Everyone knows the market data are fractal. You can look at a chart of daily data, look at a chart of weekly data, and the charts basically look the same if the scales are removed. In other words, the amplitude of the cyclic swings scale in direct proportion to the cycle period. I call this effect Spectral Dilation because longer cycle periods have larger swings. The Hurst Coefficient is directly related to the degree of dilation. Fibonccians use the Golden Spiral to show the dilation factor is 1.618. The exact degree of dilation is not important. The fact that dilation exists is beyond question. So, in round numbers, the spectrum amplitude increases 6 dB per octave of cycle period. This “1/F” phenomena seems to be almost...
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Articles
Long before we had computers to chart price, traders were making a living and doing it by watching price movement. One of the earliest types of charts was called point and figure charting (P&F). It started from traders who would tick off prices as they watched the trading. Eventually the ticks changed to X’s and O’s to note movement in price and even see trends.
Today, many chartists have switched to candlestick charting to make their decisions to buy or sell. A drawback to this style of charting is that many people are prone to exiting early from profitable trades when they see small pullbacks or corrections. An advantage of point and figure charting is that it allows the trader to see the trend and stay in the trend even through...
In my first article last week, I discussed the basics of creating the point and figure style of chart. In this article, I will build upon that knowledge and show more advanced methods for identifying patterns and projecting price movement. I want to mention that I tend to use this method of charting for longer term swing or position trades rather than intraday. Remember that time is not a factor when attempting to achieve targets in P&F and you will likely hold positions for some time. Patterns in P&F charts are a bit different than what you may be used to in candlestick charting. A triple top formation is not necessarily a reversal formation, it could be continuation. It will still offer a trading opportunity however. Look at the...
In my early days, I was always fascinated by the gap in the financial system between those who know what they are doing and profit, and those who don’t and lose money. It was really fascinating, big strong institutions made so much money and were correct most of the time. At the same time, retail traders and investors were equally wrong most of the time and lost tons of money. If I could just figure out how and why an institution made the trading decisions they did, maybe one day I could reap the same rewards was my thinking. I also spent time figuring out why retail traders performed so poorly, that was actually very easy to do. Without going into too much detail, I also realized that most retail traders and investors learned to...
Traders attempt to isolate and extract profit from trends. There are multiple ways to do this. No single indicator will punch your ticket to market riches, as trading involves other factors such as risk management and trading psychology as well. But certain indicators have stood the test of time and remain popular amongst trend traders. Here we provide general guidelines and prospective strategies are provided for each; use these or tweak them to create your own personal strategy.
Moving Averages
Moving averages "smooth" price data by creating a single flowing line. The line represents the average price over a period of time. Which moving average the trader decides to use is determined by the time frame on which he/she trades. For...
Futures’ trading has been around for hundreds of years. Even before Futures Exchanges existed trading was done by either a handshake or a forward contract. Producers and Processors of Commodities both have always needed a way to protect against price risk. The Producer, who owned the Commodity was concerned prices might drop before they delivered their product. Processors always worry that price might rise before they purchase the Commodity to process and later sell. Price risk is always a concern to these entities in the Futures markets.
These entities are comprised of Commercial traders who use a physical Commodity in their day to day business. Commercial traders do approximately 60% of the daily volume in the Futures markets...
Dark pools are an ominous-sounding term for private exchanges or forums for trading securities; unlike stock exchanges, dark pools are not accessible by the investing public. Also known as “dark pools of liquidity,” they are so named for their complete lack of transparency. Dark pools came about primarily to facilitate block trading by institutional investors, who did not wish to impact the markets with their large orders and consequently obtain adverse prices for their trades. While dark pools have been cast in a very unfavorable light in Michael Lewis’ bestseller “Flash Boys: A Wall Street Revolt,” the reality is that they do serve a purpose. However, their lack of transparency makes them vulnerable to potential conflicts of interest...
During our development years, we are taught/conditioned to think certain ways. Our years in grammar school, high school, and university are key belief system building years. One of the major conflicts during these years occurs when we are taught how to buy stocks and then how we are taught to buy and sell anything else in our life.
