Learning Technical Analysis and its Practical Application

I'm often asked WHY technical analysis.

For me I'm a visual person I like to see it.
After looking at 10s of 1000s of charts I can almost instantly read a chart to the point of "am I interested"

Nothing in my life is Grey.
Its Black or White True or False Right or Wrong.

Charts convey exactly that.
I can be definitive in my decision making process and know quickly if I'm Right/Wrong or stuck in "The Grey Zone"

I see charts as analysis of crowd behaviorin investment within that instrument.
I can see Fear/Greed/Agreement/Disagreement and uncertainty.
I can define where these points are. How long they have been in control and where they could possibly end or begin.

I also understand the value of frequency. If you can get it right often and long enough and get out of Grey or Wrong quick enough you are likely to find greater profit.

Charting allows me the opportunity to do this.
More so when trading in a discretionary manner---which this following work on Technical Analysis (T/A) will be based around. Sure those inclined may use some/all or variants of what I put up to include in a Trading system which will return various parameters from testing.

I need to be able to define and diminish RISK
THIS (RISK MANAGEMENT) is the single most important tool of trade you can have.
I suggest all traders gain a PHD in risk management and mitigation. It will serve you well and keep you in the business of trading long long after the "Smart buyers and Clever Sellers" have disappeared

Charting ---- T/A allows me the luxury of being DEFINITIVE in my management of risk.

I will presume that all reading at least understand a BAR CHART as these are the charts I will use.
Range
Gaps
Volume
Support/Resistance
Close
Momentum
Breakouts
Short/Long
Position sizing
Expectancy

Are all terms I suggest you goggle if your not sure of their place in T/A---all will be on the menu.

I will be using a great number of Charts and notations and eventually we will have some trades to work with. I will be looking at shorter time frame from Day trading to a week or so.---
Our aim is to identify opportunity --- to anticipate a move in our direction and take advantage of it. if we are right stay right for as long as our analysis anticipates further momentum in our direction all the while mitigating Risk and maximising profit. If Wrong----dont stay Wrong for TOO LONG!.

Finally

Joe has agreed to lock this thread I will be able to access for updates and then close again.
If anyone DOESN'T UNDERSTAND that there is a separate Q&A thread ALREADY going their post will be moved over to it by Joe.

Then I hope the thread can remain cohesive.
Ill hopefully have time to kick off on the weekend.

The 4 stages of a stock cycle

When analysing a single stock or an index it is wise to determine where the instrument is in the life of its cycle. Before we do anything else.

Accumulation
Up Trend -- Bullish
Distribution
Down trend -- bearish.

This helps us determine a number of things.

(1) Possible time frame
Long term
Medium term
Short term

(2) The way we are likely to trade.
Trend
Counter trend
Swing
Stay in Cash
Put the house on it

(3)Type of trade we are going to be searching for.
Breakout
Pull back.
Support/Resistance

(4) Type of signals we can expect.
Increase in volume
Decrease in volume
Gaps
Break of resistance
Holding of support

Do this with BOTH the stock you have in mind and its index.
You'll often find at important turning points a very clear confluence of Pattern in a great number of stocks and the index.
This was very clear in the top of 2008 and the recent bottom of 2009
Many stocks mirrored the index. It was clear that all was crashing down and all was coming to a halt.
Very few stocks will trade at a tangent to its index.
Get in Rhythm.



NEXT TOPICS

Looking for opportunity in each of the stages.
How to Find it
How to Trade it
How to Minimise Risk
how to Increase your Bottom Line.

Other than ARB (http://en.wikipedia.org/wiki/Arbitrage) and forgetting exotics.

There are only 3 ways I know of to turn a profit trading stock or Futures.
Its important to relate the above when deciding which one of the 3 your
putting to work in your next trade. You need to know why and when it is best to look at 1 or more.

(1) Win far more often than you lose with total profit higher than total loss.
EG 80% win rate with losers kept below total win profit.
Day trade to Short term trading often much lower R/R.

