Bands And Channels
Thus far, modifications have been based on a simple moving average or trendline. The plot can be adjusted forward or backward, the position can be reversed, or the entry or exit delayed in an attempt to begin the new trade at the time when the trend has decidedly taken a new direction. Even if prices have begun what will become a major downtrend, an entry into a short position too soon may be subjected to sharp reversals caused by conflicting fundamental and technical elements at these turning...
Interpreting The Bar Chart
The bar chart, also called the line chart, became known through the theories of Charles H. Dow, who expressed them in the editorials of the Wall Street Journal. Dow first formulated his ideas in 1897 when he created the stock averages for the purpose of evaluating the movements of stock groups. After Dow's death in 1902, William P. Hamilton succeeded him and continued the development of his work into the theory that is known today. Those who have used charts extensively and understand their...
Velocity And Acceleration
A method conceptually similar to momentum is derived from the concepts in physics of velocity and acceleration, both elements in the science of motion. Velocity, as defined in mechanics, is the rate of change of position with respect to time also called speed . There are two types of velocity, average and instantaneous. The average velocity is simply calculated as the mean velocity over a fixed distance and for a fixed time interval. In working with commodity prices, the time interval used will...
wlnPl 1
The geometric moving average itself would give greater weight to smaller values without the need for a discrete weighting function. In applying the technique to actual commodity prices, this distinction may not be obvious. For widely ranging values such as 1,000 and 10, the simple average is 505 and the geometric average is 100, but for the three sequential cocoa prices, 56.20, 58.30, and 57.15, the arithmetic mean is 57.2166 and the geometric is 57.1871. A similar test of 5, 10, or 20 days of...
Projecting Daily Highsand Lows
F1GURE IS-I Graph of the New York Stock market. F1GURE IS-I Graph of the New York Stock market. Statisticians claim that the best forecast of tomorrow's price is today's price they state that no one has been able to reliably account for all the factors that would be needed to accurately project the changes that result in the high and low prices for tomorrow. Nevertheless, many traders project these values and seem to use them with success. The simplest approach to projecting tomorrow's highs...
Adjusting for Inflation
One way of correcting for the apparent bias in the long-term charts is to adjust prices for inflation. That is, if we have a table of monthly Consumer Price Index values, all prices can be divided by the monthly percentage increase in the CPI. Therefore, if today's gold price is 400 per ounce, and inflation last year was 5 , today's price of 400 is divided by 1.05 to get 381. If the actual price of gold was 380 last year, it was very close to normal. In Figure 18-1 the CPI appears as a steady...
Info Vah
Source Themes V Greer. B.Wade Brorsen, and Shi-Miin Uu,3 ippage Costs of a Large Technical Trader Technico Analysis of Stocks amp Commodities January 1992 . Source Themes V Greer. B.Wade Brorsen, and Shi-Miin Uu,3 ippage Costs of a Large Technical Trader Technico Analysis of Stocks amp Commodities January 1992 . stocks are increasing, show reduced volatility. Many experts have theorized that the high interest rate yields seen in the 1980s, as well as the high precious metals prices, are a very...
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_ _ _ _ , _ _ . _ , ,___ _ _____ o K OOt CTNOvO ONOvONOOOa C O OOOOOOOO o o o o o o o m ro o - -rwr C NvOOrnOO coflo -o ouiNO - csr no ttedd -o flddov'ON-o o o o o o o o o o rm MD-Mmfmoooso ___ _ ., _ . roOOOOO-- -- S N StS S N NOOOOO O O ------ r 4 --- - ----- FIGURE 5-10 Trading system using two moving averages. Donchian's 5- and 20-Day Moving Average System The combined use of two moving averages has been popular among professional advisors. Of these, the most well-known is Donchian's 5- and...
The Taylor Trading Technique
In 1950, George Douglass Taylor published his book method of day trading,1 which he had been using for many years in both the stock and grain markets.2 The method is based on the experience of discipline and timing, but is carefully set down and can be implemented in either a sophisticated or simplified state. The system is intrinsically cyclic, anticipating 3-day movements in the grains. These 3 days can vary in pattern when they are within an uptrend or downtrend. Taylor's explanation of his...
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8 Louis J. Anon, Catch Short-Term Profits with ARIMA, Commodities Magazine December 1981 . FIGURE 3-10 ARIMA forecast becomes less accurate as it is used farther ahead. the market can be bought with added confidence expecting lower risk and more profit . This technique of selecting better entry points may compensate for some of the inaccuracies latent in any forecasting method. The danger of this approach is that prices may continue to move counter to the forecast, so that caution and a...