The basic principle of buying low and selling high or selling high and buying low is how we derive profit when buying and selling anything. When we buy cars or houses, we never offer what the seller is asking. We always offer a lower price and typically end up somewhere in the middle. Smart shoppers look for deals where they can buy what they are looking for at a lower price than others pay. We all typically...
Many traders use indicators to determine when to enter and exit trades. Most charting software includes dozens of different indicators that can be displayed on the charts. Popular indicators such as the Stochastic, and MACD, are frequently discussed when traders get together. I have listened to a number of these discussions; the interesting thing is that people typically explain why they use a particular indicator by citing a number of examples of when it has worked for them. When they do, another trader will typically say something like, ‘well it did not work for me, so I use the XYZ indicator which is much more reliable’. When I ask the second trader why his XYZ indicator is more reliable, the explanation usually involves a few more...
Fibonacci analysis leaped into the technical mainstream late in the 1990s. Futures traders had been quietly using this charting tool for several decades when Net-based, real-time software ported it to the equity markets. Its popularity exploded as at-home traders experimented with the arcane math and discovered its many virtues.
Leonardo of Pisa (c. 1170-1250), also known as Fibonacci, studied math among the Arabs and introduced algebra to Europe, as well as a numerical sequence that appears throughout nature. The core logic of his discovery is simple: beginning with 1+1, the sum of the last two numbers that precede it creates the next value in a Fibonacci progression.
So with this math in hand, the starting Fibonacci sequence looks...
Remember the article called Our Jack - the trader who should be a loser, but wasn’t and who should have been more profitable, but didn’t care a jot? Well, I bumped into Jack the other day which was a happy coincidence because I’d been reading a fierce argument on Trade2Win about whether Technical Analysis (TA) ‘worked’ or not. I knew Jack used TA, so I was anxious to hear his views.
"Works", laughed Jack, “It’s just a tool, you know, which just as much ‘works’ as Alexandros’s hammer and chisel did in sculpting the Venus de Milo. No, dear boy, it’s you and me that ‘works’ not the tool.”
I thought that sounded somewhat fanciful so I asked Jack how he used TA as a tool. “I use it to make assumptions about what price might do,” he said...
Introduction
In his 1978 book “New Concepts in Technical Trading Systems” J. Welles Wilder Jr. presented several methods and trading techniques which became classic. In that book Mr., Wilder introduced one of the most widely used technical oscillators today: The Relative Strength Index (RSI for short). Nowadays all kinds of technical analysis software offer the RSI as a build-in oscillator.
This is an enhanced and extended version of my article "Dissecting the RSI" which first appeared in the Technical Analyst publication and later in the Hispatrading magazine.
The actual rsi formula
According to Welles Wilder, the RSI of k periods is defined as:
where AUC(k) is the (2k-1) exponential moving average of UC and ADC(k) is the...
In part 1, I discussed two examples of how and why volume can show the changing face of supply and demand. When the order of supply and demand is change we will get a change in market direction, sometimes a significant change in trend or otherwise some degree of retracement of the prior move. We will now continue on from that discussion and show larger periods of transition which can lead to quite substantial turning points in the major trends. These can be easy to identify, but do require some patience. If you did not read the prior article it would now be worth reviewing that before going on.
Let’s firstly take a look at AWB Limited.
Since early 2006, the price of AWB had been in a downward spiral. The story that eventually came...
The power of correct volume analysis cannot be overlooked. Unfortunately the ability to read volume correctly is not readily discussed or freely available. Off-the-cuff remarks such as, “increased volume on advances is bullish and increased volume on declines is bearish” are bantered around but that’s as far as it goes. The correct use and application of volume can make for some quite startling insights into price action, especially when one is swing trading or leaning against support and resistance points or zones of confluence.
I set up my charts with a couple of extra volume measures. I use a normal volume histogram that can be found with almost all software packages. However, if there is a larger volume spike skewing the ability to...
Why Point & Figure Charts?
Point & Figure (P&F) charts are one of the simplest and clearest ways to determining the best time to buy and sell shares. The P&F system represents one of the oldest approaches to share market trading. This method takes the technical analysts approach while monitoring supply and demand for each share and the charts are designed for long-term trading so that the time and cost of trading shares is minimal.
How are Point & Figure Charts Constructed?
