Greys Saturday Lecture transcript (part 1)

The Whole purpose of this lecture is to explain the role of technical analysis in trading , its effectiveness and its limitation. Most of the concepts in here are well researched and I only point at them and will not expand as one does not really have to know loads of abstract stuff to beat the market. You do not have to be a rocket scientist to understand the market. Technical analysis is a new subject to our community and we are all learning from each other. Please do not feel I am an expert at this field because I am not. I doubt if there is any expert at all when it comes to mass behaviour..

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Those of you who wish a copy of this lecture please send me an email [email protected].

This is our agenda for this lecture.

1) What is technical analysis?
2) Market Theory
3) Ways of analysing the market
4) Technical indicators and their roles
5) Market modes (trending , trading or combination)
6) Multi time frame analysis
7) How to trade DOW
8) How to trade US stocks
9) How to short term trade ( buy now sell 5 to 10 days after)
10) Coffee break and questions from iraj
11) Confirmation principle ( Mike’s lecture)
12) Questions and answers for Mike
13) Reward/risk
14) NEWS and SPIKES
15) Tips
16) Only fools and horses (How the market cleverly out perform most traders)

Unfortunately I have to go to Scotland shortly after the lecture and I can not stay with you all.. I try to answer all your questions as much as I can..Also all EXCEL Macro and the set ups for IRD to trade the DOW as well as the lecture note will be posted on Monday


1) What is technical analysis :-

Technical analysis is the study of supply and demand in the market (Stock market, fruit market, meat market, any market where prices are MARKED by dealers).
When we technically analyse the market we try to make sure we buy cheap to sell more. All in all we technically analyse the market not to be conned by other participant and the market makers…


2) Market theory

1) Efficient market theory and its extension Random theory


Market is claimed to be efficient or random. Let me explain this. Have you ever noticed how the balls in national lottery on Saturdays move up down left right in various direction . This is an example of random movement. No predictable direction what so ever. Those who believe in random market believe prices move randomly and no one can predict the future price movements unless he has a crystal ball. Since one does not have the crystal ball any profit made from the market is pure accident. The supporters of this theory do not believe in TA or FA and argue with this simple example . Get your self a piece of paper and a coin and toss it up. Every time you get a head draw a cross above the previous point and tail below the previous. keep tossing up until you get your self a beautiful chart. Once you have that chart, you can easily find many different TECHNICAL PATTERNS such as head and shoulder, ascending triangles and loads more. According to their supporters all FA and TA fund managers are wasting their client’s time as the market is nothing but a toss up and since you have to pay commission to play the game the odds are against you and you ALL lose. No matter what. They call this as efficient market or a big Giant Casino as Nick Leeson (Rouge trader ) puts it.


2) Chaotic Market.

Ok market is hard to beat but not impossible . This is what supporters of the chaotic theory believe. They reckon the market moves in chaotic but predictable manner.
For example , get your self a balloon and throw it in the air. One thing is for sure, the balloon moves in a very complicated manner but we at least know the balloon moves in the direction of throw initially. Hey ,,, the guy has a point in here….. Technicians fall into this group. We might not be able to predict what happens to the balloon 2 minutes after the throw but surely the first few seconds we know where the balloon is heading..

I like to give you a final example:- Get your self a bag and throw 3 red 3 white balls in it, draw one ball out, What are the chances of having a red ball ? Of course 50/50. Put the ball back into the bag, what are the chances of drawing another red….. correct 50/50 again as we have put the first ball back in to the bag.
(We call this independent event and is an statistical concept)

Now, do as above but this time do not put the red ball back into the bag, what are the chances of next red YEP correct 2/6 LESS THAN 50%…
When market gets oversold it is very similar to not putting the red ball back into the bag and the odds of a reversal increases Therefore there is a correlation between prices movement . Hence the market is not a TOSS UP. . THIS IS WHY IRAJ IS A TECHNICIAN.

