Fibonacci Retracement Levels for Week 02/25–03/01

Fibonacci Retracement Levels for Week 02/25–03/01

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Fibonacci Retracement Levels
Pairs	EUR/USD	GBP/USD	USD/JPY	EUR/JPY	GBP/JPY
100.0%	1.3433	1.5507	94.20	125.88	145.87
61.8%	1.3323	1.5362	93.65	124.49	144.13
50.0%	1.3289	1.5318	93.48	124.06	143.59
38.2%	1.3254	1.5273	93.31	123.63	143.05
23.6%	1.3212	1.5218	93.10	123.10	142.39
0.0%	1.3144	1.5128	92.76	122.24	141.31

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Trading Strategy: the First Two Hours

Trading Strategy: the First Two Hours BY JOSH DIPIETRO

In this article, I will share the framework of my intra-day trading methodology. I will demonstrate how to place five to fifteen round-trip intra-day trades in the first two hours of the market, for each stock you are watching. My intra-day system is based on taking small 15 cent profits on quick reversals after a support/resistance break and is known as “countertrend-reversal trading,” not to be confused with “scalp” trading.

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I will show which stocks trade the best during the first two hours of the market and will demonstrate why trading in 100 share-blocks and using a pay-per-share broker are essential aspects to my approach. You will learn how to trade both “previous” levels and how to recognize “newly forming intra-day” support/resistance levels. Here we are only learning my basic strategy. Please do not try to trade this strategy without being formally trained.

Before this system can be applied you have to acquire the correct stocks. My system requires stocks to be priced between $100-$250. This means the stocks have plenty of volume/liquidity, therefore the stocks offer several intra-day support/resistance levels to trade in the first two hours. Stocks like AMZN, IBM, CRM, and GS are on my personal stock list.

When trading high priced stocks you only need to trade in 100-share blocks for each setup. This is important when trading via a “pay-per-share” broker. You should be paying about .0045 per share; this translates to 45 cents per 100-share trade. With my system you should not be paying more than $1.00 per trade. The only barrier to enter the market (quite literally), is that you will be required to have at least $25,000 in your account to intra-day trade (S.E.C “pattern day trade rule”).

In general, I will go long initially after a support has just broken, and I will short soon after a resistance has just broken. I do not try to predict how far a trend will continue, rather I wait for a trend to exhaust itself, and then I come in for a small profit on the inevitable pullback in price. The main element that allows this system to work consistently is the small profit taken of 15 cents ($15 on a 100-share trade), especially after the price typically runs a full $1-$2 before I enter a trade, therefore, on sheer volatility you gain your 15 cents on the reversal.

I always start by watching the pre-market (8 a.m. to 9:30 a.m.). I gather several previous price levels for my initial S/R. Once the bell rings I am armed with price levels to trade, whether the price travels up or down I have long and short positions to trade in the first two hours.

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After the first five minutes of trading “newly formed” intra-day levels (S/R) start to form, my system shows you how to find and trade these levels. These levels are found by using what’s called the “five candle-stick rule.” Figure 1 demonstrates how intra-day setups occur.

I use the one-minute candle sticks to find intra-day levels and the daily chart to find previous levels. Previous levels include levels found on the daily chart, previous day high/low, and premarket high/low.

For instance, I use the highest and lowest price for certain levels on the daily candle stick chart, and the previous day high/low, and pre-market high/low price levels for the current intra-day’s support/resistance.

If an intra-day level forms I will enter a trade exactly 25 cents past the price level on the initial S/R level breakout (as shown in Figure 1).

• If an intra-day level forms I will enter a trade exactly 25 cents past the price level on the initial S/R level breakout (as shown in Figure 1).

• If a previous level forms I will enter a trade exactly 50 cents past the price level on the initial S/R level breakout.

In Figure 2,

Here is an example of an actual trading session with Amazon (AMZN) from 9:30 a.m. to 11:30 a.m. (12/17/12).

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About the Author

Josh DiPietro (Day Trader Josh) is 34 years old, and has been day-trading stocks for 12 years.He provides mentorship programs for aspiring day traders.

Josh DiPietro is an internationally published author.He has written a book, The Truth About Day Trading Stocks: A Cautionary Tale About Hard Challenges; Learn What It Takes toSucceed.

