How to use Technical Analysis Successfully · Andrews' Pitchfork Arms Index Average True Range...
Transcript of How to use Technical Analysis Successfully · Andrews' Pitchfork Arms Index Average True Range...
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How touseTechnicalAnalysisSuccessfully
Alex Douglas
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What is Technical Analysis?• VERY broad subject – Many branches • Difficult to define
- ongoing projectfor IFTA
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Unrealistic expectations
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DoesTechnical AnalysisWork?
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Minimum Price Objective
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“Head and Shoulders Tops- The Essential
Facts”
by
David Schwartzand
Robin Griffiths
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23%
11%
13%
13%
40%
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Height of Left Shoulder Relative to Height of HeadThe Left Shoulder - LS
LH
• It is best if the Left Shoulder is large in comparison to the the height of the Head.
• Calculation = L / H
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The Left Shoulder - LSHeight of LS Relative to Pre-Formation Rally
$6.50
$8.60
$9.00
Height of the LS relative tothe Pre-Formation Rally= ($9.00 - $8.60) / ($9.00 - $6.50)= $0.40 / $2.50= 16%
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The Left Shoulder - LSHeight of LS Relative to Pre-Formation Rally
Height of LS relative to Pre-Formation Rally
Odds of Meeting orExceeding the MPO
- 65%
- 41%
- 28%
• 12% or less
• 13% to 22%
• over 22%
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The HeadHeight – Peak of Head to Neckline on day of peak
$3.00
Height of Head as a percentage= ($3.45 - $3.00) / $3.00= $0.45 / $3.00= 15%
$3.05$2.95
$3.45
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The HeadHeight – Peak of Head to Neckline on day of peak
Height of the Headas a percentage
Odds of Meeting orExceeding the MPO
- 79%
- 40%
- 28%
- 8%
• 16.4% or less
• 16.5% to 24.7%
• 24.8% to 44.3%
• 44.4% or more
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The HeadTime Taken to form the Head
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The HeadTime Taken to form the Head
Number of Weeks toform The Head
Odds of Meeting orExceeding the MPO
- 88%
- 60%
- 17%
• 5 weeks or less
• 5 to 14 weeks
• 14 weeks or moreIt is the overall relationship that is important.Patterns that form relatively quickly have abetter chance of meeting or exceeding the MPO.
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The Right Shoulder - RSSymmetry between Right & Left Shoulders
• Only 14% of confirmed H&S have a Right Shoulder that is within 10% of the Left Shoulder.
• Of those 14%, only 27% end up meeting or exceeding the MPO.
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Rating a potential H&S pattern
Percentage of MPO to be achieved
38 or more 32 - 37 29 - 31 Below 29
100% or more 91% 48% 18% 3%50 - 99% 3% 44% 44% 41%49% or less 6% 8% 38% 56%
Score from rating system
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Psychology of Trading& Technical Analysis
• DISCIPLINE•“Cut Losses & Let Profits Run”• Control of - Fear, Greed, Ego• Need to tame the urge to be “right”
• We need to go further than this and be aware of our built in BIASES that influence how we see and interpret charts.
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H O R I Z O N T A L / P A R A L L E L
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Divergence
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Divergence
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Divergence
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Divergence
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Indicators
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Indicator OverloadPrice Rate-of-ChangePublic Short RatioPuts/Calls RatioQuadrant LinesRelative Strength, ComparativeRelative Strength IndexRenkoSpeed Resistance LinesSpreadsStandard DeviationSTIXStochastic OscillatorSwing IndexThree Link BreakTime Series ForcastTirone LevelsTotal Short RatioTrade Volume IndexTrendlinesTRIXTypical PriceUltimate OscillatorUpside/Downside RatioUpside/Downside VolumeVertical Horizonal FilterVolatility, Chaikin'sVolumeVolume OscillatorVolume Rate-of-ChangeWeighted CloseWilliams' Accumulation/DistributionWilliams' %RZig Zag
Gann AnglesHerrick Payoff IndexKagiLarge Block RatioLinear Regression LinesMACDMass IndexMcClellan OscillatorMcClellan Summation IndexMember Short RatioMomentumMoney Flow IndexMoving AveragesNegative Volume IndexNew Highs-Lows CumulativeNew Highs-New LowsNew Highs/Lows RatioOdd Lot Balance IndexOdd Lot Purchases/SalesOdd Lot Short RatioOn Balance VolumeOpen InterestOpen-10 TRINOption AnalysisOverbought/OversoldParabolic SARPatternsPercent RetracementPoint & FigurePositive Volume IndexPrice and Volume TrendPrice Oscillator