Enough said on this subject lets move on

WAYS OF ANALYSING THE MARKET

Few ways of analysing that. By analysis , I mean making sure the demand still exist to sell a long position or vice versa and hence make a profit. After all this is why we are all in the market….

A) PATTERN :- Pattern analysis Those who use patterns they look into shapes, patterns and deduct a certain conclusion to help them to buy cheap sell expensive In previous lecture my colleague sb (his nick name) talked about Patterns. I will not expand on his work .

B) INDICATORS . TA indicators fall into this category. Users of this methodology use HIGH LOW OPEN CLOSE .

C) NEURAL NETWORK leave that out. Totally different story… This is what I understand best but since we have little back ground I leave it at that. Those interested parties email me for a One2One talk, if interested.
D) There are other ways of trading the market.. You can use 50/50 toss up , ask the chartroom participants or phone a friend… This way you never become a millionaire

NO MATTER WHAT METHODOLGY WE USE THE WHOLE IDEA REVOLVES AROUND ONE SIMPLE CONCEPT. HOW TO SPOT THE BARAGINS.

MARKET MODE

It is often said market can behave in any of the these three modes.. Oscillation .. Trending or both
What I am going to tell you now is that we do not have TRENDING MARKET… Market always oscillates between over bought and over sold limits except that in the trending case these limits are short lived.. O well Is that important at all? YES it is … for many reasons
1) we do not need to include trend following indicators into our decision making process… So less information overload while trading
2) Most of trend following indicators do not tell us any thing special than a simple trend line would not .. For example a Moving average cross over system would tell you market is trending up if , say 3 days MA crosses above say 10 days… Change these parameters and market does not trend and so on.. Some use 200 MA others 100 MA some 50MA depending on their vision of the market.. Some one said to me well iraj these parameters come from the stock’s personality and the cycle amplitude of the market in general and I said yeh right….
As far as my research goes Market always oscillates… up down up down up down and so on… call it higher lows established or what ever pleases you
I am going to give you a link in a minute for you to see what I mean. Notice the strong up trend in the 1 minute chart ( bottom right in the chart), while CCI was oscillating between over bought and over sold limits. Please click on

http://www.investorevolution.com/wwwthreads/bbfiles/21-74940-Image1.gif



Ok I am going to tell you how to call the market and get MOST your trades right in any market, But I need to explain the Multi time frame analysis


MULTI TIME FRAME ANALYSIS

Multi time frame analysis very robust and solid concept in technical analysis.. The theory says instead of having confirmation of MANY TA INDICATORS in ONE SINGLE TIME FRAME, use SINGLE INDICATOR IN DIFFERENT TIME FRAMES.. In another word change the
Following strategy ( example only)

BUY IF
RSI (1 minute bar) < 30 and
Money flow Positive and
CCI < 100

Into

BUY IF

RSI (I minute bar ) and RSI ( 10 minute bar) and RSI ( daily ) and RSI (weekly ) ALL < 30.

The last strategy is by far more powerful for trading /investing than the first strategy. Martin Ping an excellent TA researcher has expressed the importance of this issue many times in stocks & commodities magazine..
Now this is what you have to learn for the rest of your lives for correct trading.
If you want to take a position (say long) make sure you have loads and loads of back up in longer time frames. Lets say you are a day trader and only interested in a scalp… then have a 5 minute back up ( make sure the stock is oversold in 5 minute ) and then take a position when the 1 minute is oversold too.

continued..................

Part 2

Conversely if you was a swing trader and wished to keep for few days START WITH YOUR WEEKLY CHART as a back up and then look at the DAILY chart. In another word make sure the stock is oversold in weekly and daily… you need to check both time frames. This is your safe bet..

Now the above was basic and we have discussed this in our technical Trader BB and you are all bored with it ,.. but this was for those who are NOT a member of our unique BB… ( Respect to Mike, Ragic and of course Mo for helping me to set up this incredible BB and a great community of advanced traders).


