Table of Contents Risk Disclosure Things we will be going over 2 Most Common Chart Layouts Anatomy of a candlestick Candlestick chart Anatomy of a BAR PLOT Indicators Trend-Lines Volume MACD RSI The Stochastic Fibonacci Bollinger Bands 3 4 7 8 9 11 12 17 19 27 28 30 34
Risk Disclosure: Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results. When investing in the purchasing of options, you may lose all of the money you invested. When selling options, you may lose more than the funds you invested.
Things we will be going over 2 Most Common Chart Layouts: Trend-Lines I. Resistance II. Support III. Core Principles 4
Things we will be going over Volume & Relative Strength Index (RSI) Moving Averages + Oscillator The MACD 5
Things we will be going over Fibonacci + Bollinger Bands 6
Candlestick Bar Plot Here we see the 2 most common chart layouts On the left the candlestick, also known as the OHLC (which stands for Open High Low Close) On the right the bar plot Characteristics of a candlestick: The rectangle body represents the open and close and dictates if it was an up day or down day The 2 wicks of the candle (on the top and bottom) represent the intraday highs and lows of the trading session In electronic trading typically an up day is shown in green and a down day is shown in red 7
By looking at an OHLC chart you can see (just to mention a few) Strings of up days and of down days Periods of strength and weakness How sustained moves are and How we got to where we are 8
Bar Plot has the same CORE information Open, intraday high and intra day low, with close You are not immediately drawn to up and down days as easily with colors Open dash ALWAYS on the left Close dash ALWAYS on the right 9
10
Indicators
12
An upward or downward line on a chart indicating movements of prices over a period of time. Generally occurring after 2 points of resistance or support. 13
14 ***IMPORTANT*** You want to see the market close ABOVE or BELOW the trend-line to be considered broken
1Once a trend has formed it will remain intact until broken They help distinguish emotion 2From analytical decisions 15
Healthy trends should have higher volume to confirm a sustained 3 move may be taking place You want to see that there is continued interest in the market price action so you can be confident that the trend will continue. If the volume begins to diminish you will most likely see the move start to slow down. Higher OR Lower Important to note that you may be SHORT a market you want to see that continuation selling! 16
17
18
MACD is an indicator with 2 moving averages and an oscillator Lets break down what a moving average is and how it is used correctly And then look at the oscillator We will then look back at the MACD with a better understanding of its moving parts Moving Average is constructed by: Adding the last number of specified days and dividing by said number Example: The 5 day MA is the last 5 days added together and divided by 5 19
Lets take a look: Day 1: Day 2: Day 3: Day 4: Day 5: 5 day MA: 1170.80 1165.20 1144.40 1122.10 1127.40 1145.98 If we add a Day 6: Day 1: Day 2: Day 3: Day 4: Day 5: "Day 6": 1170.80 1165.20 1144.40 1122.10 1127.40 1123.40 The FIRST day we started tracking is deleted: Day 1: Day 2: Day 3: Day 4: Day 5: "Day 6": 1170.80 1165.20 1144.40 1122.10 1127.40 1123.40 We NOW have a NEW 5 day moving average: Day 1: Day 2: Day 3: Day 4: Day 5: New 5 Day MA: 1165.20 1144.40 1122.10 1127.40 1123.40 1136.50 20
Why I like the 20 day! This is a very popular shorter term average I like to refer to this as the spine of recent market activity It does very well to establish levels to watch (especially when used in conjunction with the 50 day moving average) Why I like it! The 50 day is a bit smoother in its read Very popular with position traders because its not too sensitive Works very well as a compliment to the 20 day MA (we will go over this in greater detail shortly) (there are an average of 200 trading days in the year this would be ¼ of the year) 21
A longer term indicator used as a yardstick Well known amongst institutions and fund traders The price action garners a lot of attention when it approaches this moving average to see how it reacts, as it is not too common of an occurrence 22
Monday morning quarterback You never have all of them on a chart at once but it is nice to look back and see how they interacted with each other after the fact to learn. OK, so you want to trade using the moving averages. Here is what you look for: a BUY SIGNAL is given when prices CLOSE ABOVE the MA a SELL SIGNAL is given when prices CLOSE BELOW the MA 23
a SELL SIGNAL is given when shorter term MA cross over longer term to the DOWNSIDE Example: 20 day crosses UNDER 50 day a BUY SIGNAL is given when shorter term MA cross over longer term to the UPSIDE Example: 20 day crosses OVER 50 day 24
An oscillator is the simple difference between two Moving Averages. To calculate the Simple Oscillator, you first compute two Simple Moving Averages, then calculate the arithmetic difference. The oscillator can be used to help identify 2 key occurrences: 1) Divergences in short-term variations from the long-term trend 2) The crossing of two Moving Averages, which occur when the oscillator crosses the zero line. CONVERGENCE A situation where 2 indicators CONFIRM price movement by coming together at a certain price point. DIVERGENCE A situation where 2 indicators DO NOT CONFIRM price movement with each other. ***Divergence usually warns of upcoming price reversal*** 25
26
RSI is another popular oscillator type indicator It is plotted on a scale from 0 to 100 Values ABOVE 75 are considered OVERBOUGHT Values UNDER 25 are considered OVERSOLD This study is widely used to determine market reversals 27
The Stochastic is an oscillator type indicator that is used to help identify changes in momentum while identifying support and resistance levels. The purpose is to identify markets that are in overbought or oversold territories and trending for a reversal. During periods of price decreases, closing prices tend to accumulate near the lows of the trading range. During periods of price increases, closing prices tend to accumulate near the highs of the trading range. 28
The Slow Stochastic Indicator is best utilized in a trending market Sideways or range bound markets are not the optimum conditions with which to use this indicator It is plotted on a chart using a range of 0 to 100 When the Stochastic lines are above 80 it is considered overbought When the stochastic lines are below 20 it is considered oversold. The Slow Stochastic is an indication of a trend change It is an alert to bring to your attention a certain market set-up and possible trade. ***While it generally is an early indication, we believe it is of the upmost importance that this indicator be used in conjunction with other indicators, such as the MACD (moving average convergence divergence) and Moving Averages*** 29
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%. 30
Fibonacci numbers: 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 Fibonacci is constructed by adding the first 2 numbers to arrive at the 3 rd : The ratio of any number to the next is roughly 62% 5 to 8 = 62.5% 8 to 13 = 61.5% 13 to 21 = 62% 21 to 34 = 61.8% 34 to 55 = 61.8% We identify the top of the range and the bottom of the range If we draw the Fibonacci from these levels we will see where the 38, 50 and 62 % levels are 31
You see the tremendous resistance at the 50% level as would be expected. But also important to note how the 38% level was both support and initial resistance throughout this snapshot of the market Looking ahead to a Market To Watch We see the massive rally, but we have begun to roll over here Lets put in the Fibonacci numbers from the low of 495 to the high of 850 as see what it looks like 32
50% will be the 680 0 level You would expect a strong level of support at this price (Notice the gap the chart left at that EXACT level...technically speaking, charts will try to fill any and all gaps left behind) 33
The basic interpretation of Bollinger bands is that prices tend to stay within the upper and lower bands. The distinctive characteristic of Bollinger Bands is that the spacing between bands varies based on volatility. They widen during period of high volatility and narrow during stagnant pricing and low volatility. 34