Exponential Smoothing
Exponential smoothing may appear to be more complex than other techniques, but it is only another form of a weighted moving average. It has the added advantage of being simpler to calculate than any other method discussed only the last exponentially smoothed value E,,i and the smoothing constant a are necessary to compute the new value. The technique of exponential smoothing was developed during World War II for tracking aircraft and projecting their position the immediate past is used to...
Spreads and Arbitrage
position taken in opposing directions in related markets, contracts, options, or shares is called a spread, or straddle. When the dynamics of the spread can be defin itively calculated, such as the price of two bonds of the same maturity and the same grade, or the price of gold in two different locations, the transaction can be considered an arbitrage. For futures markets, the most common use of the term spread relates to two delivery months of the same market. For example, a trader may take a...
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FIGURE 3-2 Error deviation for method of least squares. The line that causes to be the smallest possible value will be the best choice for these data points. The square of yt yt is always positive, thereby magnifying the importance of those data points that are farther from the approximated line on either side and reducing the significance of those points for which the approximation is good. To use the least-squares method for solving the corn-soybean price relationship, look for the solution...
Info Ktr
few seconds even though volume may vary. For practical purposes, prices might be considered equally spaced. But consider an extreme example. The price of a less liquid market changes every 15 seconds during more active times, then quiets to 5-minute intervals at one time, there is a lull of 15 minutes followed by a jump in price. Is there a difference in the way we would interpret the following two patterns Is there a difference in the way a moving average wpuld calculate the trend 10 00 10 01...
Volume Indicators
-Both the stock and futures markets are familiar to indicators that use only volume, or those that add volume, intending to make other calculations more robust. The following section gives the most popular of these indicators, most of which originate in the stock market and many of which use the number of advancing and declining stocks. Readers should note the way in which the data is used from one technique to another and consider the significance of these changes. They will be discussed at...
Quantifying the Value Area
The idea of a value area that is shaped as a bell curve, or an extended formation to represent a trending day, seems clear unfortunately, patterns are rarely as clear as these examples. To help this process, Jones has applied overlays to these patterns, using a standard deviation to measure them. In Chapter 2, we explained that, for a normal distribution, the value of 1 standard deviation represents a clustering of 68 of all values around the mean therefore, 34 are on either side. Similarly, 2...
Commitment Of Traders Report
Drawing from more than 20 years of experience in analyzing the CFTC's Commitment of Traders Report, William L. Jiler described a supplementary approach to identifying a major trend in his 1985 CRB Commodity Yearbook.9 With his usual thoroughness and clarity, Jiler presents material that had previously been unsuccessfully interpreted. Originally released the 11th day of each month biweekly since 1992 , the Commitment of Traders Report summarizes the positions of reporting and nonreporting...
Info Mru
input period numericsimple , fi1ter numeric , 1ag numeric vars slopefO , signaHO Call linear regression slope User Function slope - KLRS close,period si gna1 - si gnal 1 long signal slope is up by more than filter if lag gt - 0 and s1opellag gt fi1ter then signal - 1 short signal slope is down by more than filter if lag gt - 0 and siope lag lt -fi1ter then signal - -1 KLRSignal - signal KNDB N-Day Breakout User Function Copyright 1994-1998, P J Kaufman. All rights reserved. INPUT for N-day...
Constructions Usingthe Fibonacci Ratio
Harahus shows interesting constructions using Fibonacci ratios these are referred to as the golden rectangle, golden triangle, and golden spiral. Although there is no doubt of their importance, the application to markets can be complicated. As a behavioral model, any technique is subject to gross inaccuracy at times. In using a method as sophisticated as the Elliott Wave Theory, it is necessary to select situations that are representative examples of the phenomenon described by the FL sequence....
Phasing
One of the most interesting applications of the cyclic element of a time series is presented byJ.M. Hurst in The Profit Magic of Stock Transaction Timing Prentice-Hall it is the phasing or synchronization of a moving average to represent cycles. This section will highlight some of the concepts and present a simplified example of the method. It is already known that to isolate the cycle from the other elements, the trending and seasonal factors should be subtracted, reducing the resulting series...
Action And Reaction
The human element in the market is not responsible for the ultimate rise and fall of prices, but for the way in which prices find their proper level. Each move is a series of overreac-tions and adjustments. Many stock and commodity analysts have studied this phenomenon and base entire systems and trading rules on their observations. Elliott's Wave Principle is the clearest and most well-known of the theories founded entirely on this notion. Tubbs' Stock Market Correspondence Course is the first...
