders. The Simple Moving Average (SMA) is used mainly to identify trend direction, but is commonly used to generate buy and sell signals. The SMA is an average, or in statistical speak - the mean. An example of a Simple Moving Average is presented below:
The prices for the last 5 days were 25, 28, 26, 24, 25. The average would be (25+28+26+24+25)/5 = 25.6. Therefore, the SMA line below the
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would be (25+28+26+24+25)/5 = 25.6. Therefore, the SMA line below the last days price of 27 would be 25.6. In this case, since prices are generally moving higher, the SMA line of 25.6 would be acting as support (see :Support & Resistance.)
The chart below of the Dow Jones Industrial Average exchange traded fund (DIA) shows a 20-day Simple Moving Average acting as support for prices.
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Moving Average Crossovers
Moving average crossovers are a common way traders use Moving Averages. A crossover occurs when a faster Moving Average (i.e. a shorter period Moving Average) crosses either above a slower Moving Average (i.e. a longer period Moving Average) which is considered a bullish crossover or below which is considered a bearish crossover.
The chart below of the S&P Depository Receipts Exchange Traded Fund
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The chart below of the S&P Depository Receipts Exchange Traded Fund (SPY) shows the 50-day Simple Moving Average and the 200-day Simple Moving Average; this Moving Average pair is often looked at by big financial institutions as a long range indicator of market direction:
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The Exponential Moving Average (EMA) weighs current prices more heavily than past prices. This gives the Exponential Moving Average the advantage of being quicker to respond to price fluctuations than a Simple Moving Average; however, that can also be viewed as a disadvantage because the EMA is more prone to whipsaws (i.e. false signals).
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The chart below of eBay (EBAY) stock shows the difference between a 10-day Exponential Moving Average (EMA) and the 10-day regular Simple Moving Average (SMA):
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Weighted Moving Average
The Weighted Moving Average places more importance on recent price moves; therefore, the Weighted Moving Average reacts more quickly to price changes than the regular Simple Moving Average (see: Simple Moving Average). A basic example (3-period) of how the Weighted Moving Average is calculated is presented below:• Prices for the past 3 days have been $5, $4, and $8. • Since there are 3 periods, the most recent day ($8) gets a weight of 3,
the second recent day ($4) receives a weight of 2, and the last day of the 3-periods ($5) receives a weight of just one.
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3-periods ($5) receives a weight of just one. • The calculation is as follows: [(3 x $8) + (2 x $4) + (1 x $5)] / 6 = $6.17
The Weighted Moving Average value of 6.17 compares to the Simple Moving Average calculation of 5.67. Note how the large price increase of 8 that occurred on the most recent day was better reflected in the Weighted Moving Average calculation.
The chart below of Wal-Mart stock illustrates the visual difference between a 10-day Weighted Moving Average and a 10-day Simple Moving Average:
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Adaptive Moving Average
Adaptive Moving Averages changes its sensitivity to price fluctuations. The Adaptive Moving Average becomes more sensitive during periods when price is moving in a certain direction and becomes less sensitive to price movement when price is volatile.
The chart below of the E-mini Nasdaq 100 Futures contract shows the difference between an Exponential Moving Average (see: Exponential
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difference between an Exponential Moving Average (see: Exponential Moving Average) which weights current prices more heavily than past prices and the Adaptive Moving Average which changes sensitivity based on price volatility:
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Typical Price Moving Average
The Typical Price Moving Average combines the Pivot Point concept and the Simple Moving Average. The Pivot Point (see: Pivot Points) calculation is shown below:
• Pivot Point = (High + Low + Close) / 3
The calculated Pivot Point number is then input into the regular Simple Moving Average (see: Simple Moving Average) equation; rather than the
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Moving Average (see: Simple Moving Average) equation; rather than the input of the closing price, the Pivot Point calculation is used.
The chart below of the mini-Dow Jones Industrial Average Futures contract shows the slight difference between a 10-day Simple Moving Average and a 10-day Typical Price Moving Average:
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The Typical Price attempts to give a more real representation of where price has been by incorporating the high and low price into the most often used closing price. The Typical Price is consequently seen as a more pure Simple Moving Average; nevertheless, as can be referenced by the chart above of the mini-Dow Future, there is not much difference between either Moving Average.
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Triangular Moving Average
The Triangular Moving Average is a Simple Moving Average that has been
averaged again (i.e. averaging the average); this creates an extra smooth Moving
Average line.
The chart below of the E-mini Nasdaq 100 Futures contract shows the relation
between a 10-day Simple Moving Average and a 10-day Triangular Moving
Average:
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Average:
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Generally, simple moving averages are smooth, but the re-averaging makes the Triangular Moving Average even smoother and more wavelike
Moving Average Exponential Ribbon
The Moving Average Exponential Ribbon technical indicator is simply numerous exponential moving averages of increasing time period plotted on the same graph.