Josh DiPietro’s other published works nclude articles written for Stocks, Futures, and Options (SFO) magazine.

Day Trader Josh’s website:www.DayTraderJosh.com

Everyone Hates Bonds…. Should You?

Everyone Hates Bonds…. Should You? BY ANDREW THRASHER

There’s little doubt in my mind that going into 2013 one of the most hated asset classes was bonds. With the report from Lipper of massive inflows into equity mutual fund, the largest amount since March 2000, nearly every major Wall Street strategist turning into a bond bear and the likely lack of interest rate activity it’s easy to understand why people have turned sour on bonds. However we have had low interest rates for over four years with the only option for rates to rise, bonds still have performed handsomely. It’s been over 30 years that this current bond bull market has maintained its legs, and various indicators are giving mixed signals for whether or not its run can continue to run.

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There are numerous ways for us to evaluate momentum on a chart. The most popular, and my preferred method, is using the Relative Strength Index (RSI). The most common way to use the RSI is looking for overbought and oversold levels, most commonly at breaks over 70 and under 30. But there is still much that can be gleaned from the action between these two levels. When RSI is repeatedly unable to get to the 70 level when price is advancing it can serve as a warning sign that something might be changing in the character of the price action. Constance Brown wrote in Technical Analysis for the Trading Professional that when a security is in a bull market the RSI will often stay between 90 and 40, a sign that bear are unable to force momentum into a traditional oversold condition. During bear markets, RSI will fluctuate between 10 and 60 as bulls can’t grow their consensus to get momentum to 70. In November the 10-year Treasury’s RSI indicator hit a top at 65 and since then has been unable to break above 50. This ‘momentum bear channel’ that bonds seem to be in could last for weeks or months, in my view it’s preferable to let price lead and dictate our action.

In the bull case for bonds we have Commitment of Traders data giving us a notion that small trades are big fans of the short bond trade. Looking at the weekly COT chart of the 10-year (not shown) we can learn that small traders (often called the ‘dumb money’) is more net short than they were at the short-term bottom in bonds in March ’12 and have taken their net position to the lows last seen in April ’12 – when bond prices hit a low. When looking at COT data we often focus on what the commercial or ‘smart money’ is doing, but just as much can be learned from small traders as they are often wrong when their positions begin to grow as large as they currently are. We’ll see if this time is any different.

Disclaimer: The information contained in this article should not be construed as investment advice, research, or an offer to buy or sell securities. Everything written here is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned.

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About the Author

Andrew Thrasher is an Investment Analyst with The Financial Enhancement Group, a central Indiana-based money management firm. He specializes in technical analysis, focusing on intermarket, mean reversion, and trend analysis based on varying timeframes.

He currently holds the Accredited Wealth Management Advisor and Accredited Asset Management Specialist designations. Andrew is a level three candidate for the Chartered Market Technician® and is a member of the Market Technician Association. He also holds a Series 65 securities license and is registered with World Equity Group. You can learn more at http://www.athrasher.com and follow him on Twitter at @andrewthrasher.

Trend Following: Low Risk Breakout Strategy

Trend Following: Low Risk Breakout Strategy BY ANDREW ABRAHAM

Trend following is a strategy that has been used by traders for decades. Bull markets, bear markets, inflation or deflation–trend following has proven itself. Trend following can be used on stocks, forex or commodities as well as on any time frame.

Trend following with a plan tells you exactly:

• What to buy

• How much to buy
• When to exit with a profit or a loss

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In order to succeed in trading you need an exact plan, risk management and proper trading psychology. Miss one of this attributes your chances of success are lessened.

First, I identify the strongest markets and the weakest markets. This is done by ranking the markets via relative strength or rate of change. Relative strength or rate of change can be found on most trading platforms. This defines the universe in which I am looking for trades. The concept of trend following is based on strong markets to continue and weak markets to continue to weaken.

The next step is to look for a break out trade or break down trade if I can put on a low risk trade. Firstly the concept of a break out trade is based on Richard Donchian who was a trend follower from the 1940s till his death almost 50 years later. The breakout trade was enhanced by the concept of the so-called “Turtle Traders.” It is very simple. Buy the 20 bar high and sell the 10 bar low (You can use any variation of this).

