In the spot forex market, all trades must be settled in 2 business days. A rollover refers to the process of closing open position for today’s value date, and the opening of the same position for the next day’s value date, at a price reflecting the difference in interest rates between the two currencies.

In accordance with international banking practices, Forex brokers automatically roll over all open positions to the next date at 5 PM EST for settlement.

Rollover involves exchanging the position being held for a position expiring the following settlement date. For example, for trades executed on Monday, the value date is Wednesday.

However, if a position is opened on Monday and held overnight, the value date is now Thursday. The exception is a position opened and held overnight on Wednesday. The normal value date would be Saturday; because banks are closed on Saturday the value date is actually the following Monday. Due to the weekend, positions held overnight on Wednesday incur or earn an extra two days of interest.

Trades with a value date that falls on a holiday will also incur or earn additional interest. Forex Traders can earn interest on rollovers, depending on the direction of their positions and interest rate differential between the two currencies involved.

For instance, the primary interest rates in Great Britain are much higher than in Japan, so if a trader buys GBP, he/she will earn interest at 5 PM EST time. on the other hand, if he/she sells GBP in this currency pair, he/she will pay interest at 5 PM EST time.

Overnight Interest/Rollover is automatically paid to a client’s account after buying a currency with greater Interest Rate in its country, and charged to a client’s account if the country issuing this currency has smaller Primary Interest Rates.

Bollinger Band Percent denotes where the price is in relation to the bands. %b = 100% at the upper band and =0% at the lower band. The calculation is as follows:
Bollinger Percent B = (Close – Bollinger Lower Bound) / (Bollinger Upper Bound – Bollinger Lower Bound).

We ran a report to give you a glance at all the Bollinger Band numbers.

GBPUSD is trading at its Bollinger Upper Band on both Daily and Weekly Charts

USDCAD is trading at its Bollinger Lower Band on Daily Charts

NZDUSD is trading at its Bollinger Lower Band on Daily Charts

Download the report here

The Hang Seng Index is a free float capitalization-weighted index of selection of companies from the Stock Exchange of Hong Kong. The index was developed with a base level of 100 as of July 31, 1964.

Of the members in the Hang Seng Index, we would like to know how many are trading above its own 200 days moving average. The moving average is largely accepted to be representative of the long term trend of the stock. The percentage of the index members trading above the 200 days moving average gives us an idea how the market is trading.

We plot this from 2004 to today.

Data source: Bloomberg

From 2004 to 2007, 80% to 100% of index members are trading above their 200 days moving average. At it’s low in 2009, almost all members are trading below their 200 days moving average.

Clearly during a period of momentum during 2004 to 2007 within our data set, the high percentage of members is stable at around 80% – 100%. Prices continue to soar as observed by the soaring index value. This sort of price behavior is representative of strong momentum.

Data source: Bloomberg

For the past year, we see a steady decline in the percentage of index members trading above the 200 days moving average from Apr 2011 to Sep 2011, hitting a low of 10%. As of 24th Apr 2012, 69% of Hang Seng Index members are trading above their 200 days moving average.

We are still one notch away from the sustained 80%-100% seen during periods of extreme momentum.

Watch this space as we perform such market breadth analysis and monitoring on a regular basis.

The S&P ASX 200 index includes the 200 largest index eligible stocks listed on the ASX by float adjusted market capitalization. It is widely considered Australia’s preeminent benchmark index.

Of these 200 members in the S&P ASX 200 index, we would like to know how many are trading above its own 200 days moving average. The moving average is largely accepted to be representative of the long term trend of the stock. The percentage of the index members trading above the 200 days moving average gives us an idea how the market is trading.

We plot this from 2004 to today.

Data source: Bloomberg

From 2004 to 2007, 80% to 90% of index members are trading above their 200 days moving average. From 2007 to today, it was more of a wild ride with a speedy recovery in 2009 following one of the worst crisis in 2008.

Data source: Bloomberg

For the past year, we see a steady increase in the percentage of index members trading above the 200 days moving average. As of 24th Apr 2012, 68% of S&P ASX 200 members are trading above their 200 days moving average.

How then does this market breadth analysis look compared to the index value?

Data Source: Bloomberg

Clearly during a period of momentum during 2004 to 2007 with our data set, the high percentage of members is stable at around 80%. Prices continue to soar as observed by the soaring index value. This sort of price behavior is cause for caution.

Data Source: Bloomberg

While we observed that most members are already trading its 200 days moving average, the index value has been flat for the most part of 1 year.

Should the majority of the market continue to trade above it’s 200 days moving average, it could be a sign that a momentum market regime is kicking into place and the market would advance as a whole.

This is what we encountered today on the oanda MT4 platform:

Notice how we have a weak Tenkan Sen / Kijun Sen cross on the EURUSD hourly chart, with prices already touching the bottom of the kumo.

However, if you are using forex.com, this is the picture you see on the same time frame and period:

Tenkan Sen only just crossd Kijun Sen, and prices are still above the kumo. We all know that these 2 pictures can paint a different story for Ichimoku traders so what is happening here?