Applications Of Singletrends
The selection of the trend speed calculation period is as important as any of the system's rules. The speed determines the activity of trading and the nature of the trend to be isolated. To help this decision, some of the preceding sections have shown comparisons of the different speeds as well as approaches, based on minimizing the magnitude of the forecast errors. Without a computer, extensive examination of alternatives is impossible. Chapter 21 concentrates on the use of the computer for...
Chart Formations 1
It would be impossible for the average speculator to follow the original method of recording every change in price. When applied to stocks, those charts became so lengthy that interpretations similar to those used for the traditional bar chart were necessary to select the best patterns. In X969, Robert E. Davis published Profit and Profitability, a point-and-figure study that detailed eight unique buy and sell signals. The study covered two stocks for the years 1914-1964, and 1,100 stocks for...
Cycle Basics
Even when the seasonal pattern is eliminated, most cycles are still based on the periodic effects in our solar system. After the 1-year orbit of our planet around the sun, there is the 28-day lunar cycle converted to business days, this gives the very familiar 20-day reference, which remains overwhelmingly popular among all analysts. Other planetary effects, which should by no means be discarded offhand, can be found in Chapter 14 under the topic Financial Astrology. Throughout this chapter,...
Info Nuj
One practical note is needed here. Although there may appear to be a statistical benefit to selling heating oil in the later part of winter, there is also extreme risk. Prices jumped 40 from March to April 1982, and 20 during the same period in 1983. We must also consider that the GulfWar, which pushed prices higher from August 1990, conformed by chance to the seasonal pattern in reality, it could have happened any time during the year. These special situations do not always cause prices to...
Info Iey
All box sires use a 3-box reversal and are in points decimal fractions treated as whole numbers unless otherwise indicated. Cohen 1972 parentheses indicate approximate values. Courtesy of Chartcraft Commodity Service, Chartcraft, Inc., Larchmont, NY. Chart Analysis Limited. Bishopgate, London.Values are for long-term continuation charts. 1 Cocoa contract changed from cents pound to dollars ton. All box sires use a 3-box reversal and are in points decimal fractions treated as whole numbers...
Programming KAMA
The following Easy Language user function can be used by a system or indicator to calculate Kaufman's Adaptive Moving Average. KAMA Kaufman's Adaptive Moving Average Copyright 1990-1998, PJ Kaufman. All rights reserved vars efratioCO , smooth l , fastend .666 , siowendt.0645 , AMA O , diff O , signal O , noise O calculate efficiency ratiol efrati o - 1 diff - Sabsva 1 ue close - closed if currentbar gt period then begin signal absvalue close - close period noise summation diff,period if noise...
Breakout Ranges Based on Time
Instead of a breakout that occurs when prices move a fixed number of points away from the opening price, you can establish an opening range based on the first 60 minutes of trading.' After this time, a new high or low would be a signal to enter a long or short position. This is a trade-off between avoiding the erratic movements of early trading and missing the beginning of a price move to start early and continue in the same direction. Combined with the first-hour breakout is a calculation of...
Dispersion And Skewness
The center or central tendency of a data series is not a sufficient description for price analysis. The manner in which it is scattered about a given point, its dispersion and skewness, are necessary to describe the data. The mean deviation is a basic method for measuring distribution and may be calculated about any measure of central location, for example, the arithmetic mean. It is found by computing MD - or Avg AbsValue price - Avg price,n ,n where MD is the mean deviation, th average of the...
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AUtoday AVpnor-- today's up close or 0 i ADcod ADpaor - AD r today's down close or 0 This method essentially drops an average value and adds the new value, if any. The daily calculation of the RSI becomes simple. Wilder has favored the use of the 14-day measurement because it represents one-half of a natural cycle. He has set the significant levels for the RSI at 30 and 70. The lower level is indicative of an imminent upturn and the upper level of a pending downturn. A plot of the RSI can be...
Info Srx
Source Curtis McKallip,Jr.,Fundamentals behind technical analysis, Technical Analysis of Stocks amp Commodities, 7, no. 11 November 1989 . 1989 by Technical Analysis, Inc. Used with permission. change in value of the U.S. dollar and the volatility of interest rates have had far greater influence on price than normal fundamental factors for many commodities. Models that explain price movements must be constructed fr m prt 2 T factors of supply and demand. A simple example for estimating the...
Channel Breakout
The classic channel is formed by drawing a straight line along the bottom of an upward trend, or the tops of a downtrend , then constructing a parallel line that touches the extreme high price of that same time interval, forming an envelop, or channel, around a price move. It is easy to do this with a chart and a ruler, but not as simple to transfer this concept to a computer program. Because the concept of a channel breakout is basic to charting, an automated version may prove useful for...
