Chart patterns capture the development of crowd emotion and provide potentially high
probability trade ideas with well-defined price targets and exact measures of risk
management. But patterns - by themselves - do not necessarily lead to consistent outcomes. The development of chart patterns only alerts traders that one particular type outcome is more likely to occur than another. As price moves towards a selected price point, the trader pays more attention to the stock, ready to place a buy order if prices move a few ticks above that level. In other words, chart patterns signal that trading potential and the probability to take action may exist.
Chart patterns are an invaluable aid to trading, but only when they point the way to high...
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Articles
There are a large number of traders who look at Point & Figure charts, with "look" being the operative word. That is, for most traders, once the market data gets represented as a P&F chart, they are at the end game. If the last x entered is in one box higher than x's in other columns, you've got a "buy signal".
Why is that so? Because someone eons ago said so. What's the proof? There is none; that's just the way it is. Now, don't go thinking that I am going to trash P&F. Au contraire. I'm going to show you why it's a great tool, how to test its efficacy and use it more effectively.
Before I really get started, let me explain that not everyone considers P&F charts as something only to look at. One extremely respected investment...
There are many ways to trade, but I like combining some fundamental, knowledge or perhaps some news, an understanding of technical analysis, a grasp of how markets behave and the ability to read sentiment as demonstrated in price action, buy/sell pressures and the actual trades printing off - the deals being done.
This may sound a little involved but is actually quite easy with a little knowledge, common sense and reading the market.
On September 1st I made a list of those stocks that were already benefiting from buying interest, (or selling pressure like some insurers), in the wake of the devastating Hurricane Katrina. Building material stocks, alternative energy stocks, insurers, specialist manufacturers of rescue products were of...
The Percent Range (%R) technical indicator was developed by renowned futures author and trader Larry Williams. This system attempts to measure overbought and oversold market conditions. The %R always falls between a value of 100 and 0. There are two horizontal lines in the study that represent the 20% and 80% overbought and oversold levels.
In his original work, Williams' method focused on 10 trading days to determine a market's trading range. Once the 10-day trading range was determined, he calculated where the current day's closing price fell within that range.
The %R study is similar to the Stochastic indicator, except that the Stochastic has internal smoothing and that the %R is plotted on an upside-down scale, with 0 at the top...
Moving averages and their crossovers or crossovers with indicators are widely used in trading and
technical analysis. Shorter averages above longer averages or closing prices above them suggest an uptrend. An indicator below its moving average is a sign of a downtrend. It would be beneficial for a
trader to develop a technique to predict the closing price which will generate a crossover of averages as described above. This article introduces such an anticipation technique, based on moving averages, to determine the future closing price for which a
trend change is possible.
Let's look at figure 1 representing the German
DAX index. Subchart 1 contains two simple moving averages: 5- and 10-day, SMA5 and SMA10. It is well-known among...
The following is an interview of Michael Covel by Trade2Win Content Editor John Forman. Michael is the author of the highly regarded book Trend Following, which makes a very strong case for the value of trend trading methods.
At the very beginning of your book you differentiate between traders and investors. Why is trading better than investing?
Thinking like a trader is the only way to profit in today's markets.
Investors buy and hold. Hoping that the market will continually move up, they buy long with no exit plan. They do not manage risk so they give up control. Traders, on the other hand, do not care whether the market goes up or down. They buy long or sell short and they always have an exit plan. They have predefined exit...
The Proof is in the Trading
In my recent TASC article, "The Hunt for Superior Signals - Two Moving Function Hybrids" (September 2005), I recommended that the Moving Slope Rate of Change ("MSROC") be a part of every trader and researcher's toolbox. A quick look at this indicator demonstrates its value:
As you can see, the moving slope rate of change is remarkably smooth. Instead of using just a change in price to calculate slope (as with rate of change or "ROC"), we use the slope of a least-squares line to calculate MSROC. [Instructions for MSROC calculation are at the end of the article.] Least-squares lines are notoriously smooth. This smoothness is a major asset, as it minimizes the need for further qualification or...
I use chart patterns in my trading because they give me tips on how a stock will perform. Sometimes the tip turns out to be a lie, but that's okay. I use stops to limit losses (don't you?). When the tips are accurate, I clean up. This article discusses two such tips: partial declines and partial rises. They forecast the breakout direction from a chart pattern.