RISK PARAMETERS

However, I will only look to take a break out trade if I can put on a low risk bet. A low risk bet is risking no more than 1% of my account size. For example I have a $100,000 account size I do not want to risk more than $1,000 dollars. In order to determine this 1% risk I measure the distance from the X bar high to the Y bar low. For example if the distance from the X bar high to the Y bar low is 5, I have a $100,000 account size and determine I want to risk 1% I can trade 200 shares.

I have a bias to the long side as those trades can continue without limit, and shorts are limited. As I mentioned earlier, risk management is one of the principles that will keep you in the marathon of trading. In order to survive long term, I also limit my total allocation per sector as well as I limit my total risk on my open trade equity. I always want to trade with the trend. I look at moving average convergence divergence (MACD) and look to go long when it is above the zero line and increasing and vice versa for shorts.

SET-UP

Exemplifying the above is an example of Apple at the end of 2011. Apple on a relative strength basis was one of the strongest stocks. See Figure 1.

GETTING IN

On Dec. 20, 2011 there was a breakout signal at $395 which was a 20 day high. The initial risk was to the 10 day low. You should not risk more than 1% of your account size on any trade. In order to determine how many shares take the difference between the 20 day high and 10 day low and divide it by 1% of your account size to determine.

GETTING OUT

Once the trade started working you would have followed the trade with patience and discipline until you received a signal to exit by a violation of a trailing average true range (ATR) stop. On April 16, 2011 Apple violated the ATR trailing stop and you would have exited.

Trading in this methodology is robust and an extremely powerful of extracting profits out of trending markets.

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About the Author

Andrew Abraham is the author of The Trend Following Bible, published by Wiley.

Fibonacci Retracement Levels for Week 12/17–12/21

Fibonacci Retracement Levels for Week 12/17–12/21

 

Fibonacci Retracement Levels
Pairs	EUR/USD	GBP/USD	USD/JPY	EUR/JPY	GBP/JPY
100.0%	1.3172	1.6176	83.95	109.95	135.37
61.8%	1.3062	1.6113	83.25	108.43	133.95
50.0%	1.3028	1.6094	83.03	107.95	133.51
38.2%	1.2994	1.6075	82.81	107.48	133.07
23.6%	1.2952	1.6051	82.54	106.90	132.53
0.0%	1.2885	1.6012	82.11	105.95	131.65

 

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Geometry Based Trading Analysis: Primer 101

Geometry Based Trading Analysis: Primer 101 BY SCOTT HATHAWAY

Geometric charting approaches the financial markets from a very different perspective than the familiar and effective world of oscillators and moving averages. Instead of mathematical formulas using specific price data, price movement itself is treated as an expression of human awareness conforming to geometric principles, which are only revealed when price and time are seen as two inter-dependent aspects.

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PRICE AND TIME

Like two sides of the same coin, financial markets display certain properties only revealed through combining ‘both sides’ of price and time into one coin.

Perhaps you have seen some geometric analysis, and like me at first, felt a little overwhelmed by so much going on in one chart. The key to avoiding confusion is to go one step at a time, as geometric charting is very progressive. It requires patience, diligence, and some effort, but it is worth it.

FOUNDATION: UNITING PRICE AND TIME

According to W.D. Gann (the father of geometric charting), uniting price and time is based on $1 per time period, i.e. 1 dollar per week ($1/W) or month ($1/M), with the exception of using 50 cents per trading day (50c/TD). Naturally, much larger price levels call for larger ratios such as $10/M (gold and S&P 500 over 1,000) or 100/M (i.e. the Dow at 13,000). ¹

This one-by-one (‘1×1’) relationship also can unite price and time visually, by adjusting the chart’s vertical scale so that this 1×1 line is exactly 45^o, perfectly splitting time (horizontal x-axis) and price (vertical y-axis) in half.²

The basic analysis offered by this 1×1 line is that price is considered strong (bullish) if above, and considered weak (bearish) if below.

