Price Charts: Price charts represent the footprints of money, ie. peoples’ buy and sell decisions. Areas on any price chart where you see lots of trading activity suggests relative equilibrium in supply and demand. Areas on the price chart where you see little activity suggests supply and demand are out of balance; this is where price turns.
Time Frames: You can look at a price chart in any time frame you want these days. The purpose of looking at multiple time frames is the same as why a Doctor takes multiple X-rays when looking at a broken arm, for example. The 2 or 3 X-rays will all look different, but it’s still the same arm. Looking at multiple time frames helps us figure out where the real supply/demand imbalance is in a market...
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Articles
Trading systems are usually thought of as complex computer programs requiring massive amounts of data to calculate the best entry and exit parameters. But in trading, often the best solution is the simplest. In fact, one of the best known trading systems doesn't even require a computer. Read on as we take a look at the weekly rule system and show you how this simple system can help you profit from a trade.
Trend following is a well-known concept underlying many successful trading systems. Probably the first such system was the weekly rule devised by Richard Donchian. Test results for this system were published as early as 1970, and it was found to be the most profitable system then known.
Donchian was called the "father of modern...
S&P 500 index futures surged in popularity in the past decade after the SEC’s pattern day trading rule triggered an exodus of retail capital out of equities and into Globex, CME’s 24-hour electronic trading platform. Volume hit a historic peak in 2011, underpinned by a worldwide transition in risk from individual securities to broad macro instruments, driven by an explosion in ultra-modern derivative products. Along with the Nasdaq 100 and Russell 2000 Index futures, the threesome carve reliable road maps for active traders seeking intraday buy and sell signals.Futures trading in the hours between New York’s U.S. equity close and the next morning’s open captures market-moving events in Asian and European bourses. In turn, these...
The idea of volatility makes many traders feel jittery and uncertain. Volatility can make traders:
1) Too frightened to place a trade
2) Panic and close a trade early
The irony is that in times of high volatility, profit targets have the best chance of being hit. Often after being frightened out of a trade, the trader will quote ‘Sod’s law’ (Murphy’s Law in America) when the market turns around and carries on in the originally forecasted direction.
The pattern of volatility
Volatility ebbs and flows in the market. The basic pattern is that the market moves from periods of high volatility to periods of low volatility. Sharp bursts of activity up or down are followed by periods of relative calm. It may be that the trend has...
Indicators, such as moving averages and Bollinger Bands, are mathematically-based technical analysis tools that traders and investors use to analyze the past and predict future price trends and patterns. Where fundamentalists may track economic reports and annual reports, technical traders rely on indicators to help interpret the market. The goal in using indicators is to identify trading opportunities. For example, a moving average crossover often predicts a trend change. In this instance, applying the moving average indicator to a price chart allows traders to identify areas where the trend may change. Figure 1 shows an example of a price chart with a 20-period moving average.
Fig1: QQQQ with a 20-period moving average. Source...
When technical tools are used judiciously, their value cannot be overstated. And every time you apply a tool of technical analysis, you are calculating a consensus of bullishness or bearishness among all market participants.
For example, the moving average convergence-divergence (MACD) is simply a tool that measures shifts in consensus from bullishness to bearishness, and vice versa. Extending the basic MACD to a deeper level, we find the MACD-histogram, which is actually a tool for determining the difference between long-term and short-term consensus of value. The measure tracks the difference between the fast MACD line (short-term consensus) and the slow signal line (longer-term consensus).
The principles of market psychology...
If moving averages are hurting your trading or investing performance and getting you below average results, it’s because that’s exactly what they are designed to do. They are a very popular tool for novice retail traders and investors yet hardly used or thought about by the professional trader/investor. Helping you understand this is the focus of this piece.
Instead of going through many charts to find the perfect picture to use as an example to illustrate my logic, I like to use real trades as examples from our live trading rooms.
Below is a trade I took in the NASDAQ futures. We identified 2 strong supply zones where banks were selling that morning as seen on the chart below. When price rallied and reached the supply zones, I...
Swiss market technicians Etienne Botes and Douglas Siepman introduced the vortex indicator in the January 2010 issue of the magazine, “Technical Analysis of Stocks and Commodities.” Since then, the new technical indicator has gained traction as a reliable trend following indicator that can produce surprisingly accurate buy and sell signals. However, it will take a few more years of market testing and experience to fully evaluate the vortex indicator’s potential.