Now that you have all understood this concept I like to expand on this matter and move to more advanced issues like consolidation
Well often people say consolidation will break out in the direction of previous trend We all know this is not the case..
Using the Mutli time frame system consolidation nearly always BREAKS OUT IN THE DIRECTION OF LONGEST TIME FRAME… IN ANOTHER WORD IF THE 30 and 10 MINUTE CHART ARE HEAVILY OVER BOUGHT WHILE 1 MINUTE OVERSOLD THE CHANCES ARE
THAT THE BREAK OUT WILL BE DOWWWWWWWWWWWWWWNNNN

THOSE WHO BET IN THE DIRECTION OF THE LONGER TIME FRAME ARE THE WINNERS OF THE STOCK MARKET… could you imagine if you were short 12 month ago? There would be no loser amongst you … But how many of you went long in a bear market? Any way lets look at the future .
Past is past .. I have made similar mistakes and not better than any of you… All in the same boat guysI


How to trade the market with examples from DOW :-
( No volume system)

Some of you who trade the DOW in the afternoon with myself use the very same system I have been explaining above.. I.e the use of multi timeframe analysis …
This system is nearly used by all of us and even though it is does not have the 100% success rate but has been pretty robust to call the market. We have implemented our strategy using basic TA oscillators in different time scales..
The chart below ( please click on it) is my own set up for trading DOW.
http://www.investorevolution.com/wwwthreads/bbfiles/21-74940-Image1.gif

The platform used is IRD DYNAMIC.. www.ird.com the best in UK.. Lets put it this way…. THERE IS SIMPLY NOTHING LIKE IT IN UK . I insist all members to look at this superb broker level platform for optimum performance..
( Not on a commission in here guys… Market pays me enough )

I analyse DOW in 4 different time scale 1, 3, 10, 30 minute… If I have an oversold signal in 10 minute time frame I wait for 3 and 1 minute to get oversold and here I go…. As simple as that … The rest is just history….. This system is extremely powerful when market oscillates or has a weak trend in it..
When the market trends strongly this system still can be effective but with Spread betting firms one gets caught as the whole oscillation within the trend might have 12 points in it and that is the firm’s spread…. SO YOU WAS WARNED..
The oscillator set ups are available from my colleague Ragic eStokoe@aol and can be obtained through his email.



How to trade the US STOCK market:-
US stocks have volume information attached to it. So they are much easier to trade…. We have both price and volume to help us. In above we only had price action.
We use a methodology called VWAP technique.. This is the theory behind it… Stocks often deviate out of their average price at any given time.. The average price is called VWAP which is weighted by the price and the volume of action… When price deviates from its mean nearly always closes near or near enough its VWAP( not true in strong trending stocks)…This is why you have oscillation.. How often you have seen a stock to opens and trend without retracement … not often.. it retraces to a lower price, Which often is near the VWAP…( is not this concept what John Bollinger is talking about,,, stocks bounce of their upper and lower bollinger bands ) We have used this concept to trade the US market with an EDGE. We have used this concept to trade the US market with an EDGE… Do not expect 100% success rate.. Expect an edge in your trading .. Very much like those L 2 player… It is only an edge to give you an idea.. I have designed a simple but effective methodology using IRD-EXCEL to identify and short list these stocks.( Martin light Brown is the programmer) The whole system can be obtained from me [email protected] useable on IRD platform. Fully automated stock pick system.. All you have to do is just to short and long the stocks marked in green or red… I will include a set of instructions on how to use the macro in my email… The system short lists and sorts all best candidates in REAL TIME guys … yes Real time …. We all owe MO a drink..
Click below for some visual info on this technique..