If 1×1 is such a big deal, then wouldn’t multiplying or dividing the price amount also work? YES! 2×1, 3×1 4×1, 8×1, or smaller amounts like 1/2 x1, 1/4 x 1 (usually expressed as 1×2 and 1×4 respectively) etc. are commonly used for analysis, referred to as ‘Gann Angles’. Therefore, in a $1/TD environment, a 2×1 angle = $2/TD, 8×1 = $8/TD, 1×2 angle = 50 cents/TD ($1 per 2 TD’s), etc.³

APPLICATION

Now let’s apply some of these angles on an S&P 500 daily, using $1/TD (actually 1 point/TD) as our scaling ratio (instead of 50 cents/TD, due to the larger prices), and aligning the vertical scale so that this 1×1 relationship is exactly 45 degrees.⁴ This line is placed going up from the major low of 1074.77 on Oct 4, 2012, particularly to assess the strength of the recent up trend, as well as 2×1 and 8×1 angles. In addition, descending 1×1 angles are placed from highs at A, B & C.⁵

Since the market is still above the ascending 1×1 line, it is considered strong from a longer-term perspective. At D, the bounce showed continued strength, and offered an ideal entry. However, at E the current market is experiencing resistance from a descending 1×1 line from the high at C. From a short-term perspective, price is weak, unless broken to the upside.

In retrospect, the first and second short-term up trends were properly supported by the 8×1 and 2×1 angles respectively, each effectively indicating strength above and weakness below these lines.

Successful breakouts (blue arrows) of descending 1×1 lines from highs at A & B confirm the continuation of the overall up trend, and offer useful entry locations. The second example unfortunately encountered a whipsaw.

In conclusion, the S&P is still strong, but currently trapped in a small area of 1×1’s from important points. A break to the upside implies a continued up trend, and a downside break implies either a bear or sideways market. In this case, the descending 1×1 line from C would be extended downward, with weakness maintained while underneath. In addition, smaller angles below 1×1 from the major low would be drawn for potential support, including 1×2, 1×4 etc.

Now, let’s take a broader monthly look, using 10 points per month, and focusing on the major low of 768.63 on Oct 2002. 1×1’s are drawn from this low and also directly below from zero (a VERY useful concept!). In addition, a 30^o angle (green) is drawn from the low.⁶

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IMPORTANT TIP

The price of any low or high can be ‘translated’ into time (and vice-versa!?) by using the scaling ratio. Therefore, the major low’s price of 768.63 divided by 10/M = 76.863 months, which rounds up to 77 months, and which added to Oct ’02 becomes Mar ’09, the next major low at C! Fascinating…

An ascending wedge shape is outlined by resistance at F & G and support at C & D.

The top at G, which is on the 30^o angle (30^o is 1/3 of 90^o), is just 1 month off of 120 months from the major low, which is exactly 1/3 of 360! A great place for a major top, unfortunately for longs.

Similarly, the low at A (great long entry) is exactly 45months from the major low on the 45^o angle, which clearly identifies strength and weakness for price, with a great rally top to short at B.

The market is ripe for a correction back to support, which would be first supported by a violation of the 1×1 on the daily chart. Geometric charting is even more effective with this type of multiple time frame analysis. A weekly analysis in 10/M would clarify matters even further.

CLOSING THOUGHTS

Uniting time and price is certainly a powerful ally for any trader or analyst. Geometric charting offers many possibilities, way beyond what is discussed here, including shapes like circles, squares, trig ratios, radians, etc. But you now have enough understanding and tools to get started on your geometric journey. Good luck!

SUGGESTED READING:

1. Anything by W.D. Gann
2. Gann Made Easy (McClaren)
3. Breakthroughs in Technical Analysis (Keller) – specifically the two Gann Chapters.
4. Technical Analysis for the Trading Professional (Brown) – Great Gann chapter.
5. Anything by Michael Jenkins – for advanced study.
6. Numerous Articles by the author in Technically Speaking (MTA newsletter: Feb, Mar, Apr, Sep & Oct ’12 issues), and traderplanet.com (Oct ’12), and numerous blogs at mta.org.

