Tuesday, December 30, 2008
Wednesday, December 17, 2008
Tuesday, December 16, 2008
Monday, December 15, 2008
Saturday, December 13, 2008
F&O Outlook For 15 Dec
S2 S1 Pivot R1 R2
2765.95 2843.55 2890.20 2967.80 3014.45
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Resistance above 2,980
The market is expected to open on a weak on Monday on weak global cues.
Traders were seen writing 2,700 and 2,800 puts and covering their shorts at 3,000 call. This suggests that the Nifty has strong support at 2,700-2,800 and can move above the 3,000-mark. Also, traders were seen unwinding 3,100 strike call, indicating that the index has the capacity to move beyond 3,100 once it closes above 3,000.Nifty futures witnessed strong buying support below 2,850, while profit booking was seen above 2,900.
Wednesday, December 10, 2008
Monday, December 8, 2008
Sunday, December 7, 2008
Major Technical Indicators
MACD
Volume higher than average volume can confirm tops and bottoms at times. See how well
it did this on Ford stock below.
Volume can also confirm and add validity to a breakout and help confirm that it’s not a false breakout. See how it helped confirm the downside break down of Hewlett Packard stock. Trend lines/Support/Resistance/Volume are some of the best indicators you’ll ever find.
ADX (Average Directional Index) The ADX (Average Directional Index) is another indicator to help determine if a stock is ranging or trending. If you couple this with support/resistance lines (black) in a range or trend lines (red and blue), then you get an even more accurate picture of what the ADX is trying to say. When the ADX is above 30ish, the stock is considered to be trending. It could be trending up or down but this just states that it is trending. The ADX line is the green line below. When the blue +DI line is op top (and the ADX is above 30ish), it means the trend is upward. When the –DI is on top (and the ADX is above 30), you have a downtrend. This can also be even more accurately confirmed by the trend lines below. When the ADX is below the yellow 30 level (drawn on the chart for emphasis), it is considered to be in a range. At these times, you could use other ranging indicators that well be discussing such as the RSI or Bollinger Bands. You can and should always draw the somewhat horizontal support/resistance (black) lines when in a range. The ADX is a Welles Wilder style moving average of the Directional Movement Index (DX). The values range from 0 to 100, but rarely get above 60. To interpret the ADX, consider a high number to be a strong trend, and a low number, a weak trend. The ADX was developed by J. Welles Wilder and is described in his 1978 book New Concepts In Technical Trading Systems.
The +DI is the percentage of the true range that is up. The -DI is the
percentage of the true range that is down. A buy signal is generated when the
+DI crosses up over the -DI. A sell signal is generated when the -DI crosses
up over the +DI. You should wait to enter a trade until the extreme point is
reached. That is, you should wait to enter a long trade until the price
reaches the high of the bar on which the +DI crossed over the -DI, and wait to
enter a short trade until the price reaches the low of the bar on which the
-DI crossed over the +DI.
The DI was developed by J. Welles Wilder and is described in his 1978 book New
Concepts In Technical Trading Systems.
Formula:
Bollinger Bands – work well in ranges but not in trends. When in ranges, buy
when the price goes at or outside of the bottom band. Sell either at the
moving average (higher probable and more conservative) or at the opposing band
(more aggressive). In a range, sell short (which contains more risk) at the
top band and buy back to cover the short at the moving average (conservative)
or at the opposing band (more aggressive).
Bollinger Bands were developed by John Bollinger.
Formula:
The RSI (Relative Strength Index) gives overbought/oversold readings
accurately only in ranges. In trends, they would tend to give many false
signals. See the circled signals below. While the RSI can be used to spot
divergences, the MACD is better to use typically for that.
The Relative Strength Index (RSI) calculates a ratio of the recent upward
price movements to the absolute price movement. The RSI ranges from 0 to 100.
The RSI is interpreted as an overbought/oversold indicator when the value is
over 70/below 30. You can also look for divergence with price. If the price is
making new highs/lows, and the RSI is not, it indicates a reversal.
The Relative Strength Index (RSI) was developed by J. Welles Wilder.
Formula:
The Slow Stochastic is also a range bound indicator. It needs a sideways
market in order to be accurate with its overbought/oversold signals. See on
the left side of the chart that it gives bad signals (shown by the “X” over
them). Yet on the latter half of the chart, the stock is in a range and gives
accurate signals. While Stochastics can pick up divergence, the MACD is still
better used for that. (Note: There is also the Fast Stochastic but whipsaws so
much that it tends to do very little good and not many ever use it.)
The Stochastic Oscillator measures where the close is in relation to the
recent trading range. The values range from zero to 100. %D values over 75
indicate an overbought condition; values under 25 indicate an oversold
condition. When the Fast %D crosses above the Slow %D, it is a buy signal;
when it crosses below, it is a sell signal. The Raw %K is generally considered
too erratic to use for crossover signals.
The Stochastic Indicator was developed by George C. Lane.
Terminology:
Formula:
To recap: The best technical indicators are firstly trend
lines/support/resistance/volume. After that would come the versatility of the
MACD. It can be left on the chart at all times. Use only buy signals in the
uptrend and sell signals in the downtrend. Use both signals in a range.
In Trends use 2-3 of the following maximum:
1. Trend lines
2. Moving Averages
3. MACD (buys in uptrend or sells in downtrend)
4. ADX (above 30)
5. PSAR (for stops in strong trends) OR
6. ATR levels for stops
In Ranges, use 2-3 of the following maximum:
1. Support/Resistance
2. MACD – both buy and sell signals
3. Bollinger Bands
4. RSI
5. Slow Stochastics
6. ADX below 30
7. ATR levels for stops
The MACD (shown below) can be used in both trends and ranges if used properly. This is one of the few tools that will work well in both types of markets. If I could only have one technical indicator outside of trend
lines/support/resistance, this would be it.
There are several ways to use the MACD indicator. In up trends, you’ll only take buy signals as the price is also somewhat near the uptrend line. All of this will be illustrated in a visual below. However, let’s go into how to read the signals more.
