Lesson 2
Being A Technical Analyst
One of the main ways traders approach the market is that of technical analysis. A technical analyst doesn't look at income statements, balance sheets, company policies, or anything fundamental about the company. The technician looks at the actual history of trading and price of a security or index. This is usually done in the form of a chart. The security can be a stock, future, index, currency or a sector. It is flexible enough to work on anything that is traded in the financial markets.
The technical analyst believes that the market price reflects all known information about the individual security. It includes all public and insider information and reflects all the different investor opinions regarding that security.
Just as fundamental analysis looks at the past to help make a decision, technical analysis also incorporates the past to aid in the decision making process. However, the technical analyst believes that securities move in trends and these trends continue until something happens to change that trend. With trends, patterns and levels are detectable.
The tools of the technical analyst are indicators, patterns and systems. These tools are applied to charts. Moving averages, support and resistance lines, envelopes, Bollinger bands and momentum are all examples of indicators. These indicators help tell a a story and just as a doctor looks at x-rays to help him make a decision, an analyst looks at charts to help him make a decision.
Many people believe that to buy and hold is the right strategy for owning securities and this is fine in some circumstances. It can also be beneficial to buy and sell the same security many times in a given period. ABC.inc might be a company you want to own for the long term and that's fine. However, there's nothing wrong with buying at 50, selling at 67 and buying it back at 55. There's also nothing wrong with buying at 50, selling at 67, shorting the security at about 67 then closing your short at 55 and buying it back. In the previous example you have made your money work a little more efficiently. In the case of buying and holding you only make money when the security goes up. Why not made money when the security goes up, comes down, and goes back up again. This way, your money has worked harder for you. Technical analysis can help in predicting turning points and direction in prices.
Before applying technical analysis make sure you thoroughly understand the principals that you are applying. Read as much as you can and find a few forms of technical analysis that you feel comfortable with. Remember you only need to find one thing that works in order to make money.
Lesson 3
Trading System
Now you have decided that you are going to trade a particular security and you need to find a way of entering and exiting the market. So, how do you approach it, do you just jump in with a gut feeling or do you use some kind of system to help you make the decision.
We will look at a few ways traders decide on the best way to make a decision. First there is just guessing which way the market is going to go. Now as surprising as it may seem there are many trader who do just that. They take a look at a chart or some news and then decide if they should buy or sell. If they make money consistently then it is hard to argue that this is the wrong way to trade the market. The problem I see with this type of trading is that it is almost impossible to reproduce results consistently. In other words the trader that trades by instinct can never really pass on his knowledge, as there is no clear rules that he applies to the market on a regular basis. I know a few trader who trade like this but unfortunately I don't know any who have gone the distance and are there year after year.【BINGO收集整理】
Traders who apply a method to their trading inevitably have better results. If you use the same criteria to each trade then you at least have a reference point from which to work. If you are losing you can then change specific things in you're decision making process in order to find the right criteria. By using a method in your trading you are moving towards the scientific approach and just as a scientist will carefully research and record each experiment so should the trader trying to perfect the method he is using.
If you apply XYZ as your reason for entering a trade and you can see after a predetermined amount of trades that it is not working then you can change X, Y or Z until you find something that does work. Typically the method trader has researched a particular theory he has by doing back testing (applying the theory to historical charts) and comes up with indicators, tools or some other method of determining the entry and exit criteria. If at the end of his research he find that he can make money he will then apply that method to the market. As he still has to make the decision to enter or exit there is still the human element to consider. Even though his method tells him he should enter a trade for some psychological reason he decided not to take the trade. There lies the weakness of the method trader. Even though he knows he should enter or exit a trade he doesn't because at that particular moment in time some voice inside him tells him not to do it. The solution is to make it mechanical as much as possible.
Mechanical trading systems. There has probably been more written about mechanical trading systems than any other topic in trading. The premise of mechanical systems is that a particular theory he's been beck tested over a long period of time and has consistently made money. There is no emotion involved with the decision making process at all. If the system says buy the security then you buy or an order is automatically done for you. This takes away all the emotional up's and downs and all you have to do is buy the system and supply the money. I have been in heated debates with other trades about the value of mechanical trading systems. Some traders swear by them and others think they are a waste of time. Which is true only the individual can answer. My own personal experience with systems after having tried over twenty different ones is that they typically produce unspectacular results and after a time they tend to blow up and lose money. The other reason I am not particularly fond of systems is that when you experience large draw down (your account goes backwards) you tend to lose faith in the system just before it kicks in.
Conclusion
Trading just as in life there are no correct ways to trade only what suits the individual. Some people will be suited to giving it their best bet whilst other will prefer to use a particular method and yet others will prefer mechanical systems. It's difficult to argue with a man who is making money. My own personal preference is to use a well thought out method, which is 90% mechanical, but the final decision is left to me. Nothing will beat your own research and hard work. If you can find a successful trader and ask him to mentor you this will save a lot of time on the learning curve. Learn every thing you can from him and then adapt it to suit your own style of trading. On closing, ask yourself this question? If you really did have the goose that laid the golden eggs would you sell it?