FOOTNOTES:

1. Feel free to experiment with any value that has some meaning, such as 9/M (3²/M) on gold. Also, my own ‘Relative Charting’ method uses actual price movement for the scaling ratio, but I will only discuss the conventional approach of W.D. Gann in this article.
2. Since most geometric techniques can be done mathematically, this step is not absolutely necessary, but it tremendously helps visually!
3. For a greater understanding of Gann angles, please refer to Gann Made Easy (McClaren).
4. If your charting software does not have this feature, then hold a 45^o triangle drawing tool to the screen over the 1×1 line, and adjust the vertical scale.
5. If you do not have Gann tools at your disposal, then draw a line from the low with 1174.77 (100 points above) on Feb 28, 2012 (100 TD’s forward), then extend the line. Repeat this procedure with the appropriate multiple for additional Gann angles: i.e. a 2×1 angle with 200 points above and 100 TD’s forward, etc.
6. To draw any geometric angle manually using its respective price/time ratio, multiply the tangent ratio of the desired angle by the scaling ratio:

Tan 30^o x 10/M = .57735 x 10/M = 5.7735/M

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About the Author

Scott Hathaway has been developing new methods and techniques in technical analysis for over 5 years, including novel uses of square numbers, prime numbers, mutually exchanging price, time and geometric degrees/ trigonomic functions, and ‘Relative Charting’, a proprietary geometric methodology. He is developing a tool module for Market Analyst charting software which will feature many of his ideas. His newsletters will resume after a brief sabbatical abroad. More of his work can be seen at hathawayanalysis.com. He is a Chartered Market Technician candidate with the Market Technicians Association.

Using Technical Indicators

Using Technical Indicators By Joe Duffy

The following in an excerpt from Joe Duffy’s Inside Secrets of the Mile High Cash Club

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When you look at a chart, it may not always be clear what is happening.  Some trends are obvious, of course, but in some cases the market may be undergoing some changes that are not so visible.  For that reason, some traders have refined their technical analysis to include indicators that measure the market’s momentum, underlying weaknesses and other factors that give them early clues about what the market might do before everyone else can see it.

Many analytical software packages now include a variety of indicators, so you don’t have to worry about doing all the calculations they involve – you just have to apply them to a chart.  However, no matter how sophisticated or expensive the program, several introductory points need to be made about indicators in general:

• No single indicator is the Holy Grail for traders.  If you are looking for magic in a box, you won’t find it in any indicator.

• No indicator works alone.  Indicators provide early alerts, but you must use an indicator in conjunction with other indicators or other types of analysis before you make a trading decision.

• Many indicators look only at price, so multiple indicators aren’t necessarily the answer if they are all looking at the same thing in a similar manner.

• Be wary of “curve-fitting” – that is, applying an indicator to historical data and then trying and trying until you find parameters that work the best.  The parameters that provide the best performance in the hypothetical testing may be the ones you want but often they do not do as well in real trading.

• No matter how simple and easy an indicator is supposed to be, a beginning user will find it a real challenge to understand and interpret what the indicator is indicating.  Until you have gained some experience with an indicator, you would probably be well-advised to tap the wisdom of analysts who have worked with the indicators beforeD.  Not only can they explain to you what an indicator does, but they also can relate the indicator’s status to the current market situation and what it suggests about taking a position.

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Indicators:  Moving averages

Perhaps the indicator that is most widely used – and most easily understood – is the moving average.  One reason is they give a mechanical trading system a precise price at which to take action without calling for subjective decision-making.

An average is simply the sum of the prices for N periods divided by N, the number of periods in the average.  A moving average just involves doing this calculation for each period as the new price becomes available.

However, there are so many types of moving averages and so many ways to apply them that you could spend all of your analysis time on moving averages alone.  Here are some things you have to consider if you want to use moving averages:

Which price should you use in a moving average?  The close is the likely candidate, but you could also use the open, the low, the high or some composite of them all.  Some programs even use averages of averages.

How many periods should you use in your average?  You can make the average sensitive by using only a few periods or make it produce only a few trades by using a large number of periods.  You will have to adapt the moving average to your trading style.

What type of moving average should you use? 

• Simple – every price during the period you select has an equal weight in the average.
• Weighted – recent prices get more weight than earlier prices during the period you select.
• Exponential – all prices remain part of the average, rather than have an old price drop out of the window as with the other two averages, but a smoothing constant makes the exponential moving average more sensitive to recent prices than to older prices.

How will you use this moving average in your analysis?  There are some standard ways to apply moving averages, but not everyone uses them the same way.