When I wrote this in January 2003, we were still in a bear market, and so I concentrated on partial declines -- they predict upward breakouts. What does a partial decline look like? Consider Figure 1, a chart of a broadening bottom. That's my term for what's usually called a broadening top, but I found performance differences between tops and bottoms. For the latest statistical...
Just a mere decade ago, most investors had to depend heavily on the Wall Street "professionals". Research and technical investment information was difficult to access other than through the brokerage firms. Fortunately, the advent of internet investing has completely altered the limitations that most investors had to overcome; getting information to do their own analysis.
The past decade has witnessed tremendous advances in the utilization of computer generated technical analysis. The average investor now has the capability to create any investment trading program that they can imagine. The abilities of computers have been able to greatly enhance the performance of successful investment methods. The candlestick trading method has been...
Support and resistance levels on bar charts are a major component in the study of technical analysis. Many traders, including myself, use support and resistance levels to identify entry and exit points when trading markets. When determining support and resistance levels on charts, one should not overlook the key Fibonacci percentage "retracement" levels. I will detail specific Fibonacci percentages in this feature, but first I think it's important to examine how those numbers were derived, and by whom.
Leonardo Fibonacci da Pisa was a famous 13th century mathematician. He helped introduce European countries to the decimal system, including the positioning of zero as the first digit in the number scale. Fibonacci also discovered a...
Systematic or discretionary? It's an important question on the way to trading success. Most traders eventually end up belonging to either one or the other philosophical camp. In this article, Harald Weygand introduces an approach that most likely will interest the discretionary traders among our readers.
Traders and chartists can be categorised in various ways. Among the possibilities are system traders and intuitive chart readers. System traders develop a comprehensive set of rules, weighing statistics, utilising vast arrays of indicators and weaving intermarket correlations. Finally they combine several systems after extensive back testing. The computer, not the person, screens the market applying the system. System traders with...
In this article we present a simple trading system that we developed based on the concepts outlined in The 10 Power Principles of Successful Trading Systems.
Step 1: Selecting a market and timeframe
One of the most popular markets these days is the e-mini S&P, and that's not without a reason: It's a 500 company index. One of the largest in the world and that means you have excellent and consistent liquidity, superb volatility, tremendous leverage and no uptick rule. It's a truly bi-directional market that shorts just as easily and safely as going long. It's a fully electronic market, offering all the advantages of electronic contracts.
We decide to trade the market intraday, i.e. we will enter and exit a trade on the same day, because...
The Ichimoku Kinkou-Hyo is a technical study that was developed by a Tokyo newspaper writer, Goichi Hosoda, before World War II as a self-standing forecasting method for all financial markets. The name is a bit of a mouth-full, so many traders only call it Ichimoku, but in loose translation the full name means "One-look at the equilibrium prices." The name originated with Hosoda's pen name "Ichimoku Sanjin," which means a glance of a mountain man. This technical study consists of gauging midpoints of historical highs and lows at different lengths of time and several time lengths matched those used in the MACD's moving averages. Ichimoku provides another method of analyzing trends and brings additional points to retracement/extension...
My personal trading style is based on a method described in the 1950s by a veteran floor trader named George Douglass Taylor. The "Taylor Trading Technique" is a short-term method for trading daily price movements that relies entirely on odds and percentages. It is a method as opposed to a system. Very few people can blindly follow a system, though many find it easier to be discretionary in a systematic way.
Because this short-term swing technique generates frequent trades, it is important to know the correct plays, when to lock in profits, and when to seek the true trend. Taking a loss is merely playing for better position. One trades strictly for probable future results, not for what the market might do.
To know the correct play is...
Pivot zones can be very revealing to traders. J.T. Jackson has conducted extensive statistical research on a variety of US markets. His research has shown that traders can use daily market action to determine specific probabilities for price to trade within a certain area, and also to highlight support and resistance areas for the following day. These statistics can help enhance the quality of trading signals and (increase the "hit rate" - or number of winning trades). Additionally, these statistics offer insight into the current trend of the market and can signal the underlying strength of the trend. In the following article, this concept is applied to the Dax future, using end-of-day data for the period from 1998 to 2003.