(2) Win Far more profit than lose.
EG Less than 50% win rate with aggregate winners far greater than aggregate losers.
Generally Longer Term Position Trading Much higher R/R

(3) A combination of both
EG around 40-60% win rate with greater R/R than (1)

While Ill expand as we go along.

(1) Is ideal in all markets but tends to be used more in markets which are not showing a long term trend in one direction.A flatter type market--like we have had since mid August.

(2) We really cannot be definitively sure when a longer term trend is going to occur.
But we can through T/A be accurate enough to know when we have seen a SIGNIFICANT bottom or SIGNIFICANT Top
We may not get it perfect BUT we can place ourselves in a position of opportunity AND mitigate our risk in the process.
If we get it wrong then no real Harm done---get it right---that's what we are here for.

(3) We can also fairly accurately find INTERMEDIATE tops and Bottoms. Here we can look to capitalise on the best of both worlds.




So how can we maximise our return even further.
(Again more time will be spent on each as we go).

(1) Position sizing and Risk mitigation.
(2) Frequency
(3) Pyramiding
(4) Leverage
(5) Compounding


So



And



But more importantly



Just take a while to look at some charts.
Understand what has been offered up so far.

Technical analysis will help you answer these questions and these!

I will be discussing the way I trade in a discretionary manner.

But firstly I dont use oscillators. I do consult at times a stochastic but it is not used as a stand alone tool.
I certainly find some oscillators handy in design of Trading systems but to me trading a system is vastly different from trading in a discretionary manner.

We design systems so we have a re occurring structure which when adhered to over a long period of time will return a positive expectancy.It will have a blue print we can refer to to give us the confidence that the method is not experiencing conditions which are outside of those used in its design---often a prolonged period of out of sample condition can break a system or indeed see it out perform!

We (or at least I) trade in a discretionary manner so I have the flexibility to relax or increase importance of signals and their combination---to have infinite control over my Risk management rather than a set and forget set of parameters I would use in a System. I am for ever working at increasing my Reward To Risk. My portfolio is (Currently due to market conditions) being Rotated/Increased/Slashed/Stopped/Started revised and monitored in the hope of minimisation of Risk and Maximisation of Profit.

So from a mental point of view I have become very comfortable with.
(1) Being able to make a quick and binding decision based upon the evidence (technically) I have in front of me.
(2) Being WRONG.
(3) Being out of the market without a portfolio IS a POSITION.
(4) Being able to trade short (I only use INDEX FUTURES).
(5) Taking a loss --- what many cant face doing!
(6) Taking a profit---what many fail to do!

But above all-- I want it to be easy--Not all consuming--I need it to be super flexible--
I'm often out of the office---Over seas-- Running a Company---Living Life!


So what is the structure of my Discretionary trading.

(1) Risk Mitigation. I actually embrace risk but I will above all mitigate it at every chance I get. In the short term it has taken me out of profitable positions too early.
It has stopped me out too early and seen me pass up trades which dont add up as good Reward to Risk candidates.
BUT without doubt it has slashed my Risk to Reward. It has protected my capital base.It has allowed me peace of mind with larger positions which at worst break even. Of all the tools of trading THIS is by a country Mile the Most important aspect of trading you can learn.--EMBRACE IT

(2) Momentum I want to identify potential momentum either BEFORE or DURING its development. I want to be in front of it before it hits either short or long.
I want to protect myself from the negative effects of being on the wrong side of it.
I want to be able to see it BUILDING--MOVING--CONTINUING and STOPPING.

(3) Profit

So now we come to TOOLS

(1) Background
(2) Cycle _--As explained in Initial post. And VERY Basic Elliot!
(3) Pattern--Both Single and Multiple Bar.
(4) Price --Range position of close in Range. Reaction to factors
(5) Support/Resistance
(6) Trend lines
(7) Gaps
(8) Volume---encompassing VSA
(9) Position sizing.

I generally trade small caps --- but if opportunity stares me in the face with blue chips then they will also be traded. I make no targets and allow the chart to tell its story. My interpretation and application of my discretionary trading is the determining factor to profit. I am forever working to skew it in my favour.
Many would disagree with my decisions and I offer up the following understanding that.
I'm not here to convince you that the way I trade is the be all and end all--it isn't.