When the MACD lines go downward, then cross and turn upward, you have a MACD buy signal. You can get a head jump on the MACD lines crossing many times by using the Histogram bars. When the lines are heading down and the lines look like they are attempting a cross but haven’t yet, you can look to the histogram bars for a head jump on the actual signal. When the MACD is wanting to turn upward and the red histogram bars start to get less negative (meaning they are growing shorter), then you can try to buy ahead of the signal (crossing).
When the MACD lines are trying to turn down, you can look to the black lines to start growing shorter to get a quicker entry on the MACD signal lines. This will help you sell in a more timely fashion.
lines/support/resistance, this would be it.
There are several ways to use the MACD indicator. In up trends, you’ll only take buy signals as the price is also somewhat near the uptrend line. All of this will be illustrated in a visual below. However, let’s go into how to read the signals more.
When the MACD lines go downward, then cross and turn upward, you have a MACD buy signal. You can get a head jump on the MACD lines crossing many times by using the Histogram bars. When the lines are heading down and the lines look like they are attempting a cross but haven’t yet, you can look to the histogram bars for a head jump on the actual signal. When the MACD is wanting to turn upward and the red histogram bars start to get less negative (meaning they are growing shorter), then you can try to buy ahead of the signal (crossing).
When the MACD lines are trying to turn down, you can look to the black lines to start growing shorter to get a quicker entry on the MACD signal lines. This will help you sell in a more timely fashion.
Formula:
In downtrends you’ll only take sell signals (to sell short) near the downtrend line. When the MACD lines go upward, cross, then turn downward, you have a
sell or sell short signal.
In ranges, you can take both signals equally.
There are two more ways in which the MACD can be used. One is the MACD zero line and the other is divergence. The MACD zero line is where the histogram flips from black to red and back to black. When the MACD is below the zero line, it’s generally bearish. When the MACD is above the zero line, it’s generally considered bullish. See the example below. I’ve shown where the zero line is by highlighting it in yellow.
Divergence is where the price goes in one direction but the MACD goes in another direction. While this isn’t a trading signal in and of itself, it can be of great help. When the stock breaks in the direction that the divergence
suggested, and closes beyond the trend line, then you have a signal to trade off of. See the examples of divergence below. The red lines point to one set of divergences while the blue lines point to a second set of divergences. As you can see, the MACD can be very useful in many ways and in trends or ranges.
Just to recap the MACD, there are several ways it can trigger signals:
1. The lines crossover (MACD line crosses the signal line)
2. Going above/below the zero line
3. Divergence with price confirming
Moving Averages
There are a number of common moving averages. They all have their pros and cons. First, lets take a look at what moving averages are and do. Moving averages take the averaging of a stock’s price over a certain period that you define. What this does is smoothes out the data so you can tell “on average” if the stock is going upward or downward. After all, that’s the name of the game. So a moving average is good about answering the question of “what direction to trade”. (However, you’ll find that the MACD answers the questions of “when to trade”.) So when you combine the two, they can be powerful. Moving averages are mainly good in trends and do little good in ranges. So now the question is which moving average periods are best. The most commonly used moving averages are 10, 20, 50 and 200 day Simple Moving Averages. It’s important to know that there are other types of moving averages out there that aren’t quite as widely used such as Exponential Moving Averages (EMA’s) and Weighted Moving Averages (WMA’s). However, most big institutions use the simple moving average. A simple moving average weights all the data the same while an exponential or weighted moving average places more emphasis on the latest data (towards the right of the chart) rather than the older data (towards the left half of the chart).
So a simple moving average of 10 periods is going to give us the average price of that stock over the last 10 days. With each new day, it adds in that day to the data and drops off the oldest day to calculate the new average. The moving average is a smoothed line that connects all of these averaging points together into the moving average line.
A 10 or 20 period moving average is going to change quicker with the price action and hug closer to the price action. The pro is that it’s quick in responding to price movements. Its con is that while it does somewhat act as support/resistance; it’s a weaker one than a longer term moving average. A longer term moving average such as the 50 or 200 day simple moving average will respond slower to the price action (con) but offers stronger areas/regions of support/resistance in and of themselves than do the shorter moving averages (pro).
Let’s take a look at some below and see what they look like on the chart. Below we see a (20 day SMA) distinct downtrend on the left side of the chart and then it switches into an uptrend later on in the chart. In the final 2-3 months of the chart, the QQQQ’s go into a sideways range. This is where the moving averages would do little good except show that it’s in a range. Note that when the QQQQ’s are distinctly trending downward, the moving average provides an area of resistance. When the QQQQ’s are in an uptrend, the moving average acts as a general area of support for the price. When it goes into a range, it doesn’t act as either support or resistance.
Moving Averages are used to smooth the data in an array to help eliminate noise and identify trends. The Simple Moving Average is literally the simplest form of a moving average. Each output value is the average of the previous n values. In a Simple Moving Average, each value in the time period carries equal weight, and values outside of the time period are not included in the average. This makes it less responsive to recent changes in the data, which can be useful for filtering out those changes.
See also Exponential MA, Least Squares MA, Triangular MA, Weighted MA, Welles MA, Variable MA, Volume Adjusted MA, Zero Lag Exponential MA, DEMA, TEMA and T3.
So a simple moving average of 10 periods is going to give us the average price of that stock over the last 10 days. With each new day, it adds in that day to the data and drops off the oldest day to calculate the new average. The moving average is a smoothed line that connects all of these averaging points together into the moving average line.
A 10 or 20 period moving average is going to change quicker with the price action and hug closer to the price action. The pro is that it’s quick in responding to price movements. Its con is that while it does somewhat act as support/resistance; it’s a weaker one than a longer term moving average. A longer term moving average such as the 50 or 200 day simple moving average will respond slower to the price action (con) but offers stronger areas/regions of support/resistance in and of themselves than do the shorter moving averages (pro).
Let’s take a look at some below and see what they look like on the chart. Below we see a (20 day SMA) distinct downtrend on the left side of the chart and then it switches into an uptrend later on in the chart. In the final 2-3 months of the chart, the QQQQ’s go into a sideways range. This is where the moving averages would do little good except show that it’s in a range. Note that when the QQQQ’s are distinctly trending downward, the moving average provides an area of resistance. When the QQQQ’s are in an uptrend, the moving average acts as a general area of support for the price. When it goes into a range, it doesn’t act as either support or resistance.