The number of exponential moving averages (EMA) to plot varies immensely among users of this indicator; also, some users plot the simple moving average instead of the EMA. Likewise, the lengths of the moving averages varies wildly as well. One must factor the time horizon
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moving averages varies wildly as well. One must factor the time horizon and investing objectives when selecting the lengths for the moving averages.
In the chart below of the E-mini S&P 500 Futures contract, eight EMA's were selected, starting with the 10-day EMA and ending with the 80-day EMA:
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Moving Average Exponential Ribbon Buy Signal
The buy signal for the Exponential Moving Average Ribbons is exactly the same signal as any other moving average crossover; however, the difference is that there are numerous crossovers. Decisions must be made as to how many crossovers must occur before a buy signal is officially triggered.
A close-up of the numerous buy signal crossovers is presented below:
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A close-up of the numerous buy signal crossovers is presented below:
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Moving Average Exponential Ribbon Sell Signal
The sell signal for the Exponential Moving Average Ribbons occurs when the moving averages begin to crossover; however, determining how many crossovers must occur before a sell signal is officially triggered is up to the stock, futures, or currency pair trader.
Overall, strong buy or sell signals are generated from the Exponential Moving Average Ribbons indicator when all of the moving averages have
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Moving Average Ribbons indicator when all of the moving averages have crossed over one another.
Simple Moving Average
The Simple Moving Average is arguably the most popular technical analysis tool used by traders. The Simple Moving Average (SMA) is used mainly to identify trend direction, but is commonly used to generate buy and sell signals. The SMA is an average, or in statistical speak - the mean. An example of a Simple Moving Average is presented below:
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The Exponential Moving Average (EMA)
The Exponential Moving Average (EMA) weighs current prices more heavily than past prices. This gives the Exponential Moving Average the advantage of being quicker to respond to price fluctuationsthan a Simple Moving Average; however, that can also be viewed as a disadvantage because the EMA is more prone to whipsaws (i.e. false signals).
The chart below of eBay (EBAY) stock shows the difference between a
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The chart below of eBay (EBAY) stock shows the difference between a 10-day Exponential Moving Average (EMA) and the 10-day regular Simple Moving Average (SMA):
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Moving Average Crossovers
Moving average crossovers are a common way traders use Moving Averages. A
crossover occurs when a faster Moving Average (i.e. a shorter period Moving
Average) crosses either above a slower Moving Average (i.e. a longer period
Moving Average) which is considered a bullish crossover or below which is
considered a bearish crossover.
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The Moving Averages Triangular
The Moving Averages Triangular indicator places the majority of the weight on
the middle portion of the price series. They are actually double-smoothed simple
moving averages. The periods used in the simple moving averages varies
depending on if you specify an odd or even number of time periods.
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Adaptive Moving Average
Adaptive Moving Averages changes its sensitivity to price fluctuations. The
Adaptive Moving Average becomes more sensitive during periods when price is
moving in a certain direction and becomes less sensitive to price movement when
price is volatile.
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CHAPTER 5
Fibonacci
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CHAPTER 6
PitchforkPitchfork
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Pitchfork
Alan Andrews took Marechal's Median Lines and added what we know today
as the upper and lower parallels. The upper and lower parallels are lines
extended from the B and C pivots, forming upper and low rails to the structure.
See the chart below which has had the previous Median Line extended into a
fully fledged Andrews Pitchfork.
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It is apparent that the upper and lower parallels in this instance accurately show support
and resistance for the vehicle whilst the Median Line shows the slope and the point of
balance. Some analysts mistakenly refer to these added lines as the Upper and Lower
Median Lines. This is incorrect, there is only ONE median line, the central spine.
Drawing the Andrews Pitchfork
The first step in drawing a pitchfork is to identify a significant high or low from
which to draw the fork. This will typically be a high in the case of a down
trending market and a low in the case of an up trending market.
In short, the initial selection of the A pivot will determine the direction of fork.
The remaining pivots will alternate, thus if the A pivot was a high than the B
pivot will be a low and the C pivot will be a high. The following chart which
shows a down trending Andrews Pitchfork and clearly illustrates this.
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The primary purpose of the Andrews pitchfork is to identify the slope of price and
importantly, any change in that slope, i.e. a change in the trend direction.
Jeremy Schiff, perfecting the Pitchfork
There is a final twist to the story. Alan Andrews worked with many traders,
teaching his various chart structures. One, a New York trader named Jeremy
Schiff, came to Andrews with a hypothesis that in many case where a vehicle
is in a shallow up or down trend, the pitchfork is to steep and he devised a
manner by which the fork could be made to predict a more shallow path.
That variation of the pitchfork is known as the Schiff Pitchfork.
In this variation the A pivot is moved up 50% of the way in price towards the
B pivot. The chart below shows this:
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B pivot. The chart below shows this:
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Andrews in turn responded that if one were to move the A pivot along the price axis then
it would be logical to equally move it along the time axes, thus giving us the Modified
Schiff, the third and final commonly used version of the pitchfork.