What I'm hoping is that it will help those struggling to turn a profit see how they can apply a working methodology which I have developed and is profitable---into their own trading.

Take the thinking-- the tools and the application and use it to develop--or improve their own trading. This is simple---un ambiguous (If you become a Black and White trader!) and FUN!!!

I dont trade full time--Dont have too dont want to.---Yes it returns more than an average wage a year!

Next we will get straight into it looking at charts and explaining the ANALYSIS and APPLICATION. We will look at the tools and the subsets in the TOOLS.

I sincerely hope this thread finds those who need it most---those who Guess/Gamble and HOPE!.

There are two things I look for when evaluating a trade (while its on my watch list---and maybe the reason its on my list) or during a trade.
These two things indicate whether I should buy/sell/increase my position/move my stop or hold.

EFFORT
We generally see effort at tops/bottoms/and out of consolidations and patterns both longer and shorter term.

LACK OF EFFORT
We generally see this at tops/bottoms and IN consolidations and patterns both long and short term.

Understanding WHEN they Occur and What they mean when they do occur--give us the opportunity to anticipate a move which we can profit from.
They also tend to be great places to place stops or raise stops to.

EFFORT can take the form of a few things technically.
My favourite is THE GAP.

Gaps take effort -- some are very clear and some more subtle.
There are many types of Gaps---those I'm interested in are Break away Gaps/Continuation Gaps and Exhaustion Gaps

Gaps are often accompanied by Volume.

So the question is ---How can I tell what the effort of a gap is anticipating.
Whats it mean?

Breakaway gaps often blast through a resistance area on volume. I find the wider the gap and the wider the range with a very strong volume in the process---the more likely the GAP WILL BE FILLED---so watch for these conditions before you rush to join the crowd.

The thinking here is that buyers swamp sellers normally on open or after a trading halt.
Supply is swallowed up very fast.However buyers are reluctant to buy at prices which have increased very quickly and are well away from where the action started. So Demand dries up.

See charts
Here we take a look at a gap and we look at VOLUME as EFFORT and LACK OF EFFORT.See if you cant follow the chart. I've added some hints to help you read on the charts and Ill show you a strong concept shortly which will help you even further in your chart reading. It is something I've not seen in any books---in fact I currently have a patent attorney arranging Copy right.

Following on from discussion on the RED thread

Firstly

When looking at a chart I take the following in consideration.

Last Resistance
Last Support.
Last significant pivot high
Last significant pivot low.
Volume--looking for extremes
Range --- looking for extremes
Combination of Volume and Range
Where it sits with the rest mentioned.

So firstly I'll mark up the chart in question RED.

I was recently asked to explain how I trade INSIDE DAYS.

In fact what they are and where they fit in chart analysis.

Below is a chart which will hopefully help those who have an interest.

Click to enlarge

Re: Learning Technical Analysis Q&A

BRU was signalled on another thread.
Technically it has so much info for analysts I thought it appropriate to post discussion of it here.

BRU and all charts like it.

As a chart turns from a boring consolidation pattern often stretching years
we all look for opportunity. Often traders will buy and sit for years in a
stock hoping/waiting/preying and constantly looking for positives in every
announcement or discussion in a thread on their favorite stock.

No matter what form of analysis we use we cannot be 100% sure at anytime
that a stock will launch into the stratosphere. But we can keep ourselves
both in and out of a stock as it morphs from a maggot to butterfly and back
to maggot in many cases.

The main reason stocks cannot advance is SUPPLY. Without SUPPLY price will
rise even on the slightest demand as buyers search for sellers at higher
and higher prices.

SUPPLY MUST---Either WITHDRAW----OR BE ABSORBED and indeed Surpassed by excess DEMAND---When this happens generally Supply (Sellers) will WITHDRAW---
Price is then free to trend.