Info Fcz
If we substitute the original prices, Pu . . . into the equation for DMA5 we find out that DMA, Pt 2P2 3P3 2P4 Ps 9 This shows that double smoothing results in weighting the middle values more than the end values, rather than the original equal weighting of the simple moving average. For exponential smoothing the result is different. Because the most recent value receives the weight of the smoothing constant, a, the double smoothing causes the nearby value t to be smoothed twice by a, or a x a,...
Complex Patterns
Most charting systems involve a few simple rules, trying to model a price pattern that seems to have repeatedly resulted in a profitable move. The most popular systems are simply a breakout of a previous high or low, either a horizontal pattern or a trend channel. Over the years these approaches have proved to be steady performers. Another group of traders might argue that it is better to be more selective about each trade and increase the expectation of a larger profit, than to take many...
Cycle Channel Index
A trend-following system that operates for a market with a well-defined cyclic pattern should have specific qualities that do not necessarily exist in a generalized smoothing model. To confirm the cyclic turning points, which do not often occur precisely where they are expected, a standard moving average should be used, rather than an exponentially smoothed one. Although exponential smoothing always includes some residual effect of older data, the determination of a cyclic turning point must be...
Info Uaq
Start with either an up or down day, and then calculate the probability of the next day being up or down. This is done easily by simply counting the number of cases, given in Table 2-4a, then dividing to get the percentages, as shown in Table 2-4b. Because the first day may be designated arbitrarily as up or down, it is an exception to the general rule and, therefore, is given the weight of 50 . The probability of the second day being up of down is the sum of the joint probabilities gt UP 2 .50...
Info Lza
The GSC System states that a new price direction will begin on, or shortly after, the day calculated as where L, and H, are the days on which lows and highs occurred, and L, occurred before H,. For simplicity, an extreme may be used only twice once as the first point and once as the second. Figure 14-16 shows the order in which the calculations occur. Time-goal day T3 was calculated from lows Li and L4 before-time-goal day T7 occurred. When more than one time-goal day occurs at the same point,...
Moonphases
Returns the mean phases of the moon, corrected for the sun's aberration VARS k 0 , t 0 , next-W , i 0 ARRAV fullmoon 62 0 , newmoon 62 0 next - -62 for i - 1 to 62 begin k -next Inewmoons relative to the year 2000 T - k 1236.85 time in Julian centuries nawmoonfi - 2451550.09765 29.530588853 k 0.0001337 power T,2 - 0. 000000150 power T,3 0. 0000000007 3 power T ,4 k - next .5 full moons relative to the year 2000 T - k 1236.85 fullmoon i - 24515S0.09765 29.530588853 k 0.0001337 power T,2 -0 ....
Swing Trading
The foundation for the largest number of chart-based systems is the swing chart. Similar to point-and-figure, a swing is an upward or downward movement of a minimum size, regardless of the time it takes to achieve that move. Unlike point-and-figure, there are no boxes, and the notation does not use Xs and Os. The only difference between one swing chart and another is the swing filter. Once prices have reversed from a high or low point by the minimum amount specified by the swing filter, a new...
Spread And Arbitrage Relationships
The relationship between two markets, or between various deliveries and trading vehicles within the same market, will determine the type of trading strategy that may be applied. The types of spreads and arbitrage situations that are most often watched are 1. Substitute products, such as wheat and corn or cattle and hogs. Product substitution ranges from those markets that are nearly identical e.g., 3-month T-bills and 3-morith Eurodollars , to cotton and soybeans, which share the same land and...
Linear Regression Model
A linear regression, or straight-line fit, could be the basis for a simple trading strategy similar to a moving average. For example, an -day linear regression, applied to the closing prices, could be used with the following rules 1. Buy when the closing price moves above the forecasted value of today's close. 2. Sell when the closing price moves below the forecasted value of today's close.11 There is an important difference between a model based on linear regression and one founded on a moving...
Key Reversal Days
A formation that has been endowed with great forecasting power is the key reversal day, sometimes called an outside reversal day. It is a weaker form of an island reversal. A bearish key reversal is formed in one day by first making a new high in an upward trend, reversing to make a low that is lower than the previous low, and then closing below the previous close. It is considered more reliable when the prior trend is well established. This could be identified using EasyLanguage as if close l...
Info Gvl
movements have been removed from the series by differencing. Figure 3-9 shows three patterns of correlograms printed by EASI ARIMA on a PC. The top scale shows the importance of the coefficients. If they fall within the brackets, they have no importance if they fall outside the brackets, they are highly significant greater than two standard deviations, or 95 . The left scale gives the lag relationship, that is, the relationship of the current price to the price n days ago. An asterisk will...