Lesson 4
Pivot Points
Those of you who have been trading for a while will be familiar with Pivot Points. During this lesson I want to go over how to find a Pivot Point and also a slightly different method of using them. First lets look at how you calculate a Pivot Point.
Using a bar chart you will observe that each bar has an Open, High, Low and Close. This information represents all price activity during that particular period. In the case of the following example we shall use a daily bar. To calculate the pivot point all you need to do is add the High, Low and Close. Once this has been done you next divide the total by three e.g. The cash FTSE on the 2nd May 02 had a High of 5192.70 a low of 5125.50 and a close of 5174.10 If you add the three together you get 15492.3. You then divide that total by three to get a Pivot Point of 5164.10.【BINGO收集整理】
OK, so far so good, but what do you do with this information. Well, one technique I like to use intraday is to use the pivot point as a trend indicator. We already know that the Pivot Point for the 2nd May was 5164.10 and we will use this the next day as an intraday trend indicator. If the price is above 5164.10 then I would only be long and if it were below 5164.10 I would only be short.
As price can fluctuate around any given point I also add a further proviso. If I have support close to 5164.10 I will first wait for the price to pass through 5164.10 and support before entering short. If I have resistance close 5164.10 I will first wait for the price to move through the Pivot Point and resistance before entering long. This method becomes even more powerful when the Pivot Point is close to the opening price. If for example the opening price is 5174.10, the Pivot Point is 5164.10 and I eventually go short at 5155 I can stay short the whole day as long as it does not go above the Pivot Point. Once in a position I normally have a very tight stop to begin with and then will follow the market with a trailing stop to lock in profits.
Another way I like to add Pivot Points to my analysis is for more long-term projections. I will use the Pivot Point of a Yearly, Monthly and Weekly chart. In this case it would be the High, Low and Close of the previous Year, Month and Week. I like to think of the weekly Pivot Point as the short-term trend, the monthly as the medium term trend and the Yearly as the long-term trend. I find this particularly useful in Spot Forex. If I am below the yearly, monthly and weekly Pivot Point I know I am in a strong down trend and I can scale into multiple positions over time. The same holds true for long positions.
The point is there are many ways to determine trend. You can also use Pivot Point to find potential Support and Resistance which we will cover in later lessons. Experiment with Pivot Points and see if it suits your trading style. At the very least it is always handy to know where they are and it may help you decide which side of the market you should be trading from.
Lesson 5
Moving Average Convergence-Divergence (MACD)
History
Moving Average Convergence-Divergence (MACD) was originally constructed by Gerald Appel an analyst in New York. Originally designed for analysis of stock trends, it is now widely used in many markets. MACD is constructed by making an average of the difference between two moving averages. The difference of the original two moving averages and the moving average of the difference can be plotted as two lines, one fast and one slow.
Uses
Most modern charting software now includes MACD as standard. Once selected to display in your charting software it normally shows up as two lines plotted on an open scale against the zero line. These two lines will normally be of different color or one line a solid line and the other a dotted line. Frequently used settings are 12 and 26 period exponential moving averages with 9 period exponential moving average as the signal line. Although there are three moving averages mentioned you will only see two lines.The simplest method of use is when the two lines cross. If the faster signal line crosses above the slower line then a buy signal is generated and vice versa. It is also used as an overbought and oversold indicator. The higher above the zero both lines are the more overbought it becomes and the lower below the zero line both lines are the more oversold it becomes.【BINGO收集整理】
It may also lead to a stronger signal if the signal line crosses down when it is overbought and crosses up when it is oversold. The last common use of MACD is that of divergence. If the MACD is making new lows and the price of the security is not making new lows that is one form of divergence. Also, if the MACD has made a low and starts back up but price continues to fall that is another type of divergence(bearish divergence)and may lead to an indication of change in direction. The same applies to bullish diversion.
My Own Use Of MACD
I like to use the MACD as a trend indicator with parameters set at 8 and 18 period exponential moving averages with a 9 period exponential moving average as the signal line. All I am trying to do is establish a trend in a higher time period than the one I intend to trade. If you were trading day charts you would be looking at the MACD on the weekly.As long as the signal line remains above or below the MACD line you know the trend is still in place. As you can see from the chart examples of the 30 min Cash DJIA there was a sell signal on the 9th May 02. This way my higher time frame as I was trading intraday. I then went to the 5 min chart of the Cash DJIA and sold the rallies, confident to stay short as long as my higher time period MACD trend in the 30 min stayed intact. If the 30 min MACD signal line were to cross up I would have closed all short positions.