SUPPLY then comes and goes until for whatever reason SUPPLY exceeds DEMAND.
If DEMAND withdraws then price can and will fall even with the slightest
amount of Supply as sellers search for buyers at lower and lower prices.

SUPPLY MUST---Either WITHDRAW----OR BE ABSORBED and indeed Surpassed by
excess DEMAND (Yes SUPPLY)---When this happens generally Supply (Sellers) will WITHDRAW
Price is then free to trend.

So as we can see Supply is more important than demand.

So bear this in mind everytime you open a chart.

You should ask.

Initially on higher than normal volume bars.

What is price trying to do (on a high volume bar)
Is it succeeding (after a couple of bars).

Then on Very low volume Bars following a high volume bars

What is price now trying to do
Is it succeeding.
Does this action support the EFFORT seen in the HIGH VOLUME BAR?
Although there are very specific Signs of Strength bars (SOS)
This question can be asked of EVERY BAR.

The TRUE or beat read indications will be seen on the very high and very low volume bars
In my opinion and experience.

Knowing this then we will now visit BRU over a number of charts and
Ill point out things of interest as we go.

CHART (1) Click to Expand



Ill try for the next chart tomorrow.

Re: Learning Technical Analysis Q&A

Ok I don't really have time to do this justice and demonstrate with some chart examples (just really busy ATM).

So I'll type it out and if Tech has the motivation he can chart it up.

My methodology has similarities and differences to Tech's. The similarities are that the attributes I choose to determine my exits are based within a rules system, but act a bit discretionary with an if/then statement. I decide to lock in profits or determine my exit point based on a couple of factors. The main difference is that I do use targets...because I use an optimal F calculator. If you don't know what this is google it. This ensures that I enter a position with positive expectancy. Another difference is that I'm generally not looking at small caps, I play in the medium and large cap spaces.

My use of targets doesn't limit my upside potential very often. Whilst I find that I frequently get my target correct, I would exit the position around my target about 20% of the time when specific exit criteria are triggered. These specific criteria have to do with the reference points that Tech refer's to, specifically pivot points. I class pivots as either soft or hard. When deciding whether to exit a position I will do one of the following:

1. Use a 5% trailing stop
2. Use a momentum line with a 5% band and adjust my stop daily.
3. Use a hard pivot reference line with a 5% stop band.

What's a pivot point? A pivot is a minimum three bar structure where the middle bar (the pivot bar) has a higher high and higher low than the bar on either side. (For a high turning pivot - the reverse is true for a low turning pivot).

What is a soft pivot point? This is where the bar to the right of the pivot closes within the high low range of the pivot bar. This is normally accompanied by a volume indication and is indicative of a consolidation pattern (the stock moves sideways instead of retracing). The stock merely "rests" before continuing the established upward trend and is frequently accompanied by outside and inside bars. I frequently see a lot of traders exiting at this point, depriving themselves of valuable upside potential.

What is a hard pivot? This is where the bar to the right of the pivot closes outside the high low range of the pivot bar. These kinds of bars give a higher quality reference point for a retracement pattern as opposed to a consolidation pattern. I use a bollinger band with only a two day sample size to determine the size of the deviation from the pivot bar. Simply put, the higher the deviation from the pivot bar, the more likely the retracement pattern will emerge.

How do I decide to use my three stop loss methods? I need to distinguish a probability for a retracement pattern as opposed to a momentum pattern. Lets take the example of an upside break-out movement. If the price movement is not contained with a 12 period MA I will use a 5% trailing stop. (The price is running very hard and I will be looking to lock-in a nice short-term profit by using the trailing stop. On a weekly chart this will create a very large engulfing bar and the stock will take time to consolidate - it's better for my system to just take the quick profit and re-examine on a break of the engulfing bar). If the price movement is contained within a 12 period MA I will use either a momentum line or a hard pivot line as my stop. (The hard pivot line is generally at some distance to the current share price). The stock runs up and then pauses as the buying pressure eases.

If this is a momentum move it will have a statistically higher number of soft pivots. In these circumstances I will refer to my hard pivot line. I will also use a 12 26 MA crossover indicator to confirm the pattern. IE no cross in the MA = momentum pattern.