Is one moving average enough or will you use several averages?  Many trading systems use several moving averages, deriving trading signals from the way these averages relate to each other.

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About the Author

Joe Duffy is the president of KeyPoint Market Analytics Inc., and a member of the National Futures Association. Joe has been published extensively in the areas of trading and market analysis and has been a speaker at many international conferences. He is a three-time top ten finisher in the United States Trading Championships with actual real money annualized returns of 121%, 243% and 432%. As a mechanical trading strategy developer, Joe brings 25 years of real-time experience watching markets on an intraday basis.

Capture More Trend with Moving Averages

Capture More Trend with Moving Averages by Al Abaroa

A simple and potentially powerful tool within technical analysis is the moving average. It is easy to calculate and even easier to understand. A “simple moving average” is calculated by averaging the closing price of an asset over a specified timeframe.

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IT’S VERSATILE
There are many ways to use moving averages as a technical analysis tool.
o Traders may use a moving average to spot an existing trend or the start of a potential new trend.
o They may be used to gauge the strength of a trend.
o They often serve as potential support or resistance for the underlying asset.
o They may be useful in determining entry and exit points.
o They can be used on any timeframe (intraday, daily, weekly or longer).

COMBINE THEM
A popular strategy is the use of multiple moving averages. By using more than one timeframe, a trader can gauge the slope of a shorter term moving average versus that of a longer term moving average. This information can help to determine the strength of an existing trend.
For example, if a short term moving average is rising or falling at a faster rate than a longer term average, then one might conclude that the price trend itself has been accelerating. Or, if a short term moving average is rising or falling at a slower rate than a longer term average, then one might conclude that the price trend may be decelerating or weakening.

THEY DO LAG
Since moving averages are considered a lagging indicator, current price action is the most important component in forecasting whether momentum may be changing.

For the purpose of this discussion, we will use 20-period simple moving averages (MA) for a shorter, more sensitive price trend. For a longer term price trend, we will use a 50-period simple moving average.
Figure 1 below is a daily chart of crude oil futures.

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On the chart, the “red” line is the 20-day MA and the “blue” line is the 50-day MA. Notice that in late-April the “red” line decelerated and began moving virtually parallel to the “blue” line. This is indicating indecision in the price action.

However, once price decisively broke lower in the first week of May, the “red” line began to accelerate lower at a faster rate than the “blue” line and has continued to incrementally to do so throughout the extent of this graph. Looking forward, if the sideways price action that has persisted in the early days of June continues, one would expect the “red” line to begin leveling out again or possibly turning higher.

If price breaks lower from the congestion area, one would expect the “red” line to continue to accelerate lower at a faster pace than the “blue” line and, in turn, confirm that the trend is beginning to strengthen again.

TREND REVERSAL
Another way to use multiple moving averages is to watch for crossovers. Crossovers occur when a short term moving average crosses through a long term moving average. These crossovers can sometimes indicate a trend reversal may be happening. The key to this indicator is, “waiting for confirmation.” Having patience and waiting for a basic set of rules to occur may help a trader spot a true trend reversal signal and avoid the false signals that can potentially lead to large losses.

YOUR CHECKLIST
The following five questions can serve as a checklist to help determine the possible strength of an asset’s uptrend or downtrend and help to avoid getting a false crossover signal:
1. Is the 20-day moving average sloping up or down?
2. Is the 50-day moving average sloping up or down?
3. Is the 20-day moving average above or below the 50-day moving average?
4. Is the asset’s price above or below the 20-day moving average?
5. Is the asset’s price above or below the 50-day moving average?

The crossing of the short term moving average through the long term moving average can be a great clue as to whether a trend is being established. The foundation for an uptrend is to have a positive answer for as many of the questions as possible. Conversely, the foundation for a downtrend is to have a negative answer for as many of the questions as possible. As with any indicator, moving average crossovers are not infallible and can provide false signals. Trend analysis should be confirmed by other indicators and/or fundamentals.
Figure 2 below is a weekly bar chart of the gold futures contract.

Notice that in late 2008 a bearish signal was given and each question on the checklist above confirmed the signal. However, price soon began to climb back above the moving averages and the checklist became mixed. Soon the checklist began to provide positive responses and it remained so for an extended period of time. Also notice how the moving averages provided support throughout the trend.