Moving Averages are used to smooth the data in an array to help eliminate noise and identify trends. The Simple Moving Average is literally the simplest form of a moving average. Each output value is the average of the previous n values. In a Simple Moving Average, each value in the time period carries equal weight, and values outside of the time period are not included in the average. This makes it less responsive to recent changes in the data, which can be useful for filtering out those changes.
See also Exponential MA, Least Squares MA, Triangular MA, Weighted MA, Welles MA, Variable MA, Volume Adjusted MA, Zero Lag Exponential MA, DEMA, TEMA and T3.
Formula:
Now that we’ve taken a look at a shorter term moving average, let’s now look at a longer term moving average, the 200 SMA.
This average points to the long term trend direction and shows where many of the long term investors may be holding the stock. It’s averaging the last 200 days of data. Notice how it can act as regions of support in an uptrend or regions/areas of resistance in a downtrend
PSAR and ATR What indicators can be used to help determine stop levels? The Parabolic SAR (PSAR) or the Average True Range (ATR). The pros to the Parabolic SAR is that the stop levels (dots on the chart below) work good in a strong trend but don’t work good at all in ranges. Even in mild trends I’d discourage their use. However, look at how well they do on the strong trending part of the chart pointed out below. Consider placing your stop at the point of the red dot on the chart underneath the uptrend.
Parabolic SAR The Parabolic SAR calculates a trailing stop. Simply exit when the price crosses the SAR. The SAR assumes that you are always in the market, and calculates the Stop And Reverse point when you would close a long position and open a short position or vice versa.
Parabolic SAR The Parabolic SAR calculates a trailing stop. Simply exit when the price crosses the SAR. The SAR assumes that you are always in the market, and calculates the Stop And Reverse point when you would close a long position and open a short position or vice versa.
The Parabolic SAR was developed by J. Welles Wilder and is described in his 1978 book, New Concepts In Technical Trading Systems.
Formula:
Another alternative is the ATR. This one can be effectively used in a range or a trend. What you’d do is take the most recent ATR levels into consideration. In this instance, the stock has averaged around 70-80 cents a day on its daily range. So when you buy this uptrend, you could place your stop a bit over 70-80 cents away from your entry price. Long term traders/investors might even double or triple that number. This at least gives you an idea of the volatility of the stock. Every stock will have a different volatility and will therefore need a different distance between it and its entry and stop levels. Also, the larger the time frame, the wider the stop. So a daily chart would have a larger ATR reading than a 60 minute chart. Again, I’d not use both of these (ATR and PSAR) on a chart at the same time as it would just confuse. Pick only one. If the stock is ranging then there is only one smart choice, the ATR. If it’s trending then you have two choices. Pick whichever one speaks to you the best.
Average True Range (ATR) The ATR is a Welles Wilder style moving average of the True Range. The ATR is a measure of volatility. High ATR values indicate high volatility, and low values indicate low volatility, often seen when the price is flat.
The ATR is a component of the Welles Wilder Directional Movement indicators (+/-DI, DX, ADX and ADXR).
The ATR was developed by J. Welles Wilder and is described in his 1978 book New Concepts In Technical Trading Systems
Another alternative is the ATR. This one can be effectively used in a range or a trend. What you’d do is take the most recent ATR levels into consideration. In this instance, the stock has averaged around 70-80 cents a day on its daily range. So when you buy this uptrend, you could place your stop a bit over 70-80 cents away from your entry price. Long term traders/investors might even double or triple that number. This at least gives you an idea of the volatility of the stock. Every stock will have a different volatility and will therefore need a different distance between it and its entry and stop levels. Also, the larger the time frame, the wider the stop. So a daily chart would have a larger ATR reading than a 60 minute chart. Again, I’d not use both of these (ATR and PSAR) on a chart at the same time as it would just confuse. Pick only one. If the stock is ranging then there is only one smart choice, the ATR. If it’s trending then you have two choices. Pick whichever one speaks to you the best.
Average True Range (ATR) The ATR is a Welles Wilder style moving average of the True Range. The ATR is a measure of volatility. High ATR values indicate high volatility, and low values indicate low volatility, often seen when the price is flat.
The ATR is a component of the Welles Wilder Directional Movement indicators (+/-DI, DX, ADX and ADXR).
The ATR was developed by J. Welles Wilder and is described in his 1978 book New Concepts In Technical Trading Systems
Fibonacci Retracements A term used in technical analysis that refers to the likelihood that a financial asset's price will retrace a large portion of an original move and find support or resistance at the key Fibonacci levels before it continues in the original direction. These levels are created by drawing a trend line between two extreme points and then dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and 100%. Fibonacci retracement is a very popular tool used by many technical traders to help identify strategic places for transactions to be placed, target prices or stop losses.
Volume higher than average volume can confirm tops and bottoms at times. See how well
it did this on Ford stock below.
Volume can also confirm and add validity to a breakout and help confirm that it’s not a false breakout. See how it helped confirm the downside break down of Hewlett Packard stock. Trend lines/Support/Resistance/Volume are some of the best indicators you’ll ever find.
ADX (Average Directional Index) The ADX (Average Directional Index) is another indicator to help determine if a stock is ranging or trending. If you couple this with support/resistance lines (black) in a range or trend lines (red and blue), then you get an even more accurate picture of what the ADX is trying to say. When the ADX is above 30ish, the stock is considered to be trending. It could be trending up or down but this just states that it is trending. The ADX line is the green line below. When the blue +DI line is op top (and the ADX is above 30ish), it means the trend is upward. When the –DI is on top (and the ADX is above 30), you have a downtrend. This can also be even more accurately confirmed by the trend lines below. When the ADX is below the yellow 30 level (drawn on the chart for emphasis), it is considered to be in a range. At these times, you could use other ranging indicators that well be discussing such as the RSI or Bollinger Bands. You can and should always draw the somewhat horizontal support/resistance (black) lines when in a range. The ADX is a Welles Wilder style moving average of the Directional Movement Index (DX). The values range from 0 to 100, but rarely get above 60. To interpret the ADX, consider a high number to be a strong trend, and a low number, a weak trend. The ADX was developed by J. Welles Wilder and is described in his 1978 book New Concepts In Technical Trading Systems.