If this is a retracement pattern it will have a statistically higher number of hard pivots. Once again a 12 26 MA Crossover is used to confirm the price action. IE A cross in the MA = retracement pattern. (And I'll be looking to short on a break of the hard pivot line).

Cheers

Sir O

Re: Learning Technical Analysis Q&A

Thanks for moving that into the main thread. Tech expressed a little confusion at my definition...and if Tech's a little confused I'm sure there are others. So I'll attempt to put some charts up and hope it works. Attachment 1

So here's a fairly recent set-up. You'll note a descending plane of resistance and a horizontal support and resistance line, with an indicated hard pivot point after the initial break of the plane. Obviously I was looking for a break of the horizontal to create a higher high and new trend confirmation.

Attachment 2 is a just a close up so you can see the hard pivot point in more detail. You'll note that I have a reference line using the hard pivot. You'll also note that I have a momentum line with a 5% band. (The green trend line that moves through the price action is my target).

Attachment 3 has a bit more price action. Note where I have placed the resistance band (across two hard pivots). Also note the volume that is dropping slightly from the break of the horizontal, showing weakness and the inside and engulfing bar indicating uncertainty.

After a few more days you can see the break of the momentum line (and I've indicated the potential profit from the stop point). Note that the price action is still at some distance to the hard pivot line.

A couple more days of price action reveal a hard upward pivot (and a gap movement as well). I can now adjust my momentum line to this point. (and it has a greater importance). I also want to make sure that the resulting move from the hard pivot doesn't fall outside my 12 period bollinger. (That would mean that I would be placing a 5% trailing stop on the trade - in this case I don't).

Attachement 5 shows that the price action hit my target and then began to consoldiate. Note that there is no pivot at this point. Note the inside and engulfing bars and further consolidation. Note that we then get a soft upward pivot that corresponds to the adjusted reference line. I still have a higher high and higher low on the bar that touched my reference line, but the close is within the range of the pivot. I do not rank this pivot as highly, so I revert to my lower hard pivot line. I'm still in the trade, no sell trigger has occurred.

More coming

Re: Learning Technical Analysis Q&A

Charts below shows what would have happened had I ranked the soft pivot highly, I would have been tipped out. I can now adjust my reference line back to a momentum line to incorporate the last data point. If you look at Chart seven, I have another high turning soft pivot. I anticipate more consolidation. Note I'm getting closer to my secondary target.

Last Chart (current price action). Consolidation back to the momentum line has occurred (as anticipated). Note the upward turning hard pivot. My momentum line has now become (because of the second touch) a hard pivot line (and an ascending plane of support). I now have two hard touches and a soft touch on this line. A break of this line now is where I will take profit. (and look to short back down to the lower hard pivot line on retracement). Note that no high turning hard pivot has yet occurred and the price action is at a distance form the hard pivot resstance line. I'm still in the trade.


Hope that makes it clear for everyone what I was talking about.

Cheers

Sir O

Re: Learning Technical Analysis Q&A

*Facepalm*

You know when something is clear in your own head, but when you write it out you miss stuff (coz its obvious to you and when you re-read it your mind just inserts the words) and others get confused? I usually fix that with someone else proofing what I'm writing. Joe (or any of our sterling mods) is there any chance you could please edit the section in the locked thread to read.... The red bit is what I've changed.

What's a pivot point? A pivot is a minimum three bar structure where the middle bar (the pivot bar) has a higher high and higher low than the bar on either side. (For a high turning pivot - the reverse is true for a low turning pivot).

What is a soft pivot point? This is where the closing price in the bar to the right of the pivot closes within the high low range of the pivot bar. This is normally accompanied by a volume indication and is indicative of a consolidation pattern (the stock moves sideways instead of retracing). The stock merely "rests" before continuing the established upward trend and is frequently accompanied by outside and inside bars. I frequently see a lot of traders exiting at this point, depriving themselves of valuable upside potential.