The chart below shows a Modified Schiff fork with the A pivot moved BOTH 50% in price
and 50% in time towards the B pivot.
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These three variations on the humble pitchfork make up with is known as pitchfork
analysis but as you can see, each incorporates a Median Line at its core and that in turn
owes its birth to the Normal Line and from there...the fact that each and every action
has an equal and opposite reaction. In short, market balance, equilibrium.
Although the Andrews pitchfork is a tool bundled within many charting platforms, it is
typically used briefly and in a cursory manner by those that value technical analysis. As
you have seen, the Andrews Pitchfork has a pedigree that dates back to the earliest
part of the 20th century when Babson used it to personally amass a $50 million fortune
using his Normal Line. I would urge the reader to devote some time to this method of
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using his Normal Line. I would urge the reader to devote some time to this method of
analysis, it is without a doubt the most powerful technical indicator I have seen.
Where do we go from here and how does Coghlan Capital use these
methods?
I have used the word evolution in this document several times for a specific
reason. It would be wrong to think that the process of improvement ended in
the 1960s with Dr Andrews. The concept of predicting market balance and
turns through the application of a Normal/Median Line has continued to
evolve through Coghlan Capital founder, Paul Coghlan. He has generated over
thirty thousand charts as he strives to understand how Marechal managed to
produce the most amazing chart ever. That work continues and advances to
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produce the most amazing chart ever. That work continues and advances to
the methods pioneered by Babson and Marechal have resulted in Clivity
Analysis, a methodology that makes up the core of the Morning Analysis and
Cross Pair Analysis services and produces trades for the Coghlan Forex and
ESTrades service.
Clivity Analysis
The advances focus almost exclusively on the work undertaken by Babson and
Marechal. Andrews made a noteworthy contribution, the Andrews Pitchfork.
But it can be clearly seen that the bulk of the work was performed in an earlier
era.
The market clearly has a balance to it, once a working slope has been identified
it provides traders with direction, trend strength and critically, changes in
behavior which allow that trader to prepare for a turn or counter trend move.
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behavior which allow that trader to prepare for a turn or counter trend move.
Time and time again through what I refer to as Clivity Analysis, the analysis of
financial instruments through the use of slopes has provided me with an insight
into turns that appear to elude the majority of analysts.
99% of analysts look at the horizontal when viewing a chart, this is incredibly
myopic. They will refer to horizontal lines of support and resistance whilst
acknowledging that a market is rising or falling. Clivity Analysis all but ignores
the horizontal aspect of the chart and focuses instead on identifying the current
slope (trend), looking for a rise or fall WITH RESPECT to that slope trend
strength) and watching for a change in behavior (trend breakdown). Not a week
goes by without my receiving emails from clients that express amazement at
the accuracy with which this method of analysis works.
I am strongly of the opinion that analysts I have seen that utilize similar
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I am strongly of the opinion that analysts I have seen that utilize similar
methods, from pitchfork analysis to median line analysis, do so in a way that
doesn't come close to leveraging the vision of Babson and Marechal. With
Clivity Analysis I aim to dig deeper and come close to the methods used by
Marechal.
Rather than dimply 'draw a pitchfork', I aim to fulfill three objectives
with every chart/vehicle through a variety of tools and methods.
• Identify the current slope
• Identify the current floor and ceiling within that
Definition of 'Andrew's Pitchfork‘
A technical indicator that uses three parallel trendlines to identify possible
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A technical indicator that uses three parallel trendlines to identify possible
levels of support and resistance. The trendlines are created by placing
three points at the end of identified trends. This is usually achieved by
placing the points in three consecutive peaks or troughs. Once the points
have been placed, a straight line is drawn from the first point that
intersects the midpoint of the other two.
Also known as "median line studies".
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Investopedia explains 'Andrew's Pitchfork'
The chart shown here makes it clear why this indicator is called a pitchfork.
The first point drawn on the chart forms the handle, while the lines
extending from the other two points will make up the prongs.
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SET
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KTB
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CHAPTER 7
Bollinger Bands /ADX / Bollinger Bands /ADX /
Momentum/ RSI / OBV / MACD
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ADX Average Directional Index
Interpreting the ADX
The Average Directional Movement Index (ADX) technical analysis indicator
describes when a market is trending or not trending. When combined with the
DMI+ plus and DMI- minus (see: DMI) the ADX can generate buy and sell
signals.
However, the main purpose of the ADX is to determine whether a stock, future,
or currency pair is trending or is in a trading range. Determining which mode a
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or currency pair is trending or is in a trading range. Determining which mode a
market is in is helpful because it can guide a trader to which other technical
analysis indicators to use.
The chart of the E-mini Russell 2000 Index Futures contract below shows an
excellent example of the ADX in action:
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ADX Shows Trend Strength
The first concept to remember is that the direction that the ADX moves doesn't
depend upon the direction of the underlying stock. All the ADX shows is the
trend strength.