Formula:
Directional Movement Index (+DI and -DI)
The +DI is the percentage of the true range that is up. The -DI is the
percentage of the true range that is down. A buy signal is generated when the
+DI crosses up over the -DI. A sell signal is generated when the -DI crosses
up over the +DI. You should wait to enter a trade until the extreme point is
reached. That is, you should wait to enter a long trade until the price
reaches the high of the bar on which the +DI crossed over the -DI, and wait to
enter a short trade until the price reaches the low of the bar on which the
-DI crossed over the +DI.
The DI was developed by J. Welles Wilder and is described in his 1978 book New
Concepts In Technical Trading Systems.
Formula:
Bollinger Bands
Bollinger Bands – work well in ranges but not in trends. When in ranges, buy
when the price goes at or outside of the bottom band. Sell either at the
moving average (higher probable and more conservative) or at the opposing band
(more aggressive). In a range, sell short (which contains more risk) at the
top band and buy back to cover the short at the moving average (conservative)
or at the opposing band (more aggressive).
Bollinger Bands were developed by John Bollinger.
Formula:
RSI (Relative Strength Index)
The RSI (Relative Strength Index) gives overbought/oversold readings
accurately only in ranges. In trends, they would tend to give many false
signals. See the circled signals below. While the RSI can be used to spot
divergences, the MACD is better to use typically for that.
The Relative Strength Index (RSI) calculates a ratio of the recent upward
price movements to the absolute price movement. The RSI ranges from 0 to 100.
The RSI is interpreted as an overbought/oversold indicator when the value is
over 70/below 30. You can also look for divergence with price. If the price is
making new highs/lows, and the RSI is not, it indicates a reversal.
The Relative Strength Index (RSI) was developed by J. Welles Wilder.
Formula:
Slow Stochastic
The Slow Stochastic is also a range bound indicator. It needs a sideways
market in order to be accurate with its overbought/oversold signals. See on
the left side of the chart that it gives bad signals (shown by the “X” over
them). Yet on the latter half of the chart, the stock is in a range and gives
accurate signals. While Stochastics can pick up divergence, the MACD is still
better used for that. (Note: There is also the Fast Stochastic but whipsaws so
much that it tends to do very little good and not many ever use it.)
The Stochastic Oscillator measures where the close is in relation to the
recent trading range. The values range from zero to 100. %D values over 75
indicate an overbought condition; values under 25 indicate an oversold
condition. When the Fast %D crosses above the Slow %D, it is a buy signal;
when it crosses below, it is a sell signal. The Raw %K is generally considered
too erratic to use for crossover signals.
The Stochastic Indicator was developed by George C. Lane.
Terminology:
| Fast Stochastic | Refers to both %K and %D where %K is un-smoothed |
| Slow Stochastic | Refers to both %K and %D where %K is smoothed |
| Raw %K | Un-smoothed %K |
| Fast %K | Un-smoothed %K |
| Slow %K | Smoothed %K |
| Fast %D | Moving average of an un-smoothed %K |
| Slow %D | Moving average of a smoothed %K, in effect: a double smoothed %K |
| %D | Always refers to a smoothed %K (whether or not the %K itself is smoothed) |
Formula:
Recap
To recap: The best technical indicators are firstly trend
lines/support/resistance/volume. After that would come the versatility of the
MACD. It can be left on the chart at all times. Use only buy signals in the
uptrend and sell signals in the downtrend. Use both signals in a range.
In Trends use 2-3 of the following maximum:
1. Trend lines
2. Moving Averages
3. MACD (buys in uptrend or sells in downtrend)
4. ADX (above 30)
5. PSAR (for stops in strong trends) OR
6. ATR levels for stops
In Ranges, use 2-3 of the following maximum:
1. Support/Resistance
2. MACD – both buy and sell signals
3. Bollinger Bands
4. RSI
5. Slow Stochastics
6. ADX below 30
7. ATR levels for stops
Volume Indicators
Calculation: The number of shares (or futures or option contracts) traded over a particular period of time. On a price chart, volume is commonly shown as a histogram at the bottom (see Figure 1, below).
“Official” daily volume is typically quoted one day after the fact; that is, the volume figure released on Tuesday is the number of shares or contracts traded on Monday.
Volume is one of the most overlooked and least-discussed basic market indicators. Although it appears to be a simple indicator, it actually can be rather difficult to interpret when looked at in its most basic form — the raw
number of shares traded.
Applications
Perhaps the most opportune time to monitor volume is during a sideways market that is moving back and forth between support (the bottom level of a trading range) and resistance (the top level of a trading range).
In these situations, volume should pick up when price nears either level. If it increases when support (resistance) is tested, there is an underlying buying (selling) pressure that eventually will favor a price swing to the upside
(downside). In Figure 1, the down-pointing arrows show how volume increases as price approaches the bottom of the trading range.
A breakout of a trading range accompanied by a volume “spike” suggests a large amount of money has been awaiting the change and should help keep prices going in the same direction. Again, this principle is illustrated in Figure 1 in the late- April upside breakout of the trading range.
Key points
Abasic tenet of volume analysis is that a strong price move (i.e., a trend) should be supported by increasing volume. This is common sense: Increasing volume reflects greater market interest and participation, which should help perpetuate the price move. A period of ascending or descending prices is more likely to continue when accompanied by an increase in volume.
An important point is that volume should support the prevailing trend and not the counter-trend price action. In an uptrend, for instance, volume should increase when the market rallies, but decline when it corrects. However, because this relationship is much more important in a bull market than a bear market, and because prices occasionally can move into a long-term downtrend because of a sheer lack of interest in the market, there are quite a few exceptions to the basic rule. For example, a stock trading higher despite a relatively low volume
can sometimes be a sign of strength. Ultimately, price patterns are more important than volume patterns.
Variations: Volume-based indicators
There are a large number of volume-based technical indicators. One of the most basic is the volume oscillator, which calculates the difference between shorter-term (say, 10 days) and longerterm (say, 40 days) moving averages of volume.