The key difference lies in the fact that oanda allows trading on weekends, therefore plotting candles whenever there is a price change, throughout the weekend. On the other hand, Forex.com does not have weekend trading so on weekends you do not have any candles plotted. This explains the data points discrepancies when the indicators are plotted on Metatrader.

So which is better? On one hand oanda may be accurate since it factors in more data points through out the weekend. On the other hand, one can argue that the weekend prices are not liquid and therefore should be disregarded. Our take is that if you trade on weekdays, then only look at weekdays, and vice versa. Also, make sure that your charting broker platform is the same as your execution broker platform to prevent any confusion.

We prefer to only look at data excluding weekend trading, across our platforms and devices.

The Australia Dollar has been under selling pressure and looks to consolidate into a sideways movement in the near term.

The Kumo resistance region marked by the purple region above current prices suggests Australian Dollar has more tendency to trend lower following this consolidation.

Traders might want to initiate short positions when prices are near the upper bolinger band around 1.0436, at the time of writing.

The distinct kumo “cloud” you see painted across Ichimoku charts is a forward looking indicator, with current prices painting the cloud 26 periods forward. Put another way, today’s kumo cloud was painted by prices 26 periods ago. This mechanism allows the indicator to display future support and resistance, a very useful function for traders. We will see this in play in a bit.

This article analyses the daily EURUSD chart using the Ichimoku lens. Before that, this is what the chart looks like naked:

What you can probably tell is prices being locked in a range between 1.2993 and 1.3484, highlighted by red horizontal lines. This is happening after the strong down trend from October 2011 to mid of January 2011.  At this point, you probably do not have enough information to enter a trade. Let’s bring in the Ichimoku indicator for more price action insight:

We have confirmation of a ranging market from the following:

• The red horizontal line called the Kijun Sen is mostly flat. Since this is the 26 period 50% equilibrium line by definition, a flat Kijun Sen suggests that price is ranging. It is still flat.
• In addition, we see repeated kumo twists, whereby we see the could alternating between bullish and bearish signals, another sign of range-bound movements.

At this juncture, the question most traders are trying to answer will be, “are prices going up or down from here?”. And our conclusion is that a bearish move is more likely, here’s why:

Succinct Summation of Week’s Events (4/20/12) (The Big Picture)

Fear Barometer Bubbling (SurlyTrader)

Cambodia Joins Stocks Party (WSJ)

Visualizing the Bear (MarketSci)

Insanely Expensive Gadgets for the Elite 1 Percent (Wired)

Historically this is the dividends you would get from any investments in Singapore Airlines.

Chart above is the Weekly Chart of SIA.

SIA is in a long term down trend. There would still be more downward pressure.
The last low made in 2008 serves as key support level @ 7.91

We expect near term (next few months) prices to test 11.18. SIA is entering a short term consolidation with more sideways movement to be expected near term.

The 61.8% retracement level @ 11.20 is coincidentally near the 11.81 level we mentioned earlier. Traders should pay attention to this key resistance region of 11.81-11.20.

Breaking above this level, we should expect prices to try testing 12.22 next.

What a pain searching for a solution, especially gmail users! We just tried an it’s crazy. If the search led you here, this will be your final stop. We found the best way, and we took under 5 minutes. Here you go, one universal free method for any and everyone to get that email alert:

Sign up for a free email account with GMX at http://www.gmx.com

Open up your MT4 -> Tools -> Options -> Email. At the screen, tick Enable then use the following info for the rest.

SMTP Server: mail.gmx.com:587
SMTP Login : yourusername@gmx.com
SMTP Passsword: your gmx email password
From: yourusername@gmx.com
To: email address you want the message to go to (should be the email you frequent)

RESTART your MT4 program for the changes to take effect.

This method worked for us on the first try. It should for you too.

Since you are here, why not check out some free EAs too!

Cheers,

Glenn & Jay

Founders, AsiaPacFinance.com

We all know Ichimoku was designed to be a trend following indicator, meaning you get rewarded on monster trends because it keeps you in them, but suffer whipsaws because there can be little differences between a start of a trend and a start of a whipsaw. Take the ideal bullish setup for example, where these are the criteria:

• Tenkan Sen crosses above Kijun Sen
• Price above Kumo and Kijun Sen
• Chikou above price and Kumo
• Span A above Span B
• Rising future cloud

The above is more likely to lead to a bull trend, but the same setup can also lead to a whipsaw. And since every disciplined trader sticks to his system, getting hit by whipsaws is the cost of the trend follower’s game.

This article is written after interacting and discussing with many of our clients. One of the most often asked questions is, “how to avoid whipsaws?” One method is to employ conservative take profit levels.

Ichimoku looks complicated on charts, with so many lines with different colors, but to a seasoned Ichimoku trader, the lines require no legend and since you guys have been following us for awhile now, we will not define the lines. You should be able to identify them just by looking . Now Ichimoku is a dynamic and comprehensive system, and the discussion below only touches on some elements. It is NOT everything you need to know, just a few good ideas we came up with, and which we use.