Strong downward trend = Increasing ADX
As can be referenced from the chart of the E-mini Russell 2000 Index Futures
contract above, when the e-mini future was rising in a strong upward trend, the
ADX indicator was rising.
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ADX indicator was rising.
When the e-mini futures contract moved into a non-directional consolidation
phase, the ADX decreased.
ADX is a Great Complement to Other Technical Indicators
The ADX is so popular because determining whether a stock, commodity, or
currency market is trending or not trending can help a trader avoid the pitfalls of
some indicators.
Moving Averages
Moving averages and their variants are effective during trending markets;
however, during consolidation periods when prices go up and down, but in no
direction, moving average indicators have a tendency to give numerous false buy
and sell signals that add up to trading losses. During trending markets, use
moving averages, trend lines, and other trend following technical indicators.
Oscillators
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Oscillators
Oscillators are extremely effective in non-trending markets. Buying low and
selling high is accomplished quite readily with oscillators. Unfortunately,
during trending markets, oscillators perform quite poorly, often selling short
during a bull market run or buying during a bear market downtrend, adding
up to large losses. For periods of non-trending, use oscillators like Stochastic
Fast & Slow, RSI, or Williams %R and other range-bound indicators like
Bollinger Bands or Moving Average Envelopes.
Introduction
The adx indicator is best known as a trend indicator as it can identify when a stock
is trending. ADX stands for Average Directional Index. Used in a stock screen, ADX
can help to quickly identify trending stocks. This webpage will help traders and
investors learn how to use adx.
A rising adx indicator line tells the trader that the strength of the trend is rising
and price is moving with the trend. A falling ADX trend indicator means the
strength of the trend is decreasing and price is likely consolidating (i.e. trading in a
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strength of the trend is decreasing and price is likely consolidating (i.e. trading in a
horizontal trading range) or retracing (i.e. dropping in price but not trending). It's
important for all traders and investors to know how to use adx.
Common to both questions are four additional qualifying questions:
Is there a trend?
What is the direction of the trend?
How strong is the trend?
Is the trend just beginning or is it coming to an end??
Note: Many traders will say that stocks are always trending. They're either trending upward,
downward, or sideways. In the context of the ADX indicator, stocks only trend higher or they
trend lower. ADX does not consider sideways trading action as a trend.
What Do The ADX Indicator Numbers Mean?
ADX is one of the more popular indicators. It can assist in answering the above questions. A
high ADX reading (i.e. >25) indicates the presence of a trend. A low ADX reading (i.e. <20)
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high ADX reading (i.e. >25) indicates the presence of a trend. A low ADX reading (i.e. <20)
indicates there lack of a trend. Be aware that the ADX indicator by itself does not indicate the
trend direction.
ADX is based on moving averages over a period of time. The DI Period (default period of time) is
14 bars but other settings can be used. Using a daily chart, ADX(14) means the ADX is based on
14 days. Swing traders, because they are dealing with shorter periods of time might use fewer
bars (e.g. 10).
The strength of the trend generally follows the following criteria:
ADX Rating Description
Between 0 and 20
No trend exists (do not trend trade)
Between 25 and 30
A trend is forming
Between 30 and 50
A strong trend exists
Above 50
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Above 50
A very strong trend may begin to weaken
Keep in mind that a falling ADX doesn't mean the trend has ended. It only
means the strength of the trend is becoming weaker.
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CHAPTER 8
Investor Sentiment CycleInvestor Sentiment Cycle
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Bull market Bull market
A stock market environment in which investors are optimistic and the prices of stocks, indexes, and other assets are rising.
How does a bull market start? Is impossible. What we can say is that in every big decline eventually there is a bottom, after which the market starts to recover, or at least does not sink further. Unfortunately, no one knows that the market has reached bottom until after it’s already done so.
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After the market hits bottom, there’s so much pessimism remaining from the bear market that many investors are reluctant to participate in the market. The only people still in the market are those who bought and held on the way down, a few brave investors, or short-term traders. Those who lost most or all of their money don’t believe there will ever again be a bull market. Thus, at the start of may bull market most investors are suspicious and unwilling to participate. They want to avoid the pain of more losses.
Following is a chart of the range of feelings that investors feel during a typical bull and bear market cycle. This chart will help you to plan future strategies.
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Case study
If you look, AII, a nonprofit educational organization, polls its
members for their view of the market: bullish, bearish, or neutral. AAII can be surprisingly accurate, and it’s a useful guide as long as you do the opposite of what the members are feeling (it’s a contrarian indicator). Therefore, when AAII members are over 65 percent bearish, this a bullish signal. Conversely, when AAII members are over 65 percent bullish, that is bearish signal. Although these surveys measure extreme emotions, don’t use them to time the market. After all, investors can remain overly bullish
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use them to time the market. After all, investors can remain overly bullish or bearish for long periods. Nevertheless, AAII can give important insight into the current investor’s mood.
It’s a bull market!