Figure 2 depicts price action in McDonalds (MCD) from late 1998 to early 2000, when the market traded in a range roughly between $38 (support) and $471⁄2 (resistance). When the stock approached the resistance level in early April 1999, the volume oscillator indicated (by turning negative) that average shortterm volume was decreasing compared to average long-term volume. This suggested prospects for a new high were marginal; in fact, an upside breakout never occurred.
After the failed April rally, short-term volume picks up (indicated by the rising volume oscillator) in conjunction with falling prices. That is the first indication the market bias is now to the short side.
Another popular volume- based indicator is on balance volume (OBV), which relates volume to price movement by adding the day’s volume to a running total when a stock (or futures contract) closes higher and subtracting the day’s volume when a stock closes lower. The OBV line can then be analyzed like a bar chart.
For the next six months or so after the failed April rally, it is very difficult to tell directly from the price and volume charts what the market bias is. However, the better-defined downtrend of the OBV indicator implies it is still to the downside. During November and December, the market once again tests the resistance level. When this test fails (a “false breakout”— a penetration of resistance followed by a quick reversal), the volume oscillator once again turns down, indicating a continued bias to the downside.
Not until early 2000, when the market forms a top around $43, does short-term volume surpass long-term volume. Soon after that, a breakout below support is accompanied by a large volume increase, revealing huge underlying selling pressure. The bias to the downside is confirmed by the falling OBV indicator
Bottom line
Volume is much more volatile than price, and much more difficult (especially for beginners) to analyze effectively. It sometimes seems as if for no reason there will be a plethora of volume spikes followed by short periods of virtually no trading at all.
To the untrained eye, situations like this tend to cloud the picture enough to make the study of volume meaningless. Benefiting from volume analysis requires skills that can only be mastered through experience and time, and it is probably more of an art form than any other type of market analysis
Volume & Healthy Trends
Technical traders are always looking for good trends to trade. A position or swing trader uses the volume indicator to try and locate healthy trends that
they can “ride” for a month or so. We will look at some past examples so that a beginner trader can get a feel for how to use the interpretations of this very important indicator.
• An upwards movement is a strong trend if volume is increasing as price heads up, and sessions where price decreases are associated with lower volume.
•A healthy downtrend would see volume increasing as price decreased and volume
decreasing on sessions where the price increases.
Figure 3 – February to March of 2004 has several well behaved “healthy trends”.
There are three healthy trends that can be analyzed from February through May. Two of two of them are uptrends and one is a downtrend. Even thought they
are not very long lasting, their progression will be covered more in depth coming up. In a general sense one can see that in mid February price increased
as volume trended upwards. In March, the initial down move came on increasing volume. Lastly, after the downtrend reverses, the middle of the following
uptrend comes on increasing volume.
The first two healthy trends will be explored in figure 4; the third healthy trend will be covered in figure 5. It should be evident that identifying trends,
during trending market situations such as the one in figure 3, can be very useful to a trader. You can see for yourself the amount of pips that each trend
moves.
Importance of Volume
Volume’s Significance:
Volume is important because when a large number of trades are placed in a certain day or session, which means there are many buyers and sellers that set this price. Therefore, the close for the session will be accurate since it is a consensus between the traders and investors that are buying and selling.
If volume was low, the price has been set by a smaller number of individuals and organizations and may not be representative of the true value.
Difference between Equity Volume and Forex
Volume:
Volume is different in Forex than in equities. In equities every share traded is considered 1 volume, so selling 100 shares, and conversely someone buying those 100 shares counts as 100 in volume. In Forex the market is decentralized and it is impossible to keep track of all the amounts and sizes of contracts in
a given day. Instead the way volume is measured is to count how many ticks or changes of price there are throughout the session. There needs to be a certain amount of contracts signed to move the price one way or the other, and each tick represents this amount. Therefore volume can still be measured, even though it’s a little bit of a roundabout way compared to equities.
- Volume should be used as a corroborative evidence of a trend, not as primary evidence.
- Volume can be used to confirm price changes. When a trend starts, and there is not a pick up in volume activity, that may mean that the trend is weak and does not have commitment.
- Secondly, if there is a pick up in volume, then that may mean that a change in price may be approaching. The direction of the movement during this increase in volume can be indicative of the upcoming action.
Who is in Control?
A bullish market is one in which there are more buyers than sellers. A bear market is one where there are more sellers than buyers. When a majority of buyers move to seller position, price drops. As price drops, more long positions switch positions to avoid losses, bringing price down further. This snowball effect can cause a volume spike and possibly a trend reversal.
Referring to long or short positions is easier than buying and selling as in Forex selling one currency is buying the other and vice versa. To be in a long or short position on a particular pair can only mean one thing.
Accumulation – is a term used to describe a market that is controlled by buyers.
If there is a downward trend that stalls when volume is increasing or high, that means there are more buyers willing to buy the pair at the lower price and accumulation is taking place. Once all the sellers are
exhausted, then buyers will outnumber sellers and the downtrend will reverse.
These are the two ways that a day can be characterized as accumulation:
1. Volume increases compared to yesterday and closing prices move
higher.
2. After trending downwards, price moves very little on a pick up in
volume.
Distribution – is a term used to describe a market that is controlled by sellers.
If there is an upward trend that stalls, and volume increases, that must mean that there are many sellers willing to sell the pair at the higher price. Therefore buyers have lost control to sellers.
These are the two ways that characterize a day featuring distribution:
1. Volume increases and closing price moves down.
2. After trending upward, price moves very little on a pick up in volume.
High Volume and Reversals:
As mentioned before, volume can provide insights in trend reversals. In a longer term scenario traders may be able to identify and ride trends. Reversals come about as there are changes in the underlying fundamentals for a currency pair. Identifying these changes is the real challenge of trading currencies.
Usually as investors and traders catch wind of these fundamental changes volume picks up as more and more investors get on board.
A reversal can be different from a volume spike, which is an increase in volume in a single trading period. Reversals usually come on several to many days of higher than average volume. The short-term extra volume needed for a spike can be brought about by a single news item and its effects can wear off
just as fast. Trend reversals are based more on fundamental economic shifts and changes in the economies of two countries.
Figure 2 – Example of a trend reversal on high volume in the USD/JPY pair.