What is the Vortex Indicator?
The vortex indicator plots two oscillating lines, one to identify positive trend movement and the other to identify negative price movement. Crosses between the lines trigger buy and sell signals that are designed to capture the most dynamic...
Volume is a measure of how much of a given financial asset has been traded in a given period of time. It is a very powerful tool but is often overlooked because it is such a simple indicator. Volume information can be found just about anywhere, but few traders or investors know how to use this information to increase their profits and minimize risk.
For every buyer, there needs to be someone who sold them the shares they bought, just as there must be a buyer in order for a seller to get rid of his or her shares. This battle between buyers and sellers for the best price in all different time frames creates movement while longer-term technical and fundamental factors play out. Using volume to analyze stocks (or any financial asset) can...
William Delbert Gann is perhaps the most mysterious of all the famous traders in history. Known for using geometry, astrology and ancient mathematics to predict events in the financial markets and even historical events, Gann's trading strategies are still widely used today, 62 years after his death in 1955. Gann disciples claim he was one of the most successful stock and commodity traders who ever lived, while critics argue there's no concrete proof that he ever made a great fortune from speculation. Was Gann really a great trader, or was he merely a ‘guru’ who profited from selling books and running seminars?
Early Life
W.D. Gann was born in 1878 in Lufkin, Texas, the first of 11 children in an impoverished cotton farming family. He...
To engage in momentum trading, you must have the mental focus to remain steadfast when things are going your way and to wait when targets are yet to be reached. Momentum trading requires a massive display of discipline, a rare personality attribute that makes short-term momentum trading one of the more difficult means of making a profit. Let's look at a few techniques that can aid in establishing a personal system for success in momentum trading.
Techniques for Entry
The impulse system, a system designed by Dr. Alexander Elder for identifying appropriate entry points for trading on momentum, uses one indicator to measure market inertia and another to measure market momentum. To identify market inertia, you can use an exponential moving...
MACD divergence is discussed in most trading books and frequently cited as the reason for trend reversals, or as to why a trend could reverse. In hindsight divergence looks great; many examples can be found where a reversal was preceded by MACD divergence. Look closely though, and you'll find that many reverses aren't preceded by divergence, and often divergence doesn't result in a reversal at all. So before assuming divergence is a reliable tool to use in your trading, let's dig deeper into what MACD divergence is, what causes it, and how to improve the use of divergence.
What is Indicator Divergence?
Indicator divergence is when an oscillator or momentum indicator, such as the Moving Average Convergence Divergence (MACD) indicator...
When it comes to investing, there is no shortage of theories on what makes the markets tick or what a particular market move means. The two largest factions on Wall Street are split along theoretical lines into adherents to an efficient market theory and those who believe the market can be beat. Although this is a fundamental split, many other theories attempt to explain and influence the market - and the actions of investors in the markets. In this article, we will look at some common (and uncommon) financial theories.
Efficient Market Hypothesis
Very few people are neutral on efficient market hypothesis (EMH). You either believe in it and adhere to passive, broad market investing strategies, or you detest it and focus on picking...
I have always found it very interesting, how many different ways people look at charts and all the different pieces of information people try to attain from a price chart. How could so many people look at the same chart and have so many different opinions? Fascinating.
With all the different schools of thought on money, markets, charts and so on, what should we really be looking for on a price chart? I mean, conventional technical analysis books have hundreds of pages in them with information on so many indicators, oscillators, chart patterns and more. With all this, there must be some edge to be gathered, right? I speak with thousands of traders around the world and everyone is trying to make something “work”. This is where I see most...
Technical indicators, especially those specifying a particular performance level between two extreme values, help investors identify and measure market trends.
Identifying Extremes
A recurring theme in the analysis of stock price performance is the concept of exhaustion, which applies to advances as well as declines. A period of exhaustion exists when the price of an asset moves in one direction as far as the market will allow. At that point, the number of interested buyers diminishes, and the sellers direct the price movement, or vice versa. Exhaustion indicates a trend reversal. Exhaustion gaps appear on stock price charts, indicating a stock’s final attempt to reach a new high with an abrupt move on high trading volume. They signal...