The chart reveals the truth It doesn’t matter whether you’re an investor or trader-by pulling
out a chart of the major market indexes, you can discover important clues. There is no better way to identify an uptrend than by looking at a char. Although using fundamental analysis can help when looking at individual stocks, when looking at the overall market, I highly recommend that you rely on charts. Charts display a variety of technical data such as support and resistance, overbought and oversold conditions, stock patterns, and trends.
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trends.
What about the P/E ratio?
One fundamental indicator that can be helpful when analyzing the state of the market is the price to earning ratio. This is the stock’s current price divided by earning per share for the previous twelve months. Traditionally, the average P/E of the S&P 500 is 15, so if you look at the P/E of the entire market and it’s lower, then the market ma have room to go higher. If the P/E of the entire market is higher than 15, it’s possible that the bull market is in it’s later stages.
Economic indicators give buy signals
During a bull market, economic conditions may be dismal and
political conditions unsettled (or worse) but the market keeps going higher. This is the power of a bull market, and you should not fight the uptrend. If you are overly worried, pull some money off the table for diversification, put it into cash. But do not exit a bull market without a solid reason –pay attention to your clues and indicators.
Case study
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Case study
During a bull market, another factor at play is the actions of the Federal Reserve System, which is the central banking system of the United States. They receives all the media attention and that people watch closely. This policy-making committee has the power to raise or lower interest rates, which effects the bond market, as well as the stock market. For example, from 2008 to 2013, in response to a financial crisis, the Fed kept interest rates artificially low by buying billions of dollars in bonds. That helped fuel one of the strongest bull markets in history.
Economic indicators Economic indicators
1. Interest Rates
2. Inflation
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2. Inflation
3. The monthly jobs report
The bull market gets stronger
• Don’t fight the Tape = During bull markets, the market tends to ignore bad news, a clue that you are really in a bull market. Therefore, it is not advisable to fight to no matter how many problems there are in the economy or the world. Some investors or traders, distrusting the power of the bull market, not only move to cash buy may bet against the bull market by selling short. That is, they sell shares they don’t currently own intending to purchase them later at a lower price. These doubters, rather than making money, all too often lose money. Why? Because they were wrong: If you are in the middle of a raging bull market, think of it as a freight train barreling down the tracks. Selling shorts
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market, think of it as a freight train barreling down the tracks. Selling shorts stocks during a bull market is like stepping in front of the train, hoping it will stop before it hits you.
• Digging deeper into a stock chart. = For example, during a bull market, if the major market indexes rise above their 200 day moving average, that is a significant buy signal. Even long term buy and hold investors who use fundamental analysis pay attention to the 200 day moving averages. During a bull market, the price of the S&P500 may rise above its 50 day, 100 day, and 200 day moving average. Moving averages are very popular with traders and investors because they help confirm the market’s direction. At a glance, you can see where the market is headed-up or down.
• Everyone is genius in a bull market. = AS the market climbs, more retail investors believer the market will never go down. Some go on margin, attempting to double down on their stock purchases. In fact, during the later stage of many bull markets, margin debt levels skyrocket. This means that greedy investors of trader are borrowing money to buy even more stocks and ETFs.
• The parabolic melt-up = Sometimes bull markets go up so fast and high that is shocks investors and traders. During the melt-up stage, most short sellers have given up, and many bearish columnists are so humiliated that they stop warning of a crash. When the market goes parabolic, if you are on the long side,
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warning of a crash. When the market goes parabolic, if you are on the long side, you won’t believer how much money you are making. By “parabolic,” we mean that stock prices go straight up, defying market gravity. Investors are giddy, along with anyone who works on Wall street. At this stage, you’ll see panic buying as investors are afraid they are going to miss out on the rising stock prices. As buyers rush in to buy anything that moves, stocks or indexes will zoom up in a straight line well above their 100-day and 200-day moving averages. Also, MACD will rise above and beyond its 9-day signal line. Although market indexes don’t go parabolic very often, penny stocks often do, which is why penny stocks are so risky to trade. After all, what goes up must come down.
• The Climax = At the final stage of some bull markets the market reaches a climax. It
doesn’t matter why, but it happens. If you’re brave enough to short the market at this
price level, you could lose a fortune. Of course, you could be right about the market,
and even recognize a market top. That is when you can short stocks, planning to cover
at a lower price. If your market call is good and the market falls, you reap big bucks
during a bear market. But if you time it wrong, the market will teach you a lesson that
you’ll never forget. Rather than betting against the market, most astute investors or
traders sit quietly and wait for the market to stop climbing.
• The end of the bull market = Eventually, the bull market ends and the market slows
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• The end of the bull market = Eventually, the bull market ends and the market slows
down or reverses direction. It can come in one dramatic correction, in short selloffs, or
even in wave after wave of selling. Wall street and its followers are now in disbelief.
They will tell you a dozen reasons why the market is going down and here’s the
interesting part: They always tell you it’s coming back quickly and most investors
believer them. After all, financial institutions as well as millions of individual investors
are programmed to think the market always goes up.
