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Lecture ThreeTechnical Analysis II
Andy Bowerwww.alchemetrics.org
Advanced Chart Patterns
Fibonacci Levels•Retracements•Clusters
Elliott Wave Analysis•Impulse 5-waves•Corrective 3-Waves
Indicators
Moving Averages•Simple/Exponential/Weighted
Oscillators•Momentum/CCI/RSI/MACD/Stochastics
Fibonacci Levels
Series•1, 1, 2, 3, 5, 8, 13 etc•Ratios 61.8%, 38.2%, 23.6%•Inverse 161.8%
Retracements•Additional retracements 50%, 100%•23.6%, 38.2%, 50%, 61.8%, 100%
Extensions•100%, 161.8%
Fibonacci RetracementsExamples
NasdaqNasdaq 100 ETF Weekly 2005100 ETF Weekly 2005
Fibonacci RetracementsExamples
SPY S&P100 ETF DailySPY S&P100 ETF Daily20032003--20042004
Fibonacci ClustersExamples
BroadcomBroadcom 15min15min20052005
Elliott Wave Analysis
Patterns•Impulse waves in direction of trend•Impulse waves have 5 steps•Correction waves against trend•Corrections have 3 steps
Ratios•Retracement and extension follow fibonacci
ratios
Time•Multiple time frames
Elliott Wave AnalysisPatterns
2211
33
44 55 aabb
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ImpulseImpulse••W3 or 5 mayW3 or 5 may ““extendextend””••W4 canW4 can’’t overlap w1t overlap w1••Often, when w3 extends w1=w5Often, when w3 extends w1=w5
CorrectionsCorrections••ZigZig--zagzag••FlatsFlats••TrianglesTriangles
162% Wave 3 ExtensionExample
Nasdaq100 ETF DailyNasdaq100 ETF Daily20022002--20052005
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33
22
44
IndicatorsMoving Averages
Simple•Sum over period, divide by period•Smoothing• but.. Substantial lag
Exponential•Weight each prior price point using:
EMA% = 2/(n + 1) where n is the number of days•Faster response than Simple Moving Average (SMA)
Uses•Crossover systems (poor in consolidating markets)•Support and Resistance trend lines
Moving AverageTrend Lines
Long term trend usingLong term trend using178 period EMA178 period EMA
Short term trend usingShort term trend using89 period SMA89 period SMA
IndicatorsOscillators
Attempt to capture “momentum”informationfrom price action
Oscillators vary between bounds• Upper bound=“overbought”• Lower bound=“oversold”
Basic momentum:M=V0-VnNo upper/lower boundary
Common Oscillators• Commodity Channel Index (CCI)• Relative Strength Index (RSI)• Stochastics (K%D)
Relative Strength Index(RSI)
RSI = 100-100/(1+RS)
RS= Avg of n days’up closesAvg of n days’down closes
•Varies between 0-100.•Overbought generally > 70•Oversold generally < 30•Often used to detect “fading trend momentum”
based on a divergence between RSI peaks/troughscompared with price action peaks/troughs
RSI-Price DivergenceNasdaqNasdaq 100 ETF Daily 2005100 ETF Daily 2005
RSIRSI
RSI SmoothedRSI Smoothed
Computer Pattern Matching
Strategy•Isolate tradable patterns.. Then test
Backtesting•Evaluation of a trading strategy using historical price
data to measure performance.
Metrics•Equity Curve•Profit Factor, Sharpe Ratio•Drawdown•Avg Trade %
BacktestingEquity Curve
BacktestingPeriod Returns
BacktestingPerformance Report
BacktestingOptimization
Strategies may have parameters•Optimize to maximize profitability•Need to be wary of “curve fitting”
Split data into segments•Backtest & Optimize on some segments•Then forward test on remaining segments
Minimize number of variables
Genetic Algorithms
Parameter Optimization•Searching a large multi-dimensional space•Typically better at avoid local optima
Use for Optimizing•Indicator based systems•Neural Network topology
Backtesting•Curve fitting issues are very important
Neural Networks
Used to isolate “unknown”patterns
BackpropagationBackpropagationNeural NetNeural Net
Real NeuronsReal Neurons
Neural Networks
Used to isolate “unknown”patternsInputs•Indicators/Other Networks
Outputs•Profit/Sharpe Ratio/etc
Network configuration•Optimize using Genetic Algorithms
Backtesting•Curve Fitting issues are very important