Absolute Breadth IndexAccumulation/DistributionAccumulation Swing IndexAdvance/Decline LineAdvance/Decline RatioAdvancing-Declining IssuesAdvancing, Declining, Unchanged VolumeAndrews' PitchforkArms IndexAverage True RangeBollinger Bands Breadth ThrustBull/Bear RatioCandlesticks - JapaneseChaikin OscillatorCommodity Channel IndexCommodity Selection IndexCorrelation AnalysisCumulative Volume IndexCyclesDemand IndexDetrended Price OscillatorDirectional MovementEase of MovementEfficient Market TheoryElliott Wave TheoryEnvelopes (Trading Bands)Equivolume/CandlevolumeFibonacci StudiesFour Percent ModelFourier Transform
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Indicator Overload• So many indicators available at the click of a button
• Danger – Selecting the indicator that supports yourpre-conceived view of the market
• Complex is not necessarily Better
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Thoroughly learn a handful of Indicators• Trend Following Indicators
• Moving Averages• Directional Movement Index• On-Balance Volume
• Momentum Indicators / Oscillators• RSI• Stochastic
• Hybrid Indicators• MACD• Bollinger Bands
• Need to Avoid the Collinearity Trap
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Time FrameWeekly = Tide Daily = Waves Intraday = Ripples
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Time Frame
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|------ BOLLINGER BANDS ------|2 sd either side of the mean
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|------ BOLLINGER BANDS ------|
89%
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BFX – Belgium
BBands narrowestsince 1995
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BFX – Belgium+10%
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Soybean Futures
Turn suggests end ofthe impulsive move
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February March April May June July August September October1998
18.5
19.0
19.5
20.0
20.5
21.0
21.5
22.0
22.5
23.0
23.5
24.0
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%b
(Last – Lower BBand) .
(Upper BBand – Lower BBand)
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February March April May June July August September October1998
0.5
1.0
18.5
19.0
19.5
20.0
20.5
21.0
21.5
22.0
22.5
23.0
23.5
24.0
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1996 1997 1998 1999 2000 2001 2002 2003
2025303540455055606570758085
0.470.480.490.500.510.520.530.540.550.560.570.580.590.600.610.620.630.640.650.660.670.680.690.700.710.720.730.740.750.760.770.780.790.800.810.82AUD-USD (0.6626, 0.6668, 0.6610, 0.6656)AUD-USD
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1996 1997 1998 1999 2000 2001 2002 2003
2025303540455055606570758085
0.470.480.490.500.510.520.530.540.550.560.570.580.590.600.610.620.630.640.650.660.670.680.690.700.710.720.730.740.750.760.770.780.790.800.810.82AUD-USD (0.6626, 0.6668, 0.6610, 0.6656)AUD-USD
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1996 1997 1998 1999 2000 2001 2002 2003
2025303540455055606570758085
0.470.480.490.500.510.520.530.540.550.560.570.580.590.600.610.620.630.640.650.660.670.680.690.700.710.720.730.740.750.760.770.780.790.800.810.82AUD-USD (0.6626, 0.6668, 0.6610, 0.6656)AUD-USD
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August September October November December 2003 February March April May June July August September O
25
30
35
40
45
50
55
60
65
70
114.5115.0115.5116.0116.5117.0117.5118.0118.5119.0119.5120.0120.5121.0121.5122.0122.5123.0123.5124.0124.5125.0125.5126.0126.5USD-JPY (117.40, 117.48, 116.02, 116.20)
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August September October November December 2003 February March April May June July August September O
5101520253035404550556065707580
114.5115.0115.5116.0116.5117.0117.5118.0118.5119.0119.5120.0120.5121.0121.5122.0122.5123.0123.5124.0124.5125.0125.5126.0126.5USD-JPY (117.40, 117.48, 116.02, 116.20)
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%b(RSI)
(RSI – Lower RSI BBand) .
(Upper RSI BBand – Lower RSI BBand)
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er October November December 2003 February March April May June July August September O
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1.0
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114.5115.0115.5116.0116.5117.0117.5118.0118.5119.0119.5120.0120.5121.0121.5122.0122.5123.0123.5124.0124.5125.0125.5126.0126.5USD-JPY (117.40, 117.48, 116.02, 116.20) www.alexdouglas.com
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How to use Technical Analysis Successfullywww.alexdouglas.com
• Ensure that you have realistic expectations
• Don’t take statements on how well various tools oftechnical analysis ‘work’ at face value – Dig deeper
• Be aware of Psychological Biases• Suppress the urge to be “right”
• Learn how to detect valid Divergence signals
• Select a handful of indicators and thoroughly learnhow they are created and how they behave
• Seek confirmation across timeframes