Notice how volume picked up dramatically at the end of 2004 after a two month downtrend. The fundamentals between these two currencies must have changed and traders responded, increasing volume at the market bottom. The downtrend buckled and the USD/JPY went on a yearlong trend in the opposite direction. Most reversals will not have such a big surge of volume, but this is a good visual example of how a reversal on high volume can happen.
Trends move in waves with retractions. The lines labeled A-B-C try and show the main parts of the wave for both the long term downtrend and uptrend. They are very rudimentary and if one is interested, it would be beneficial to research Elliot Wave Theory to learn about this phenomenon further.
Volume
Volume measures the “worth” of a market move. If a currency pair has a strong price move either up or down, the perceived strength of that move depends on the amount of volume for that period. Moves backed by higher volume are more significant. By monitoring volume, a trader should not be left behind on important market moves. Important moves will usually come on a spike, or a short period of time when there is more volume than normal. Volume can help a trader prepare for breakout from a trend. Traders should also be able to identify periods where there are calm ranges and consolidation as they will have lower volume.
Consider the figure below:
Figure 1 – Examples of movements on higher volume; and sideways price action on lower volume.
Option Greeks
1) Option Greeks: DELTA
Delta is a measure of the change in the option price resulting
from a change in the underlying stock price.
The delta values will be positive for Calls &
negative for Puts.
At-the-money (ATM) options have (absolute) deltas around 0.5.
Out-of-the-money (OTM) options have (absolute) deltas between 0 to 0.5.
In-the-money (OTM) options have (absolute) deltas between 0.5 to 1.
2) Option Greeks: GAMMA
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Gamma is a measure the rate of change of delta due to a
one-point change in the price of the underlying stock.
Unlike delta, gamma is always positive for both Calls and Puts.
Gamma is the highest for the ATM options, and gradually gets lower as it moves
furthers towards ITM and OTM.
That means that the delta of ATM options changes the most when the stock price
moves up or down, as compared to ITM & OTM options.
3) Option Greeks: THETA
Theta is a measure of the rate of decline of option’s time-value
resulting from the passage of time (TIME DECAY).
Theta is typically highest for ATM options, and is progressively lower as
options are ITM and OTM.
This makes sense because ATM options have the highest time value component, so
they have more time value to lose over time than an ITM or OTM option.
4) Option Greeks: VEGA
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Vega is a measure the sensitivity of an option’s price to
changes in Implied Volatility (IV).
Vega is highest for ATM options, and is gradually lower as options are ITM and
OTM.This means that the when there is a change in volatility, the value of ATM
options will change the most. This makes sense because ATM options have the
highest time value component, and changes in Implied Volatility would only
affect the time value portion of an option’s price.
Friday, December 5, 2008
Forex Pivot Point Trading Tips
Here are some easy to memorize tips that will help you to make smart pivot
point trading decisions.
- If price at PP, watch for a move back to R1 or S1.
- If price is at R1, expect a move to R2 or back towards PP.
- If price is at S1, expect a move to S2 or back towards PP.
- If price is at R2, expect a move to R3 or back towards R1.
- If price is at S2, expect a move to S3 or back towards S1.
- If there is no significant news to influence the market, price will
usually move from P to S1 or R1. - If there is significant news to influence the market price may go straight
through R1 or S1 and reach R2 or S2 and even R3 or S3. - R3 and S3 are a good indication for the maximum range for extremely
volatile days but can be exceeded occasionally. - Pivot lines work well in sideways markets as prices will most likely range
between the R1 and S1 lines. - In a strong trend, price will blow through a pivot line and keep going
How to Trade with Pivot Points
Breakout Trades
The pivot point should be the first place you look at to enter a trade, since it is the primary support/resistance level. The biggest price movements usually occur at the price of the pivot point.
Only when price reaches the pivot point will you be able to determine whether to go long or short, and set your profit targets and stops. Generally, if prices are above the pivot it’s considered bullish, and if they are below it’s considered bearish.
Let’s say the price is hovering around the pivot point and closes below it so you decide to go short. Your stop loss would be above PP and your initial profit target would be at S1.
However, if you see prices continue to fall below S1, instead of cashing out at S1, you can move your existing stop-loss order just above S1 and watch carefully. Typically, S2 will be the expected lowest point of the trading day and should be your ultimate profit objective.
The converse applies during an uptrend. If price closed above PP, you would enter a long position, set a stop loss below PP and use the R1 and R2 levels as your profit objectives.
Range-bound Trades
The strength of support and resistance at the different pivot levels is determined by the number of times the price bounces off the pivot level.
The more times a currency pair touches a pivot level then reverses, the stronger the level is. Pivoting simply means reaching a support or resistance level and then reversing. Hence, the word “pivot”.
If the pair is nearing an upper resistance level, you could sell the pair and place a tight protective stop just above the resistance level.
If the pair keeps moving higher and breaks out above the resistance level, this would be considered an upside “breakout”. You would also get stopped out of your short order but if you believe that the breakout has good follow-through buying strength, you can reenter with a long position. You would then place your protective stop just below the former resistance level that was just penetrated and is now acting as support.
If the pair is nearing a lower support level, you could buy the pair and place a stop below the support level
Theoretically Perfect?
In theory, it sounds pretty simple huh? Dream on, pal!
In the real world, pivot points don’t work all the time. Price tends to hesitate around pivot lines and at times it’s just ridiculously hard to tell what it will do next.
Sometimes the price will stop just before reaching a pivot line and then reverse meaning your profit target doesn’t get reached. Other times, it looks like a pivot line is a strong support level so you go long only to see the price fall, stop you out, then reverse back into your direction.
You must be very selective and create a pivot point trading strategy that you intend to strictly follow.
Let’s go look at a chart to see just how difficult and easy pivot points might be
Ooooh pretty colors! We like...
Look at the orange oval. Notice how the PP was a strong support but if you went long on PP, it never was able to rise up to R1.
Look at the first purple circle. The pair broke down through PP but failed to reach S1 before reversing back to PP. On the second break down though (second purple circle), the pair did manage to reach S1 before once again reversing back to PP.
Look at the pink oval. Again, PP acted as strong support but never was able to rise up to R1.
On the yellow circle, the pair broke out to the downside again, sliced right through S1, and managed to fall all the way down to S2.