Bull market strategies
• Buy and hold stocks (but not forever) = The buy and hold strategy has been drilled into the minds of investors for decades. The idea is to buy stock in a fundamentally sound company and hold it for the long term (think in term of years). Here’s a suggestion for investors: Rather than buying and holding forever, buy and hold stocks until something fundamentally or technically changes in the company. This is how buy and hold should work, but it requires more effort on your part. One of the reasons that indexes make sense is that you don’t have to pick winning and losing stocks. After all, it’s extremely difficult for even the pros to find the right company to buy and hold.
• Buy and hold index ETFS (but not forever) = Buying and holding ETFs that match
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• Buy and hold index ETFS (but not forever) = Buying and holding ETFs that match indexes makes more sense than buying individual stocks as long as you don’t buy and hold forever. As previously mentioned, long term investors and long term traders should buy and hold until the trend changes or there are clues a bear market is approaching. It’s hard to argue with the success of these super investors, who are patient, disciplined, and focused. If you have a long time frame and have the personality traits of the best buy and holders, then you can stay the course through the next bear market by not selling. Most people say that it’s impossible to time the market. It‘s true that on one can time the exact top or the exact bottom, but you can buy early enough to take advantage of the next bull market and get out early enough to prevent losses from the next bear market.
• Dollar cost averaging: = Dollar cost averaging is an old but popular investment strategy. If you are buying an holding mutual funds, index funds, or index ETFs, dollar cost averaging can be profitable. The idea behind dollar cost averaging is to buy more shares at a lower price a regular intervals. Basically, you buy more shares when price are low and buy fewer shares when prices are high. By investing a fixed amount on a set time schedule, you don’t have to try to time the market. It should be stressed that this strategy primarily works during a bull market. If you follow it during a bear market, you are adding to a losing portfolio with little hope a positive return, that is , until the bear market ends.
• Buy high and sell higher = In strong bull market, buy high and sell higher often works brilliantly as leading stocks continue to climb. Those who believe the market “can’t go any
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brilliantly as leading stocks continue to climb. Those who believe the market “can’t go any higher” are shocked when it does. (on the other hand, if the market weakens or changes directions, you must use strict money management tactics such as stop losses-an order that instructs the broker to enter an order to sell (or buy) when the price falls, (or rises) to a designated level-to avoid losing money.)
• Pyramiding (Scaling in or out) = This strategy, first introduced by Jesse Livermore, is used by a number of top traders. Instead of committing all his investment dollars at in time, Livermore would pyramid (or scale) into a position: This is , he would buy on a limited number of shared at a time. If the stock performed as he expected, he’d buy more shared. If the stock didn’t perform as he expected, he’d sell. Livermore also often used this strategy to test whether he was trading in a bull or bear market.
• Buy low and sell high = Buying low and selling high sounds brilliant, but in the real world, it’s difficult to accomplish, especial if you are trying to find the low or the high. Your goal is to try to buy at a relatively low price and sell a higher price . Buy when the market is in an uptrend, and sell or reduce your positions when the market becomes dangerous, or is in a downtrend.
• Speculating with call options = Owning a call option is similar to “going long” a stock. If you believe that the option’s underlying stock will go up in price, the call option usually follow. The attractive part about owning call options is that you can participate in the upswing of a stock without actually owning the stock and for a lot less money.
• Pyramiding (Scaling in or out) = This strategy, first introduced by Jesse Livermore, is used
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• Pyramiding (Scaling in or out) = This strategy, first introduced by Jesse Livermore, is used by a number of top traders. Instead of committing all his investment dollars at in time, Livermore would pyramid (or scale) into a position: This is , he would buy on a limited number of shared at a time. If the stock performed as he expected, he’d buy more shared. If the stock didn’t perform as he expected, he’d sell. Livermore also often used this strategy to test whether he was trading in a bull or bear market.
• Follow the money = If you want to make money in the market, it makes sense to “follow the money” that is, to buy what the institutions are buying. Actually, institutional activity is reflected in the charts, indicators, and clues. So when you obey market signals, you are following the institutions.
When the bull market end
1. Financial writers and retail investors are extremely bullish
2. Retail investors are buying everything that moves, and on margin
3. It seems like everyone is in the market with loads of stock tips
4. Negative earning start to matter
5. Failed rallies = A chart showing a series of lower lows and lower highs
is significant.
6. Irrational hubris dominates the market = Such overconfidence is
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6. Irrational hubris dominates the market = Such overconfidence is
often a sign that the bull market is coming to an end, and if the
overspending gets worse, then the market may move into bubble
territory.
7. Unusual market behavior becomes the norm = Make a print of
observing the indexes, as well as what is happening overseas. Like a
detective, you have to put all the clues together, and if something
doesn’t feel right, don’t ignore it. You may have to take action.
When the market indicators say sell
• Moving averages. = Below its 50- day, 100-day, or 200day moving averages,
this is bearish signal. However, keep in mind that moving averages is a
lagging indicator, which means that tis signals are often late.