In 1983, legendary commodity traders Richard Dennis and William Eckhardt held the turtle trading experiment to prove that anyone could be taught to trade. Using his own money and trading novices, how did the experiment fare?
The Turtle Experiment
By the early 1980s, Dennis was widely recognized in the trading world as an overwhelming success. He had turned an initial stake of less than $5,000 into more than $100 million. He and his partner, Eckhardt, had frequent discussions about their success. Dennis believed anyone could be taught to trade the futures markets, while Eckhardt countered that Dennis had a special gift that allowed him to profit from trading.
The experiment was set up by Dennis to finally settle this debate. Dennis...
Trading breakouts or pullbacks, which is better? This is a hotly contested debate, even among professional traders – but it shouldn’t be!
As a quick reminder:
- Buying a breakout is buying when the price is moving up and above an area of resistance.
- Buying a pullback is buying when the price is moving down towards support, typically sometime after a breakout higher
- Vice versa for selling.
There are advantages and disadvantages to both of these approaches. As traders we need to fully UNDERSTAND and ACCEPT the range of possible outcomes from our strategy. Only then can we feel comfortable executing it again and again over time.
Let’s look at an example.
Chart 1: USDJPY 1hr candlestick chart
In Chart 1, a trader is analysing...
Trading financial instruments as a full-time professional trader requires a vast knowledge of the financial industry. Those who are trading the financial markets over a long period of time with consistent profit have probably gone through many difficult stages in their trading career. There are many different types of trading strategy available and professional traders have developed their preferred strategy based on their own personal traits. In this article, we will discuss an excellent trading strategy for use in the forex market. The Fibonacci trading strategy has been used in forex for a long period of time and many experts consider the Fibonacci retracement tools as their favorite. In the eyes of many professionals, the financial...
Among Wall Street researchers, there are two main approaches to stock picking: fundamental analysis and technical analysis. Fundamental analysis subscribes to the belief that the shares of companies will reflect changes in forward progress and financial health. In contrast, technical analysis concentrates on stock price action and how such changes reflect shifts in investor psychology. Technical analysis is totally indifferent to underlying company developments.
Therein lies its fatal flaw. As one might suspect, there are different approaches to technical analysis and there is what purports to be an academic treatise on the subject: Technical Analysis of Stock Trends, the ninth edition of which devotes nearly 800 pages to the subject...
If you have been following the NASDAQ index, you know that prices have been making all-time market highs lately, even though the other indexes have been stuck in a range. There are a lot of stocks that are also at an all-time market high. As traders, we know that we should participate in the dominant trend but base our exits on supply and demand zones. The biggest question when a market high has been hit becomes: where are we supposed to exit when we do not have a supply zone to mark the top?
There are a couple of technical tools that we can use to identify probable targets for our trades, both intraday and on swing trades. It is important to note that none of these are as strong as actual supply zones but they do seem to offer higher...
Technical indicators have long been misused by traders and investors alike. Many learn the traditional style of using the indicators and then try to massage the data to fit certain strategies of trading only to have them fail when the market conditions change. Others simply do not understand their use properly and misinterpret the data.
As a Chartered Market Technician and member for the Market Technician’s Association, I was required to gain a deep understanding of how most indicators and oscillators work. I was fortunate enough to learn some special tricks for using these indicators so that they work much better than originally intended, in any market!
One such modified indicator is the popular Relative Strength Index (RSI). I...
In all forms of long-term investing and short-term trading, deciding the appropriate time to exit a position is just as important as determining the best time to enter into your position. Buying (or selling, in the case of a short position) is a relatively less emotional action than selling (or buying, in the case of a short position). When it comes time to exit the position your profits are staring you directly in the face, but perhaps you are tempted to ride the tide a little longer, or in the unthinkable case of paper losses, your heart tells you to hold tight, to wait until your losses reverse
But such emotional responses are hardly the best means by which to make your selling (or buying) decisions. They are unscientific and...
Trading requires reference points (support and resistance), which are used to determine when to enter the market, place stops and take profits. However, many beginning traders divert too much attention to technical indicators such as moving average convergence divergence (MACD) and relative strength index (RSI) (to name a few) and fail to identify a point that defines risk. Unknown risk can lead to margin calls, but calculated risk significantly improves the odds of success over the long haul.