http://www.investorevolution.com/wwwthreads/bbfiles/21-74939-vwap.gif


How to short term trade :-
Some of you who are not day trader need a system which selects stocks to buy now and sell in short term of say 5 to 10 days… We are currently working on this system which we call it regression strategy and will be posted to all members as soon as ready…. I think be around next 7 to 10 days.. Please email me should you require the system.. YOU NEED TO USE IRD AS YOUR PLATFORM IN ALL ABOVE..
We use a concept called Fibonnaci Peak trading system.. The concept revolves around the idea that market cycles around the Fibonnaci numbers of 8,13,21 …where every number is the sum of two previous ones.. We then apply this concept to RSI (Close and not RSI WILDER ) in these different time frames. As soon as these three RSI turn direction from OB/OS levels at the same time we get the REVERSAL in the price .. This trading strategy is the result of my research work with my trading partner Mike Walker (Traderxxx) and Edwina (Ragic)….. It is an excellent approach to trading…or investing…. The results are very good. If you need the back tested result please email me or Ragic. Or Traderxxx..

Risk Reward:--

Risk/Reward in its basic form means MAKE SURE THERE IS MORE REWARD IN A TRADE THAN RISK….. simple guys hey
Very very simple… In another word if you are risking your cash with 10 points stop loss ( broker’s spread say 10 points 10 + 10 = 20 ) then with a 3:1 reward risk DO NOT GET OUT earlier than 60 points or even better IF THERE IS NOT 60 POINTS IN A TRADE DO NOT OPEN A POSITION..

Guys this is a very simple calculation. If you are counting on scalping 2 points here and 3 points there with 10 points stop and 10 points brokers spread you are simply being naïve trading the market… Brokers would love the MANIAC TRADERS who go for silly scalps.. (over trading)
.
*** COULD YOU IMAGINE IF YOU HAD 50 POINTS STOPLOSS ******
**** SPREAD BETTING WITH HIGH SPREAD IS MORE DANGEROUS THAN ANTRAX FOR SCALPERS *******
**** YOU WIN OF COURSE BUT YOU LOSE MORE UNLESS IF YOU GO FOR LONGER TIME FRAMES *********************

Risk management:---

The concept of risk management is an extension of above concept but you bring your trading capital into equation.

If you had a £ 10 000 and you decided to become a trader and make your self a million pound, then how much of it would you risk for each trade.
$ 2500 ? £ 1000 ? £500 0r £ 200.. I will not bore you with reasoning as various position sizing algorithms.. Just click here

http://www.rightline.net/education/managingrisk.html
Any way the correct answer would be 2% to 4% at all times . Not any more

Yes as a trader we look into capital as our business and are not risking more than 2% at each time.

O well Iraj, this is not very clever’ If I am only risking 2% of my capital of 10K then i.e. 10000* 2%= £ 200 . I.e. 4 stocks of MICROSOFT. ( CFD not Spread bet)

Hehe just trade 4 shares of MSFT how on earth I am going to make a reasonable amount of profit then.
O well, I have to increase my risk level , yes?. Yes this is true.. Those who have to trade the market with small capital , have to increase their risk level to have a reasonable profit and as risk level increases the likelihood of loss increases. This is mathematically against the trader. This is why those with small amount of exposure always lose.
I NOW REFER YOU TO THE MINIMUM FUND CONCEPT. This concept states that there is threshold below which trading the financial market becomes gamble. Have you ever asked your self why the casino’s do not allow the punters to bet more than a certain limit. Because they are using their threshold below this minimum level while theirs is un -limited. In long term all punters will be loser.. SO WILL BE 80 % of day traders..

Statistically every thing is against a trader. Absolutely every thing. The only weapon we have is Technical analysis and the technical trader BB ( LOL).

Why stop loss ?
1) Stop loss is exactly what it sounds. Stop the loss. When you deal with Uncertainty then stop loss becomes an integral part of any trading system. In another word If I had a 100% fool proof, robust trading strategy then would I need Stop loss system as part of my trading system? OF COURSE NOT, Birth of stop loss in financial market is due to uncertain pattern of behaviour of its participant. If market traders would behave in a total and complete predicable manner then stop loss would be meaning less. In fact the market it self would be meaning less. Market would explode from within and would not exist.