In late 2011, the moving average support began to fail and the rules of the checklist, once again, became mixed. In the spring of 2012, a bearish crossover occurred. However, the 100-period moving average had not rolled over. As mentioned earlier, the key to this indicator is, “waiting for confirmation.” Having patience and waiting for a basic set of rules to occur may help a trader spot a true trend reversal signal and avoid the false signals that can potentially lead to large losses.

THREE CHOICES
An asset can only be doing one of three things: trending higher, trending lower or trading sideways (range bound). Price action such as higher highs and higher lows coupled with upward sloping moving averages are identifiers of an uptrend. Conversely, lower lows and lower highs coupled with downward sloping moving averages are identifiers of a downtrend.

THE TAKEAWAY
Finding ways of identifying the onset of a new trend in an asset may be a useful tool when trading. However, it is not the Holy Grail and should be confirmed by using other indicators that fit the trader’s personal style. Positions should be monitored closely as there is substantial risk of loss in trading futures and options. Such an investment is not suitable for everyone as an investor could lose more than the original investment.
Moving averages may help a trader find a trend and perhaps capture more of a move.

Remember, the trend is your friend.

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About the Author

Al Abaroa is the Chief Strategist for Kingsview Financial and the editor of The Commodity Wire and Options Pro Report. The weekly reports provide readers and subscribers with an overview of the commodity markets and market specific strategies. In addition, Abaroa is the author of Options Pro Essentials. The book is geared to help novice and intermediate traders with the complexities of options based strategies. He has been a registered broker and trader since 1993. From his early work in the 90s on an equity desk to present day commodity focus, he carries close to two decades of experience. Abaroa is a respected source for market commentary, and his insights have been shared with CNBC, BNN, and printed in the Dow Jones Wires, WSJ, Barron’s, Reuters, and Bloomberg. Previously, he served as sector editor of Mega Trends, an all markets monthly distributed by Dow Jones News

Mean Reversion: Modern Day Moving Averages

Mean Reversion: Modern Day Moving Averages BY GUNJAN DUA

Moving averages are one of the most widely used indicators in technical analysis studies. What started with the simple moving average and then towards exponential moving average has with the passage of time and advent of computer programmed software’s have made technicians to experiment and come up with new types of data calculation.

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DEFINITION
Mean reversion suggests that the asset prices will eventually reverse towards its mean or average before trend resumption or trend reversal, it can be that the prices will return towards the average or consolidate for a while up to the time it comes closer to the average, this is a process on which many trading systems are based on where action is taken when the recent performance has differed from their historical averages.

MODERN MOVING AVERAGES
Simple moving averages are still used by many but with time and a requirement to measure price differently made way for new thoughts and new averages. In this article I will explain newer moving averages which have evolved with time and need.

DOUBLE EXPONENTIAL (DEMA) AND TRIPLE (TEMA)
A moving average is a smooth curving line which provides the visual confirmation of the longer term trend of an average, they are lagging indicators where faster moving averages are choppy and longer term averages are smoother, to decrease the time lag these modified exponential averages were thought of. They are used for providing signals in crossover or trend determination earlier than other moving averages.

DOING THE MATH
Double Exponential MA Formula:

DEMA = 2*EMA – EMA(EMA)

Triple Exponential MA Formula:

TEMA = (3*EMA – 3*EMA(EMA)) + EMA(EMA(EMA))

Where:
EMA = EMA(1) + ? * (Close – EMA(1))

? = 2 / (N + 1)

N = The smoothing period.

Chart 1 has moving average crossover, it clearly shows that TEMA gives signal the earliest followed by DEMA and then Simple Moving average. So the lag is reduced and we can enter the trend earlier.

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DISPLACED MOVING AVERAGE (DispMA)
A DispMA is a moving average which can be adjusted forward or backward by a specific time interval. Shifting the Moving Average Backward to stay in the long term trend, it will create a lagging effect shifting the moving average forward to make a timely exit when the counter trend develops, it will create a leading effect.