The concept...
Trend analysis is a complex process that goes beyond trend lines, channel lines and retracements. An important aspect of this type of analysis is the identification of patterns that reinforce trends and of formations that signal the reversal of trends.
Chart formations that show the extension of trends are called continuation patterns. They consist of pauses within trends and they are generated by traders who realize some or all of their profit typically ahead of significant releases of economic data or strong technical level. These behavioral patterns translate into chart formations and tend to look like neutral moves. However, they can either slope against the original trend or, more rarely, slope in the direction of the trend...
One of the great joys of having invented an analytical technique such as Bollinger Bands (see desc. below) is seeing what other people do with it. While there are many ways to use Bollinger Bands, following are a few rules that serve as a good beginning point.
Bollinger Bands provide a relative definition of high and low.
</span />That relative definition can be used to compare price action and indicator action to arrive at rigorous buy and sell decisions.
Appropriate indicators can be derived from momentum, volume, sentiment, open interest, inter-market data, etc.
Volatility and trend have already been deployed in the construction of Bollinger Bands, so their use for confirmation of price action is not recommended.
The indicators...
Understanding the way volume affects the market is key to successful trading, as price signals won’t always tell the whole story. Professional traders have one advantage over the private trader: they can read volume. Not only that but they can – and will – hide volume from you to give themselves an advantage. Large banks and brokerage houses claim that to make a market, they need an edge over the rest of the crowd. Large orders that are processed do not appear on the tape, as they would show up on the radar of other professional traders who would then change their bid/offers or pull orders.
The professional trader uses price and volume, and usually no other indicator, to read the true balance of supply and demand, as Richard Wyckoff...
There has long been debate about price data and what kind of data are most appropriate for market analysis and reference. Much of that discussion revolves around traded price vs. indicative price. The former is the actual price at which a transaction is executed, while the latter uses the bid/offer as the basis for price series.
In the stock market, and most exchange-based markets, much of what is presented to the public is the last traded price. When one looks at the stock tables in the paper, or at the quotes presented on many screens, that is what they see. In many cases, this presents a fair representation of the market. The widely known and understood exception is thinly traded markets where the instrument in question (stock...
Elliot Wave theory was initiated in the 1930s by Ralph Nelson Elliot. His basic theory was that crowd behaviour, the basis for market activity, tends to operate in recognisable phases, and as such, price movements can be anticipated to some degree.
During his early studies, using Stock Market data for his analysis, Elliot isolated thirteen examples of patterns - or waves - that are repetitive in their form only, and that the time and amplitude of the waves need not necessarily be repetitive. To demonstrate what he learned, Elliot named, defined and illustrated each pattern, showing how several small patterns could be brought together to create one larger example of the same form, which would in turn merge into another, larger version...
Technical analysis can be defined as the study of past price behavior in an effort to determine patterns and trends that are believed to be predictable of the future. At the core of this school of thought is the assumption that human behavior is repetitive in nature. We all recognize that, although human behavior patterns may have recurrent tendencies, they do not normally express themselves in the same exact, mechanical manner each time. Even with this qualification in mind, technical analysis is capable of providing us with the ability to make price forecasts characterized with an improved probability of outcome. It can help us achieve the "edge" required in our pursuit of long-term consistent success.
A wide array of technical...
What is Market Profile?
Everyone has seen conventional volume displayed as a vertical bar underneath the price bar. But the most important information that this cumulative tally of total volume omits to tell you is at what individual prices the trades that make up this volume were traded at. Knowing what prices traded the biggest volume can give you a significant edge with regards to understanding what price levels traders see as significant now, and likely will again if market price trades back in the same area.
In its simplest form,
Market Profile is a graphical organisation of price, volume and time information. Market Profile displays price on the vertical axis and volume/time on the horizontal axis. In the conventional legacy...
Anyone who has studied point and figure charting will be aware of Kermit Zieg, who has published many articles and books on the subject. In this interview, George Hallmey met Kermit in his home near Washington and discussed with him his trading style.
In the interview, Kermit explains
Some of the history of point and figure charting.
The advantages of point and figure over other charting methods.
How he combines point and figure charting with an options strategy to swing trade US stocks.