• Moving Average Convergence / Divergence (MACD) = MACD is also very
popular with traders and investors. When MACD crosses below its 9-day
signal line or below the zero ling (and stays below), that is a bearish signal.
As always, you must confirm with other indicators and your own analysis
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As always, you must confirm with other indicators and your own analysis
before buying or selling based on MACD. Like moving averages, MACD is
lagging indicator, so its signals are sometimes late.
• Relative Strength Index (RSI) = Tell you whether the market index is overbought or oversold. Unfortunately, RSI can remain overbought or oversold for a long time before the index reverse direction. Nevertheless it’s useful in pointing out when the market is getting a bit frothy or too complacent.
• The Bond Market = keep your eye on the 10-year Treasury yield . When the yield rises, then bond price are falling. When the yield drops, bon prices are rising. If the yield moves up too quickly, and bon price fall, it not only hurts the bond market but it may disrupt the stock market.
• P/E ratio = For example Historically, the averages P/E of the S&P500 is 15 . If the P/E of the market is well above 15, the market may be overbought. However, if the P/E below 15, the market could be oversold. Remember, the market can remain overbought or oversold (according to the P/E) for long periods before reversing direction.
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reversing direction.
• Chart Patterns = If the bull market is really coming to an end, you may see chart patterns such as a double top. Then there is a final decline, in other word, the stock rose to the same level twice but failed to break through to the upside.
• The Market = The most powerful indicator is the market itself. It is always right, and always has the final word. The market performance, represented by the major market indexes, should be viewed on a chart.
Characteristics and Strategies of a Sideways market. = Investing in or trading a sideways market is extremely challenging and is frustrating for both the bulls and bears. The bears are unhappy because the market doesn’t go down low enough going straight up and begins to meander around. A sideways market is an indecisive one. Once you identify a sideways market, think of whether the previous trend was bullish or bearish. If it follows a lengthy bull market, a bear market could be near, but it’s not guaranteed.
Sideways market
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market could be near, but it’s not guaranteed.
Strategies for a flat sideways market• Cash or cash equivalents (CDs and Money markets)• Index Funds • Selling Covered Calls
Characteristics of a Bear market
Bear market = a stock market environment in which investors are
gloomy, the prices of stocks and other securities are falling, and the
broad market indexes have fallen by 20 percent or more off its recent
high.
At the bottom of the market
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At the bottom of the market
• Financial writers and retail investors are extremely bearish
• Retail investors are pouring out of Equity Mutual Funds
• Good economic news is ignored
• End of day rallies on high volume
When Market indicators say buy
1. Moving averages = Major indexes rise and stay above their 50-day,
100-day, or 200 day moving averages, this is a bullish signal.
2. MACD = When MACD crosses above its 9-day signal line or moves above
the zero line (and stays above it), this is a bullish signal. Nevertheless, always
confirm with other indicators and your own analysis before buying or selling.
3. RSI = It tells you whether the market index is overbought or oversold. If
RSI foals below 30, that is a signal that the market is in oversold territory.
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RSI foals below 30, that is a signal that the market is in oversold territory.
(Similarly, when RSI rises above 70, that signals an overbought market)
4. Chart patterns = If the bear market is really coming to an end, when you
look at a chart you might see patterns such as a double bottom. That occurs
when the market does not break below major support levels and then reverses
direction (twice). The second time it holds support, it forms what looks like a
“w”, which propels the market higher.
Fight with a Bear market
1. Buy and hold (If you are long-term investor)
2. Cut your losses (or Lock in gains)
3. Move to cash
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4. Buy and hold inverse ETFs (but not Forever)
5. Sell on the rallies (or add to your Inverse Funds)
6. Use Shorting strategies
7. Speculate with Put Options
PsychologyPsychology
Psychology of entry and exit
The decision to exit a trade is very different from the decision the
enter a trade. Why?. You can wait until the market is in a condition where you
feel the time is right to enter, and a good trade can be made. Before entering,
you do not have to do any money, except opportunity cost. When exiting you
cannot simply watch. Once in the market, you must accept whatever the market
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cannot simply watch. Once in the market, you must accept whatever the market
does or get out immediately. You can no longer wait, but are now at the mercy
of the market. If the market moves in an unexpected manner you may lose
substantial sums of money, you must always decide whether to stay with a
position or get out. This is not the case before entering a position.
When is the stress and the pressure greatest when trading before entering,
while a trade is on, or after exiting? Most traders would probably agree stress is
greatest while holding a position and less before a position is put on or after it
is taken off. This why many people reject paper trading as not realistic. There is
no way to simulate the amount of pressure you must undergo when holding a
position. Even if a loss is experienced after a trade, there is a least a sense of
resolution, which is an important way for most people to reduce stress.