What is a hard pivot? This is where theclosing price in the bar to the right of the pivot closes outside the high low range of the pivot bar. These kinds of bars give a higher quality reference point for a retracement pattern as opposed to a consolidation pattern. I use a bollinger band with only a two day sample size to determine the size of the deviation from the pivot bar. Simply put, the higher the deviation from the pivot bar, the more likely the retracement pattern will emerge.

Some nuts and bolts stuff here. My sifting but there is more from the start.

tech/a said:

so we have a re occurring structure

to have infinite control over my Risk management rather than a set and forget set of parameters

I am for ever working at increasing my Reward To Risk.

So from a mental point of view I have become very comfortable with.
(2) Being WRONG.
(3) Being out of the market without a portfolio IS a POSITION.
(5) Taking a loss --- what many cant face doing!
(6) Taking a profit---what many fail to do!


(1) Risk Mitigation.
BUT without doubt it has slashed my Risk to Reward. It has protected my capital base.It has allowed me peace of mind with larger positions which at worst break even. Of all the tools of trading THIS is by a country Mile the Most important aspect of trading you can learn.--EMBRACE IT


So now we come to TOOLS

(1) Background
(3) Pattern--Both Single and Multiple Bar.
(5) Support/Resistance
(6) Trend lines
(9) Position sizing.

I see charts as analysis of crowd behavior in investment within that instrument.

Click to expand...

Can add one thing about risk mitigation and that it is strategy dependent. No value in moving a stop to break even on a favouable 5% move if trading a trend. Wiggle room is subjective.

I remember I went over seas for 8 weeks and forgot about this thread.
Ill attempt to add to it as time goes by. There is some good stuff here from
Sir O.

But I want to spend a lot of time on Volume Can OZ you will see when I get to your expertise
And I would like for you to Chime in as well I know you have done a lot of work in these areas.
Joules your also no slouch in T/A and would appreciate anything you would like to post.

If anyone else wishes to add please do.

There is also a Q&A thread which Id like people to use to keep this as clean as possible for those
referencing it.

To my Favorite Topic

VOLUME

Volume can be both a sign of weakness and a sign of strength.
People find and rightly so that this is counter intuitive. Strength yes
but how can it pre empt weakness?

What does high volume show?
(1) Supply swamping demand
(2) Demand swamping supply
(3) Supply SELLING into demand
(4) Demand BUYING into supply
(5) Accumulation Volume
(6) Distribution Volume

Technical traders need to be able to recognize each.
There is a difference and its NOT subtle. Its Glaring.

So How can I tell which is which.
Lower time frame data is very handy but you can see it in daily and even weekly charts.
However longer time frames mean it takes longer for us to CLEARLY recognize whats happening.

Here are a few charts building a volume story for SBM
Not all types are shown and there is much more I can help with as far as reading the chart for
possible future outcomes. Again TIME!!!! Grrr.

I will return but guests are here!



What we need to look for is not JUST Really Excessive Volume and range BUT
also CLUSTERS of unusually high volume.
Range can tell us a great deal.

In lower time frames clusters can and do form 1 bar in a higher time-frame
This can tell us a great deal about the final bar as to likely type of volume.

tech/a said:

(1) Supply swamping demand
(2) Demand swamping supply
(3) Supply SELLING into demand
(4) Demand BUYING into supply
(5) Accumulation Volume
(6) Distribution Volume

Click to expand...

Only just noticed this thread ….. valuable stuff here Tech …..
Please feel free to add more at your leisure.

Thought it would be good to mark up a chart and the Bar by Bar commentary.
This is how I would be looking at one in a watch list.
This trade panned out to a little over 50% in a week.

So now in REAL TIME.
I have finished a trade and this is on my watch list
because of something not so obvious. The unexpected
has occurred so Now I'm really on to it.
Maybe nothing but I suspect its Something.



Whats do you think?

Is it reducing volume on previous bars?(CIA)

willoneau said:

Is it reducing volume on previous bars?(CIA)

Click to expand...

I’ll
Post my opinion before open tomorrow
W —— partly

It actually ended up stopping me out
Look over the last 30 or so bars