In P&F charts both axis are dependent on price rather than one being based on price and the other on date. The key unit in a P&F chart is the point, or unit of price. The point size may change in value along the y-axis to provide consistent and relative price...
What is price action?
Price action is the behavior of the price of a specific currency, commodity, stock, or other security over a specific period of time. All financial markets display the price movement of a security over varying periods of time on price charts. The price action on a price chart reflects the aggregate belief of all market participants about the value of a security’s price during the specified period of time reflected by the price chart.
Price action analysis allows you to see exactly what is happening in any given market at any given time because price action is the visual trail of the supply and demand situation of the given trading instrument over a specified period of time. A chart’s natural price action...
Let's begin by looking at the chart in figure 1. At this stage of the cycle, my main purpose in writing is to "alert" you to potential danger in the market. I attempt to do this by explaining the Long Wave cycle, sharing its history and accuracy, and then pointing out where we are in the cycle ... and the implications of being there. As a refresher, we are in the very late stages of a roughly 75 to 80 year cycle. In my observation, I refer to these cycles as "life cycles" because they last expectancy at the late stages of the cycle Kondratieff wrote about cycles, they lasted about 50 years which was the average 'life cycle' or life expectancy of that era. Currently, the average life expectancy is about 78 years. Is it a coincidence...
There is a saying in trading, "Look left to make the right decisions." We will do the same. To determine the major trend of our stock, we can start at the current price and look left until we find a major top or major bottom. If we come to a major bottom, then we are likely in an uptrend and should trade in that direction until the major bottom has been violated. Should a major top come first, then we would be looking for shorting opportunities until that top has been violated by higher prices.
Figure 1
Once we have found the major trend, we can enter into that trend once an intermediate or minor trend is signaled. In the above chart, we saw that from the right edge of the chart, we first found a minor top. Since this doesn't give...
In previous articles I have discussed swing highs and swing lows and also touched upon a different type of analysis called Gann Theory. This is a popular style of analysis that looks at patterns and repeatable price action based on time. After receiving some emails on the subject, I decided it best to examine Gann Theory a bit further in my articles. I am not going to go into the history of Gann Theory or give a biography of W.D. Gann. Instead, I will discuss some practical applications of some of his theory.
There are three trends applicable to any time frame which you are analyzing: Minor, Intermediate and Major. That also means that there are three types of swing highs and lows that correspond with these trends. Let's examine the...
Whilst I generally shudder when I recall my first naïve steps in the world of trading and the hoard of indicators I had on my charts, there is one indicator I feel stands apart from the rest. It’s not based on price and so represents an additional dimension on which to make decisions. I also think it is a very close relative of tape reading. In this article, we will look at some of the basics of using Cumulative Delta.
The Delta Theory Simplified
For a trade to occur in the markets, we need two things - a buyer and a seller. Price does not move down because there are more buyers than sellers. This is impossible, for every buyer there must be a seller. Price moves down when sellers are aggressive and buyers believe that sellers are...
Most traders are glued to indicators and oscillators and that's ok if you use them correctly. The issue is that many traders take each conventional buy and sell signal an indicator or oscillator produces and that can lead to trouble. For those new to trading, the following information should provide a good foundation of an understanding of how to properly use oscillators, if you're going to use them at all.
To illustrate my points, I will use the Commodity Channel Index (CCI). This is certainly not because CCI is my favorite oscillator; I don't use any indicators or oscillators in my trading at all. The goal in trading is to achieve the lowest risk, highest profit margin, and highest probability entry point into a trade. The only way...
One of the most common areas of confusion for the new trader is chart reading. For example, I had a trader who had been trading for years, but he did not know the difference between the two types of candlestick charts. As we were going through the technical analysis material, it was clear that he understood the basic candlestick concept, but nothing more.
The basic candlestick concept is in all of Steve Nison's books and similar books on conventional technical analysis. Yet the info presented there is somewhat single dimensional because it focuses only on a single trading session. For instance, every candle has four points which are well-known. They are the (H) high, (L) low, (O) open and (C) close. The range is the distance between...
Consistent low risk profits from trading and investing is a challenge many millions of people take on, yet only a select few are ever able to attain. The objective and mechanical rules for consistent low risk profits are very simple, yet the layers of illusion keep most from ever seeing what is real in trading and investing.