If you ever attempted to go long on this chart, you would have been stopped out every single time.
Personally, we would have not even thought about buying this pair - Why not? Well we have a little secret. What we didn’t show you regarding this chart was that this pair was trending down for quite some time now.
Remember the trend is your friend. We don’t like to backstab our friends, so we try our best to never trade against the trend.In the next lesson, you will learn how to use multiple timeframes to trade with the correct trend direction so you’re able to minimize possible mistakes such as the one above
The pivot point should be the first place you look at to enter a trade, since it is the primary support/resistance level. The biggest price movements usually occur at the price of the pivot point.
Only when price reaches the pivot point will you be able to determine whether to go long or short, and set your profit targets and stops. Generally, if prices are above the pivot it’s considered bullish, and if they are below it’s considered bearish.
Let’s say the price is hovering around the pivot point and closes below it so you decide to go short. Your stop loss would be above PP and your initial profit target would be at S1.
However, if you see prices continue to fall below S1, instead of cashing out at S1, you can move your existing stop-loss order just above S1 and watch carefully. Typically, S2 will be the expected lowest point of the trading day and should be your ultimate profit objective.
The converse applies during an uptrend. If price closed above PP, you would enter a long position, set a stop loss below PP and use the R1 and R2 levels as your profit objectives.
Range-bound Trades
The strength of support and resistance at the different pivot levels is determined by the number of times the price bounces off the pivot level.
The more times a currency pair touches a pivot level then reverses, the stronger the level is. Pivoting simply means reaching a support or resistance level and then reversing. Hence, the word “pivot”.
If the pair is nearing an upper resistance level, you could sell the pair and place a tight protective stop just above the resistance level.
If the pair keeps moving higher and breaks out above the resistance level, this would be considered an upside “breakout”. You would also get stopped out of your short order but if you believe that the breakout has good follow-through buying strength, you can reenter with a long position. You would then place your protective stop just below the former resistance level that was just penetrated and is now acting as support.
If the pair is nearing a lower support level, you could buy the pair and place a stop below the support level
Theoretically Perfect?
In theory, it sounds pretty simple huh? Dream on, pal!
In the real world, pivot points don’t work all the time. Price tends to hesitate around pivot lines and at times it’s just ridiculously hard to tell what it will do next.
Sometimes the price will stop just before reaching a pivot line and then reverse meaning your profit target doesn’t get reached. Other times, it looks like a pivot line is a strong support level so you go long only to see the price fall, stop you out, then reverse back into your direction.
You must be very selective and create a pivot point trading strategy that you intend to strictly follow.
Let’s go look at a chart to see just how difficult and easy pivot points might be
Ooooh pretty colors! We like...
Look at the orange oval. Notice how the PP was a strong support but if you went long on PP, it never was able to rise up to R1.
Look at the first purple circle. The pair broke down through PP but failed to reach S1 before reversing back to PP. On the second break down though (second purple circle), the pair did manage to reach S1 before once again reversing back to PP.
Look at the pink oval. Again, PP acted as strong support but never was able to rise up to R1.
On the yellow circle, the pair broke out to the downside again, sliced right through S1, and managed to fall all the way down to S2.
If you ever attempted to go long on this chart, you would have been stopped out every single time.
Personally, we would have not even thought about buying this pair - Why not? Well we have a little secret. What we didn’t show you regarding this chart was that this pair was trending down for quite some time now.
Remember the trend is your friend. We don’t like to backstab our friends, so we try our best to never trade against the trend.In the next lesson, you will learn how to use multiple timeframes to trade with the correct trend direction so you’re able to minimize possible mistakes such as the one above
Pivot Point Trading
Mark Mc Rae
You are going to love this lesson. Using pivot points as a
trading strategy has been around for a long time and was originally used by
floor traders. This was a nice simple way for floor traders to have some idea of
where the market was heading during the course of the day with only a few simple
calculations.
The pivot point is the level at which the market direction changes for the day. Using some simple arithmetic and the previous days high, low and close, a series of points are derived. These points can be critical support and resistance levels. The pivot level, support and resistance levels calculated from that are collectively known as pivot levels.
Every day the market you are following has an open, high, low and a close for the day (some markets like forex are 24 hours but generally use 5pm EST as the open and close). This information basically contains all the data you need to use pivot points.
The reason pivot points are so popular is that they are predictive as opposed to lagging. You use the information of the previous day to calculate potential turning points for the day you are about to trade (present day).
Because so many traders follow pivot points you will often find that the market reacts at these levels. This give you an opportunity to trade.
Before I go into how you calculate pivot points, I just want to point out that I have put an online calculator and a really neat desktop version that you can download for free
HERE
If you would rather work the pivot points out by yourself, the formula I use is below:
Resistance 3 = High + 2*(Pivot - Low)
Resistance 2 = Pivot + (R1 - S1)
Resistance 1 = 2 * Pivot - Low
Pivot Point = ( High + Close + Low )/3
Support 1 = 2 * Pivot - High
Support 2 = Pivot - (R1 - S1)
Support 3 = Low - 2*(High - Pivot)
As you can see from the above formula, just by having the previous days high, low and close you eventually finish up with 7 points, 3 resistance levels, 3 support levels and the actual pivot point.
If the market opens above the pivot point then the bias for the day is long trades. If the market opens below the pivot point then the bias for the day is for short trades.
The three most important pivot points are R1, S1 and the actual pivot point.
The general idea behind trading pivot points are to look for a reversal or break of R1 or S1. By the time the market reaches R2,R3 or S2,S3 the market will already be overbought or oversold and these levels should be used for exits rather than entries.
A perfect set would be for the market to open above the Unfortunately life is not that simple and we have to deal with each trading day the best way we can. I have picked a day at random from last week and what follows are some ideas on how you could have traded that day using pivot points. |
On the 12th August 04 the Euro/Dollar (EUR/USD) had the following:
High - 1.2297
Low - 1.2213
Close - 1.2249
This gave us:
Resistance 3 = 1.2377
Resistance 2 = 1.2337
Resistance 1 = 1.2293
Pivot Point = 1.2253
Support 1 = 1.2209
Support 2 = 1.2169
Support 3 = 1.2125
Have a look at the 5 minute chart below
The green line is the pivot point. The blue lines
are resistance levels R1,R2 and R3. The red lines are support levels S1,S2 and
S3.