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The entry decision is indeed important, but you can always walk and
wait for another time to play. You are not allowed this luxury when exiting and
must follow and sometimes suffer through the trade. Of course, some traders
can walk away and forget about their positions by having the brokerage firm
send them a margin call, but this is a passive decision to avoid pain and
responsibility as well as means of denial.
Many traders equate longer holding times for a trade as a way to
make more money in an attempt to squeeze the last penny of profit. We are
often brought up to learn to work long and hard to complete an endeavor.
Trading is different. Markets can make extreme moves quickly and often do
nothing. Market may move in exaggerated ways, but this is simply the
reflection of the participant in the market.
A good way to develop a trading method is to try to draw the
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A good way to develop a trading method is to try to draw the
movement of the market. You may find it difficult to simulate the jagged and
confusing moves of the market, but this will help to see how the market
actually moves.
The following is very brief review of the support / resistance concepts
discussed in this section.
1. A security’s price represents the fair market value as agreed between
buyers (bulls) and sellers (bears).
2. Changes in price are the result of changes in investor expectations of the
security’s future prices.
3. Support levels occur when the consensus is the price will not move lower.
4. Resistance levels occur when the consensus is the price will not move high.
5. The penetration of the support or resistance level indicates a change in
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5. The penetration of the support or resistance level indicates a change in
investor expectations and a shift in the supply/ demand lines.
6. Volume is useful in determining how strong the change of expectation
really is.
7. Trader’s remorse often follows the penetration of a support or resistance
level as prices retreat to the penetrated level.
8. Once penetrated, support levels often provide price resistance and vice
versa.
Bull and Bear markets (speculation philosophies)
Bull markets are fed by the increasing public entry into rising market until such time that
distribution of stock from strong to weak holders or “saturation” has been completed.
Therefore, as you are riding a long position in a bull market you should observe “everyone
pulling with you” , a general sweeping up of price and enthusiasm. Dickson Watts once
said “Public opinion is not to be ignored. A strong speculative current is for the time being
overwhelming and should be watched closely. The rule is to act cautiously with public
opinion: against it boldly”
A bear market is anathema to the average participant who wants to enter from the long
side. Possibly after entertaining this idea a few times, losses encourage the less stubborn
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side. Possibly after entertaining this idea a few times, losses encourage the less stubborn
ones to wait for a better time in which to operate. Therefore, in a bear market, you want
to see a general lack of enthusiasm, empty chairs, pale faces. You should be rowing all
alone as you enter short positions. There should be no general agreement and
enthusiasm toward the short side. Take not of how your correct position seem to the
swept up be everyone pulling with you and joining the party, as well as how your correct
bearish position are usually taken in lonelier times and conditions.
Left brain / right brain, Reality and Trading the Markets.
The starting point for success in trading the markets profitably is to perceive
market reality accurately. While this may sound obvious enough, most traders enter the
market place with preconception, biases and incorrect perceptions of market reality. They
soon learn, however, that the market is a ruthless taskmaster. You either line up with the
market’s reality, or you lose money.
The market’s consciousness, it seems, justifies itself in its harshness, as it
points out to traders that there are only three realities possible in the marketplace.
Markets can either move up, move down, or sideways. The simple recognition or,
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Markets can either move up, move down, or sideways. The simple recognition or,
perhaps, they not so simple recognition of which of these three realities is active at any
particular time is all that is necessary to trade successfully. All of our analyzes of the
markets are supposedly for the purpose of bringing our focus on the market reality so we
can trade profitably.
Increasingly, as technicians dominate the trading marketplace, we find a
predominant of left brain oriented traders. Our brain is dived into two hemispheres, the left
hemisphere (left brain) and the right hemisphere (right brain). On the surface, this
revelation appears to be a modern scientific discovery. But the truth, the 17th century,.
French theologian, philosopher, and scientist, Blasé Pascal, noted that men are either
mathematic, accounting and science-oriented or are geared toward art, theology, literature,
music, etc. This is effectively left brain and right brain activity respectively. The left brain is a
logical side of our minds, and the right brain is a creative, artistic side. Modern scientific
research has confirmed Pascal’s observations.
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research has confirmed Pascal’s observations.
The key to true success in the marketplace is to use both the left brain and right
brain in consonance. The is the success principle of synergy, the concept that the whole is
greater than the sum of its parts. One plus one does not equal two: one plus one equals
three. Indeed, there a sheath, a bundle of fibers called the corpuscallosum, which bridges
the area between the left brain and the right brain. The sheath physically expands and
strengthens as a person uses both sides of his brain.
Technicians are primarily left brain oriented. They are logical, analytical
and make widespread use of computers. But trading is an art, not science, and art is
right brain activity. True enough, an investor can hypothetically trade using only the
left brain. There are such animals are pure technicians. But pure technicians are like
mechanics. Then something gets out of sync that is unexplainable or unexpected, out
of routine, a mechanic will become flustered. In a like manner, a purely technical
trader is often lost when the market doesn’t go his preconceived way.
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trader is often lost when the market doesn’t go his preconceived way.
Thank YouThank You
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