The two main forms of analysis in trading and investing are technical and fundamental analysis, and they are very real. However, thinking that mastering these two forms of "conventional" analysis will lead to consistent low risk trading and investing profits is an illusion second to none. The more an individual attempts to master these types of analysis, the more they may be layering complex, subjective illusions...
In my nearly 20 years in this industry, and almost five years of teaching, I have come to the not-so-startling conclusion that there are two types of traders in the world - those that make money and those that don't. I call these two groups the 90 percenters (the money losers) and the 10 percenters (the money makers). While these statistics on trading success are open to debate, they make it easier to demonstrate some common mistakes that unsuccessful traders habitually do.
A very common mistake that the 90 percenters do is change their reason for being in the trade. In every class I teach, this question/example is always asked, and without doubt, most of the students laugh and admit to making this very basic mistake.
When determining...
Many of us are already using support/resistance levels to locate possible turning points in the markets. We can identify these by looking at multiple time frame charts. Depending on your style of trading (investor, swing trader, day trader, etc), you could use two larger time frame charts to identify trends and support/resistance levels. For a day trader this could be perhaps a daily and a 30-minute chart. Once we have an idea of potential turning points from the bigger picture charts, we can step down to a smaller chart. This could be a 5-minute chart that we will use to manage our trade once we enter the position. Our next chart will be our action chart. This one will be the smallest time frame in our charts we look at. Perhaps a 1 or...
Over the coming week, the legion of earnings announcements will hit the market and will continue over the next few weeks. Being in the seasonally most volatile period of the year and hand in hand with some very interesting technical developments recently, we look to this period to bring in precious volatility and exciting price action.
The big event over the last several days in the financial markets is a fresh, multi-year breakout in Gold to new, All Time High. In our June 28th Newsletter as well as some recent discussions in the Evolution Trading Studio, we pointed out some Bullish price behavior and that the Gold market was beginning to "heat-up." It is gratifying to see the price follow through on our expectations, and the time has...
There are a lots of words thrown around in trading terminology but no one really understand truly what they mean when it comes down to trading and reading the text to truly understand what the author wants to say. This word "setup" in particular is an all-encompassing word. So some clarification is needed.
The setup means different things to different authors. In general, a setup is an area (price or indicator) where he would take action; this can be opening a position or closing one. The setup has to meet a number of criteria either from price, volume or any number of indicators being used. Setups can come at different times of the day or weeks. For a scalper, one setup may appear one after another, providing him many opportunities...
Like any other day traders, we are always looking for correlation in other markets or indicators to give us an edge. It's not easy when there are lots of data and techniques out there to choose from. Those that are out there simply work in one market but not in others while more work at one type of market condition and not in others and so on.
Scalping and day trading in particular has a peculiar type of behavior where everyone wants to know what the market will do in the next minute or so in order to catch a small tiny profit -- little by little to accumulate with highly leveraged trades. That said, every weapon helps to avoid losses and to add to the higher probability of success. Percentage is everything in this type of trading, the...
Of all the facets of trading, the first that a new trader must learn before he can engage the markets with any degree of confidence is the identification of low risk entries on a price chart. Notice that not just any entry will do, only those offering the biggest reward for the least amount of loss potential.
If you've ever read about or had the chance to chat with any successful trader, you will find one common thread: They all (without exception) have an edge based on low risk entries.
What defines a low risk entry? I define it as the following: The price level where a trader can expose the least amount of capital to prove whether his edge will work. I tell students to look for these areas by identifying "the line in the sand" or...
One of the challenges a new trader faces - amongst many others - is finding the optimal time interval for the candlesticks being plotted on their charts. The trading approach or style one implements will of course, have a big influence. For instance, a swing trader (one who intends on holding positions for days and weeks) will have little use for, let's say, a 144-tick chart. On the other hand, a day trader may find tick charts an essential part of his analysis.
The most commonly used time frames are 1, 3, and 5-minute candles. When deciding which period to utilize, one must keep in mind that the shorter the time frame, the noisier the chart. In other words, the shorter time frames generate many more signals; however, those signals...