How he selects stocks to trade.
The interview is provided in streaming video format below. If you have trouble viewing it, please download the interview instead.
George met Kermit as part of a series of 18 in depth inteviews with successful...
Volume patterns are much harder to interpret than price patterns. The difficulty stems from the clandestine strategies of big market players. These folks tend to move slowly and cover their tracks within the broad noise of daily movement.
While price bars tell many tales in a vacuum, volume has little or no meaning without underlying price movement. But don't abandon your volume study just yet. It still adds power to prediction when you apply it judiciously.
The importance of volume depends on its location within the overall pattern. For example, heavy volume through a broken trend line suggests the start of a new trend, while the same activity after a long rally or decline predicts a reversal. This counterintuitive logic confuses...
In this streaming video, Phil provides the outline of a trading strategy he uses regularly for trading the forex market.
In this example, he demonstrates a simple break-out strategy on the Eur/JPY pair using 15 minute charts, but his interpretation of the charts, using price action and candlestick analysis, can be applied to many other price patterns across the currency pairs.
He details his precise method for identifying and trading this set-up, including:
when the set-up is most likely to appear
why you should avoid taking the trade on the first break-out
where to place a stop-loss and why you should resist the temptation to move this to break-even at the first opportunity
how candlestick analysis can be used to support the...
In the first and second parts of this series I looked at some of the various elements you will need to master if you are to have a chance of succeeding at trading. In this final article, I will run through a strategy I have used in the past to illustrate some of the concepts previously discussed.
Basic Strategy
The UK stock markets tend to be range-bound, especially on a short-term basis. This strategy looks to buy low and sell high, so it is swing based. It uses the basics of support, resistance and trendlines combined with money management as I've discussed earlier.
The Rules:
Look for a test of support or resistance or a trendline that fails to break.
If it tests support and bounces up, then go long and place the stop just...
Steve Nison is a busy man. Ever since his first book "Japanese Candlestick Charting Techniques" was published in 1991 he has run his own advisory business, which gives trade recommendations to institutional investors and hedge funds. He is also one of the most respected teachers on trading the financial markets, and his seminars are always a sell-out wherever he goes. Since the publication of his first book he has written another two best sellers on
Candlestick analysis. His first book is affectionately known as the "modern-day bible" of trading.
Tom Hougaard caught up with Steve Nison during a quiet day in the market.
Tom Hougaard: How did it all start?
Steve Nison: 30 years ago I worked for a commodity broker and advisory service...
In part 1 of this article, I looked at some of the basic elements of trading, including chart reading and money management. In this second part, I will consider some other essential issues, such as the need for discipline in trading and the importance of practice and planning.
The Importance of Discipline
I have previously mentioned why it is important that you DON'T move a stop-loss to increase risk, and I wanted to go through the "what if" scenario of letting a stop run.
We'll take this example from Barclays from January 2003.
Here we have a nice double (or even triple) bottom on support, and a clean bounce up. You take this long entry with a tight manual stop at 360.
This is what happens over the days to come...
Brilliant...
Many traders will rather play a pullback than a breakout of the highs. In fact some research by Larry Connors in the US showed that on the
S&P in a ten year period from 1993 if you had bought 10-day-high breakouts and exited when prices crossed the 10 day moving average you would have lost over 312 points.
However, during the same time if you had bought every 10-day-low and exited when price crossed its 10 period moving average then you would have made over 830 points. Many trade the breakout of the highs but as Connors says "In reality it appears to be very wrong."
Although playing breakouts can be said by others to be a valid tool in a trader's tool kit, many often find that what they perceive as a breakout is actually a swing...
Today is Monday December 27th and the US is open. Many would say, "oh, what's the point, the action will be thin and the pickings, if any, hard." Well, in my experience, that approach is mistaken. 36 minutes before the market even opened today, I read this story:
"Amazon.com, Inc. (AMZN) said Monday the 2004 Holiday season was its "best ever", with the online retailer setting a record of more than 2.8 million units ordered in a single-day, or 32 items per second worldwide. The Seattle-based company said consumer electronics sales was its largest sales category."
Again many would say, "oh, the news will be in the price so it's pointless" This is also just plain wrong a lot of the time.
I have traded AMZN three times today, all...