The aim of the DisMA is to avoid sudden whipsaws which usually come in the matured trend or news related events, the displacement will cause less number of false signals. The usual displacement levels are 3 days to 5 days forward or back. It can be used for finding support and resistances or as a crossover signal and also quite useful in cyclical studies.

Chart 2 shows that the longer moving average placed forward keeps us in the trend while the shorter moving average which is placed backward helps us get a timely exit.

WEIGHTED MOVING AVERAGE (WMA)
Let’s take a look at another type of moving average. The aim of WMA is to take away the lag and increase the sensitivity factor towards the price. The Weighted moving average is weighted average of the last n prices, where the weighting decreases by 1 with each previous price.

MORE MATH
Calculation: ((n * Pn) + ((n – 1) * Pn-1) + ((n – 2) * Pn-2) + … ((n – (n – 1)) * Pn-(n-1)) / (n + (n – 1) + … + (n – (n – 1)))

WMA reacts more quickly to price changes because it places more importance on the recent price moves , that way it shows the trend faster as compared to the simple moving average.

LEAST SQUARES MOVING AVERAGE
This moving average sometimes also called as an End Point Moving Average. It is based on linear regression but takes it one step forward by estimating that what would have happened if the regression line continued, making it more responsive to trends and spotting the trends earlier as compared to other moving averages.

ITS USES
Used mainly as a crossover signal with itself or with other moving average or can be used with the price moving above or below it as a buy or sell signal.

In Chart 3 we plot three moving averages in one chart; the first one is Least Square Moving average (green) also called as End point moving average. The Red Circles show the price rise above the average showing change in trend or end point of trend up and down helping to exit the position or take the opposite trade.

The other two are WMA (thick violet) and EMA (dashed Red), calculation of both the averages is nearly same but in WMA more weight is given to the current price so it shows that WMA is closer to price as compared to EMA

WILDERS MOVING AVERAGE
As the name suggests this was created by Welles Wilder the great technician whose works include Relative Strength Index (RSI), Average Directional Index (ADX), Parabolic Sar and Average True Range (ATR). This is sometimes called as the modified moving average; the aim is to smooth the price movements to identify price trends.

Wilder EMA = price today * K + EMA yesterday (1-k)
Where k = 1/N, N = Number of Periods

The formula is similar to EMA which has 2 parameters, a time series and a look back period and it returns a smooth line. Price staying and closing above the average is termed as an uptrend and below it as a downtrend.

Chart 4 shows two averages under Wilders calculation. The longer moving average can be used for trend determination and shorter for trading for buying on dip and sell on rise. Crossover provides trading signals but with a lag.

RISING EQUITY CRUVE
Almost everyone uses moving averages in trading price trends, these newer moving averages will help traders capture trend in a better way and build a finer trading system towards understanding market trends better yielding a rising equity curve.

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About the Author

Gunjan Duaa is an analyst and a proprietary trader managing funds for HNI clients using technical studies as the base of his work for the last 8 years. He develops his own trading systems combining Technical analysis, Quantitative analysis and Behavioral Finance techniques.

He is a Chartered Market Technician (CMT) from India. He is a Board Member of The Association of Technical Market Analyst (www.atma-India.net) a technical analysis society affiliated with the Market Technicians Association (MTA), New York. He writes for many websites and takes active interest in teaching people about Technical analysis and behavior of crowds at different market scenarios.

His articles can be found at http://www.moneylan.com.

Fibonacci Retracement Levels for Week 12/10–12/14

Fibonacci Retracement Levels for Week 12/10–12/14

Fibonacci Retracement Levels
Pairs	EUR/USD	GBP/USD	USD/JPY	EUR/JPY	GBP/JPY
100.0%	1.3125	1.6130	82.82	107.94	132.88
61.8%	1.3030	1.6080	82.39	107.24	132.36
50.0%	1.3001	1.6065	82.26	107.02	132.20
38.2%	1.2971	1.6050	82.13	106.81	132.04
23.6%	1.2935	1.6031	81.97	106.54	131.85
0.0%	1.2876	1.6001	81.71	106.11	131.53

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MyDigiTrade is one of the most modern, innovative and powerful platforms which allows copying deals of professional traders to your brokerage account in real time. http://www.mydigitrade.com/traders?pr=9276#.UMQuyQq3ojw.twitter

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