There are loads of ways to trade this day using
pivot points but I shall walk you through a few of them and discuss why some are
good in certain situations and why some are bad.
The Breakout Trade
At the beginning of the day we were below the pivot point, so our bias is for short trades. A channel formed so you would be looking for a break out of the channel, preferably to the downside. In this type of trade you would have your sell entry order just below the lower channel line with a stop order just above the upper channel line and a target of S1. The problem on this day was that, S1 was very close to the breakout level and there was just not enough meat in the trade (13 pips). This is a good entry technique for you. Just because it was not suitable this day, does not mean it will not be suitable the next day.
The Pullback Trade
This is one of my favorite set ups. The market passes through S1 and then pulls back. An entry order is placed below support, which in this case was the most recent low before the pullback. A stop is then placed above the pullback (the most recent high - peak) and a target set for S2. The problem again, on this day was that the target of S2 was to close, and the market never took out the previous support, which tells us that, the market sentiment is beginning to change.
Breakout of Resistance
As the day progressed, the market started heading back up to S1 and formed a channel (congestion area). This is another good set up for a trade. An entry order is placed just above the upper channel line, with a stop just below the lower channel line and the first target would be the pivot line. If you where trading more than one position, then you would close out half your position as the market approaches the pivot line, tighten your stop and then watch market action at that level. As it happened, the market never stopped and your second target then became R1. This was also easily achieved and I would have closed out the rest of the position at that level.
Advanced
As I mentioned earlier, there are lots of ways to trade with pivot points. A more advanced method is to use the cross of two moving averages as a confirmation of a breakout. You can even use combinations of indicators to help you make a decision. It might be the cross of two averages and also MACD must be in buy mode. Mess around with a few of your favorite indicators but remember the signal is a break of a level and the indicators are just confirmation.
We haven't even got into patterns around pivot levels or failures but that is not the point of this lesson. I just want to introduce another possible way for you to trade.
Monday, November 10, 2008
Bollinger Band Breakouts
Basically the opposite of "Playing the Bands" and betting on reversion to the mean is playing Bollinger Band breakouts. Breakouts occur after a period of consolidation, when price closes outside of the Bollinger Bands. Other indicators such as support and resistance lines (see: Support & Resistance) can prove beneficial when deciding whether or not to buy or sell in the direction of the breakout.
The chart of Wal-Mart (WMT) below shows two such Bollinger Band breakouts:
Bollinger Band Breakout through Resistance Buy Signal
Price breaks above the upper Bollinger Band after a period of price consolidation. Other confirming indicators are suggested, such as resistance being broken in the chart above of Wal-Mart stock.
Bollinger Band Breakout through Support Sell Signal
Price breaks below the lower Bollinger Band. It is suggested that other confirming indicators be used, such as a support line being broken, such as in the example above of Wal-Mart stock breaking below support.
This strategy is discussed by the man who created Bollinger Bands, John Bollinger, in his book Bollinger on Bollinger Bands Bollinger Bands can also be used to determine the direction and the strength of the trend. The chart below of the E-mini S&P 500 Futures contract shows a strong upward trend:
Bollinger Band Showing a Strong Trend
The chart above of the E-mini S&P 500 shows that during a strong uptrend, prices tend to stay in the upper half of the Bollinger Band, where the 20-period moving average (Bollinger Band centerline) acts as support for the price trend.
The reverse would be true during a downtrend, where prices would be in the lower half of the Bollinger Band and the 20-period moving average would act as downward resistance.
Bollinger Bands adapt to volatility and thus are useful to options traders, specifically volatility traders. The next page describes how to use Bollinger Bands to make better options trades.
Sunday, November 9, 2008
Playing the Bollinger Bands
Playing the bands is based on the premise that the vast majority of all closing prices should be between the Bollinger Bands. That stated, then a stock's price going outside the Bollinger Bands, which occurs very rarely,
should not last and should "revert back to the mean", which generally means the 20-period simple moving average. A version of this strategy is discussed in the book
Trade Like a Hedge Fund by James Altucher.
Buy Signal
In the example shown in the chart below of the E-mini S&P 500 Future, a trader buys or buys to cover when the price has fallen below the lower Bollinger Band.
should not last and should "revert back to the mean", which generally means the 20-period simple moving average. A version of this strategy is discussed in the book
Trade Like a Hedge Fund by James Altucher.
Buy Signal
In the example shown in the chart below of the E-mini S&P 500 Future, a trader buys or buys to cover when the price has fallen below the lower Bollinger Band.
Sell Signal
The sell or buy to cover exit is initiated when the stock, future, or currency price pierces outside the upper Bollinger Band. These buy and sell signals are graphically represented in the chart of the E-mini S&P 500 Futures contract shown below:
More Conservative Playing the Bands
Rather than buying or selling exactly when the price hits the Bollinger Band, the more aggressive approach, a trader could wait and see if the price moves above or below the Bollinger Band and when the price closes back inside the Bollinger Band, then the trigger to buy or sell short occurs. This helps to reduce losses when prices breakout of the Bollinger Bands for a while. However, many profitable opportunities would be lost. To illustrate, the chart of the E-mini S&P 500 Future above shows many missed opportunities. However, in the chart on the next page, the more conservative approach would have prevented many painful losses.
Also, some traders exit their long or short entries when price touches the 20-day moving average. This was the methodology used for going long in the book Trade Like a Hedge Fund.
A different, and quite polar opposite way to use Bollinger Bands is described on the next page, Playing Bollinger Band Breakouts.
Bollinger Bands
Bollinger Bands is a versatile tool combining moving averages and standard
deviations and is one of the most popular technical analysis tools available for
traders. There are three components to the Bollinger Band indicator:
- Moving Average: By default, a 20-period simple moving average is used. Upper Band: The upper band is usually 2 standard deviations (calculated from 20-periods of closing data) above the moving average.
- Lower Band: The lower band is usually 2 standard deviations below the moving average.
Bollinger Bands (in blue) are shown below in the chart of the E-mini S&P 500 Futures contract:
There are three main methodologies for using Bollinger Bands, discussed in the following sections:
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