Continued...................

Part 3 (Final part )

News Is that any good? … If you are technician then by definition you ignore the news. This does not mean news has no effect on the chart. Any fool knows it has. It just that most news leaks to the chart and chart see it coming. On the release of news the chart spikes (obviously as there are some naives who feel they can trade the news and move in to push the stock more volatile which eventually settles. Saying that few professional like our own Yvonne knows how to take care of her trades and moves in and out fast enough to make a quick gain. I have never been able to trade the news with out losing due to market efficiency. How ever as I said some believe they can.



Paper trading:--

Most paper traders win Millions on paper and lose in real trading do you know why. Simply because paper trading does not wind the trader up?
A paper trader is relaxed. When you are relaxed your losses do not count and all you see is your profits. Paper trading although useful but does not make a man out of a trader . ONE HAS TO FACE THE MUSIC TO LEARN AND WHAT A PAIN FULL PATH GUYS. PAY AND LEARN

I have learnt more from my losses in the market than ever from text books.


Accept Defeat :--

You need to have a viable strategy to win in market
The first thing you have to realise is the loss. Accepts early loss as a gift of God. Acceptance of defeat is good. It shows you are made for the job. Be proud of your losses. Your losses has given you a valuable edge. LOSS is GOOG. LOSS is like GREED for wealth. GREED AND LOSS are your best friends. Once you get used to the loss and how it operates you will avoid it . Loss will avoid you too. Never let few losses here and there stop you all from your mission.
A good trader recognises his failure soon enough to cut his losses fast and get out fast. Those who accept defeat and do not challenge the market have better chance of winning the market.
Loss does not mean loser.. loss means experience.. loss is as power full as greed for wealth


Only fools and horses (How the market cleverly out perform most traders):-
Market is a very very clever entity.. Some of the market participants are computer programmes that use Artificial Intelligence techniques to rip off us traders.. We call them Bot traders… It is very difficult to beat them. It is like playing chess against a machine… You will be able to win the machine provided you concentrate on your trades and have a pretty robust strategy…. OVER TRADING IS OUT OF THE QUESTION …. OVER TRADING IS LIKE PLAYING WITH 10 COMPUTER and expect to win them all…. I have seen this silly trader in a US room trading 100 times a day, claiming a fantastic success rate… Yeh was not born yesterday me you know…
THE DELBOYS OF STOCK MARKET ARE THOSE WITH NO STRATEGY AND FEW DARTS EXPECTING TO BECOME a MILLIONAIRE THIS TIME NEXT YEAR……


GOOD luck guys..

Dai i enjoyed reading your post and i'd just like to mention a couple of things that are written in a very light hearted,easy going way.

As you said "If you trade with a 10 point loss and the brokers spread is 10 ponits then with a risk reward of 3:1 i do not get out earlier than 60 points.

If you take the trade on a level 2 screen you do not have to pay a brokers spread becuase you can buy on the bid.So with a 10 point stop you've only got to let the stock run 30 points for the same risk reward.

Level 2 screens are not necessarily used for scalping,the fact is that they lend themselves towards this because their information and execution speeds are superior to other forms of trading.

I can understand people criticizing level 2 trading,but the fact of the matter is that most people dont fully understand,how it truly works and how it can be used to trade in all different time frames.Who says you have to trade it 100 times/day why cant you just trade once and get that brilliant entry point with out paying a spread.

Now if you put the style of trading you talked about above with the information and execution of level 2 direct access,havent you got an even better system?

I've done one and three minute stock trading as you mentioned coupled with level 2 direct access and it works a dream.because the indicators dont narrow the entry close enough but the level 2 does.Then being able to save the spread is another bonus.

Level 2

Nas,

I could not agree more with your observations regarding Level 2 trading, this was written for what I consider is the majority of people here who are just using a spread firm, I think fins being the most widely used!

Dai