30 Min Cash DJIA
Lesson 6
Stochastics
History
George Lane was the originator of the sochastics in the 1970's. Lane observed that as prices increase in an up trend, closing prices tend to be closer to the upper end of bars and in a down trend closing prices tend to be nearer the lower end of bars. Lane developed stochastics to discern the relationship between the closing price and the high and low of a bar. Typically used to identify overbought and oversold conditions the indicator consists of two lines: % K and %D. These two lines fluctuate in a vertical range between 0 and 100. Readings above 80 are considered overbought and readings below 20 are considered oversold. When the faster %K line crosses above the slower %D line and the lines are below 20, a buy signal is generated. When the %K lines crosses below the %D line and the lines are above 80 a sell signal is generated.
My Own use Of Stochastics
Well as usual just to be contrary to everyone I don't use the stochastics to signal overbought or oversold although I do take note of the readings. I like to use them as possible buy and sell opportunities after defining a trend. If the trend is up as in the example below on the AUD (Australian Dollar) I like to only take buy signals regardless of the reading as long as the trend remains in place. I ignore the sell signals. I purposefully weaken the stochastics to give me more signals and I use 8,3,3 as my settings. This gives more signals and shows the hand of the weaker players. The same is true of selling in a down trend. I ignore the buy signals and only take the sell signals. I don't use stochastics on their own as trading method as all the settings I have tried ultimately resulted in to many wipsaws. Experiment with different settings and consider adding this indicator to your trading arsenal. Good trading.
Lesson 7
ADX (Average Directional Index)
History
Average Directional Index (ADX) was developed by J. Welles Wilder Jr. and as its name implies attempts to measure the strength of the direction the security is moving in. ADX is measured in a scale from 0-100 with readings above 25 indicating that you are in a trend whilst readings below 25 indicate that you are not in a trend. As the scale is measured from 0-100 it doesn't matter if the trend is up or down, the scale and reading are still from 0-100 e.g. if you were in a strong down trend the reading might be 45. You might get the exact same reading if you were in a strong up trend. The reason I mention this is that many of my students get confused when first introduced to ADX and see the indicator rising as the trend goes down (see charts). Wilder himself admitted that ''Directional movement is the most fascinating concept I have ever studied'' 'New Concepts In Technical Trading Systems'. Readings of over 60 are fairly rare in my observations and once they are at the extremes can actually mean the direction is getting ready for a change. See First chart below.【BINGO收集整理】
My Own use Of ADX
I highly recommend this little technique. You may not get that many signals but when you do they will be high probability. I like to use a 21 period moving average on the time period I am trading. First the ADX must be 30 or over, no action is taken unless the ADX has achieved this reading. Next the security must retrace to its 21 period moving average. Once these two conditions have been met you can enter the market. Once in the market keep two things in mind. Have a tight stop on the initial entry, perhaps above the most recent high or most recent low depending on direction or even a dollar amount. Next, be aware of the last high or low once in trade e.g. the ADX has a reading 30 or above, the security makes a high and then retraces to the 21 period moving average. Your first target should be the last high or you should at least pay close attention to what happens to price around that level. The same goes for the short trade. You have a reading of 30 or above and it makes a new low. It then pulls back to the 21 period moving average and you enter short. Your first target should be the previous low or monitor closely at that price level.
Relative Strength Index
History
Relative Strength Index was developed by J.Welles Wilder Jr. and introduced in his book 'New Concepts In Technical Trading Systems'. It is one of the most popular technical tools around. Relative strength Index (RSI) is measured on a scale from 0-100 with a reading above 70 being overbought and a reading below 30 being oversold. Originally he recommended a 14-day period as the setting but many other time periods have now become popular. Wilder discusses 5 uses of RSI in his book.
Tops and Bottoms
These are indicated when the readings go above 70 (top) and below 30 (bottom)
Chart Formations
The RSI may form chart formations that may or may not appear on the actual bar chart e.g. you might see a head and shoulders formation on the RSI but not on the bar chart.
Failurengs
When the RSI goes above 70 or below 30 this is a strong indication that the market is ready for a reversal.
Support and Resistance
It is sometime more apparent that support or resistance is forming in the RSI than can be seen on the bar chart.
Divergence
When price makes a new high or low and this is not confirmed by the RSI this can be a very strong indication that a reversal is imminent.
My Use Of RSI
My own favorite use of RSI is that of divergence. When the security you are trading makes a new high and the RSI turns down that is bearish divergence. The same is true of bullish divergence. When price makes a new low and the RSI turns up that is bullish divergence. I also prefer to see divergence at major tops and bottoms. That is to say, if we have been in an up trend for some time and I am already thinking this might be topping and I see divergence then I am a lot more confident that it has in fact topped and vice versa. I don't like to use RSI as a sole trigger for a new position but rather I like to use it in combination with other indicators to help build a picture. You will notice that in most cases of divergence the security makes a low as does the RSI, then the RSI begins to turn up but the security continues down. Now the security make a new low and the RSI does come down but not as low as it's previous low and that is the point where action can be taken. The fact that the RSI has not dropped lower than its previous low and the price has, is the point of recognition. If I also have a break of a trend line or it has reach a projection or some other confirming analysis then I would enter a trade. 【BINGO收集整理】