One tool that actually provides potential support and resistance and helps minimize risk is the pivot point and its derivatives. In this article, we'll argue why a combination of pivot points and traditional technical tools is far more powerful...
Point-and-figure (P&F) charts have been a part of the technician's toolbox for more than a century. They were used by Charles Dow in the late 1800s and Victor deVilliers published the first detailed explanation of this technique in 1933 in his book, "The Point & Figure Method of Anticipating Stock Price Movements". P&F charts track only price changes and ignore time. Proponents of this technique believe that focusing solely on price changes eliminates day-to-day market noise. By ignoring smaller movements, traders believe that it should be easier to identify significant support and resistance levels. In this article we'll introduce you to several popular P&F patterns that may be useful in identifying potential breakouts.
Using a...
Can the market predict a recession? A “yes” answer might seem tautological on the surface, but isn’t. A recession is technically a reduction in economic activity, rather than in stock prices. Rephrasing the question a little, is it possible to have, whether in the long term or the short, an environment of low stock prices and high real income (along with high industrial production and employment)? To the first part, certainly not if the population at large is relying on stock appreciation for its remuneration. But given that wages and salaries still make up the bulk of most people’s personal income, a bear market shouldn’t affect said income by all that much.
Information, Not Opinions
The data isn’t hard to plot. Sustained reduction of...
The Ichimoku Kinko Hyo or equilibrium chart isolates higher probability trades in the forex market. It is new to the mainstream, but has been rising incrementally in popularity among novice and experienced traders. More known for its applications in the futures and equities forums, the Ichimoku displays a clearer picture because it shows more data points, which provide a more reliable price action. The application offers multiple tests and combines three indicators into one chart, allowing the trader to make the most informed decision. Learn how the Ichimoku works and how to add it to your own trading routine.
Getting to Know Ichimoku
Before a trader can trade effectively on the chart, a basic understanding of the components that make...
Predicting the future is impossible, right? If he were around today, W.D. Gann would beg to differ. His first prophecy is believed to have happened during World War I when he predicted the Nov. 9, 1918, abdication of the Kaiser and the end of the war. Then in 1927, he wrote a book entitled "Tunnel Through The Air," which many believe predicted the Japanese attack on Pearl Harbor, and the air war between the two countries.
His financial predictions were perhaps even more profound. In early 1929, he predicted that the markets would probably continue to rally on speculation and hit new highs… until early April. In his publication, The Supply and Demand Letter, he delivered daily financial forecasts focusing on both the stock and commodity...
In September 2014, we introduced OMI (Option Mobility Index), an analytical tool measuring trending potential of the S&P500 index, which supplemented the ODI (Option Deviation Index) concept published in 2005. It didn’t take long to prove its usefulness, as the market ended its over 5-year bullish run and turned into a sideways moving phase, which for this index is very common.
Traditional trading using futures contracts for low-trending market conditions is a challenging task, as even though the market may stay within a certain range, its turning points usually flip through various levels within the channel. But for any market condition there is always an options strategy which may be applied.
As trading conditions get tougher...
How many times have you heard someone say, “Trading is an art, not a science.”? I have heard that for years and years and I have to say, it is probably the most ridiculous statement I have heard when it comes to trading and, as we all know, there are some pretty ridiculous statements in the trading world. There is absolutely nothing artistic about trading at all. This is, 100%, a numbers game… How much willing demand and supply there is at each price level is what determines price turns and movement. It’s the buy orders vs. the sell orders and, again, it all comes down to the numbers on both sides of that equation and nothing else. To think Picasso or Van Gough should be brought into this discussion is rather amusing if you think about...
When shorting equities, one often faces the challenge of distinguishing between a topping formation and a change in trend. Many successful short sellers will try to focus their efforts by looking at clues that are offered from the schools of technical analysis and fundamental analysis. Read on to find out how studying these different methods a trader can gain confidence in shorting the market
Technical Analysis
Since the equities markets are primarily dominated by long traders, short traders try to prey on the weak longs to trigger breaks and start downtrends. They try to put enough pressure on the market to create situations where the weaker long gets out because of the fear of giving back gains. It is the job of the short seller to...