By keeping conservative take profit levels, we look to catch the earlier portion of a trend or whipsaw (before the whipsaw).

The chart above shows a weak TS/KS cross bearish trigger, and bearishness confirmed by a kumo break later, and bearish future cloud formation. By most accounts, this is a bearish setup in the green box. For a conservative take profit level, we can use the Kumo shadow floor/ceiling (flat portion), which in this instance played out perfectly because it was indeed a whipsaw, which reversed after hitting the kumo shadow level.

Same for this bullish example:

We have a medium TS/KS bullish cross, followed by a kumo break, and hitting the Kumo shadow ceiling line, before reversing into a whipsaw. Note that Kumo shadows do not always exist, and are formed from prior strong trends.

Notice how in the chart below, in the absence of Kumo shadows, and presence of repeatedly twisting clouds, price is whipsaw-ing. Again in the green box we see how price hits the Kumo ceiling profit target, before ranging violently.

The above is just one example of using conservative take profit levels, to avoid whipsaws. But some of you are probably wondering now, then won’t we be avoiding trends as well, with profit levels that conservative? That’s a very good question, and a trade-off for avoiding whipsaws. One way to “have your cake and eat it” will be to take profit on half the position, and let the other half ride into the potential trend. Alternatively, you can simply eat what you can, so long as you are profitable.

The above discusses conservative take profit levels. We previously discussed conservative entry levels from retracements. It will be ideal to balance these 2 factors into a high reward: risk trade. This means determining your conservative take profit level, and then waiting for the opportunity to enter at a conservative entry level (ie. you are not far from the point at which the trade is wrong and void), such that your reward to risk is high. Of course you will miss out on certain trades, but your basket will be full of high reward: risk trades, which is great.

Let’s tie in these 2 factors with one example which played out a few days back on EURUSD:

See first the Tenkan Sen /Kijun Sen cross, which is a strong bullish crossover above the Kumo. We notice too a flat kumo shadow ceiling, which is a possible profit target. We then wait for a better entry.

The lime green horizontal line at the low of 12th April, was also the monthly pivot support. Prices retraced to this level twice, with close prices bouncing off the ascending red trend line. With the added support from the Kumo, the trader entered long at 1.3110, the trend line intersection, 77 pips from the profit target. A tight stop loss was placed below the monthly support pivot, also the low of 12th April. This was at 1.3095 and 15 pips from entry price, giving the trade a potential reward:risk of over 5x. Such a reward to risk ratio is high even by trend following standards. And it was a good trade.

*the above trade was executed and shared by our friend FX Hilton.

Please share with us any other strategies you have on avoiding whipsaws!

We conceived this idea trying to answer the very same questions above. Here’ what you can do:

1. Depending on your strategy, wait for your trade trigger.
2. Once you have a trade trigger, enter a pending order 1 ATR (Average True Range) away. For example, if you had a buy trigger at 1.0020, and ATR was 20, then enter a pending buy at 1.0000.
3. Your take profit can be 2 ATRs. In the above example, that will be 1.0040. And your stop loss can be at 1 ATR, that’s 0.9980. This will be a 2:1 reward:risk system. Adjust the TP and SL according to your preference.

So here’s the broad logic. Technical analysis by nature is lagging. Patterns emerge after the prices that create them. Therefore it is likely you are a little late in your (perfect) trade setup because you had to wait for the trigger.  In tandem to this fact, we have all experienced the volatility of markets, whereby prices often go against us at some point in our trade. These 2 factors often give us the option to enter at a retracement.

The example below shows a breakout strategy called the Kumo break, where you trade  a price breakout from the Kumo clouds, shown by the green circles. Notice how prices tend to retrace after the trigger, shown by the red arrows, before playing out to your favor shown by the green arrows.

The next question you might ask is, a retracement entry by how much? Here’s where ATR comes in, measuring the volatility for the past 14 periods. A logical retracement entry level will be a multiple of ATR.

Such a trading style has strong psychological benefits, since you are getting a “bargain” on every trade, at a discount of the ATR. It’s like going shopping only when there is a 50% discount. The downside to this methodology is that the shop owner, Mr. Market, may not always give you the discount, therefore you will definitely miss out on trades that do not retrace. These are the trades whereby the moment you enter the trade, it goes in your favor straight towards your take profit, which is rare based on our experience.

We hope the above can get you thinking about other ways to improve your trading system. We threw it out here for discussion and idea creation purposes, and look forward to any of your comments.

To orientate you to the chart above, the buy signal was generated at the point where the arrow points “Retest of trendline”. This is identified as a strong point of support through multiple confirmations as follows:

• Price touches the trend line (red line drawn diagonally down from left to right).
• At this point, the Chikou Span (turquoise lagging line) is getting support from previous price candles.
• You also see the bollinger band enveloping prices, and price is getting support from the lower line of the bollinger band.
• We also have weekly support pivot @ 1.3048 and monthly support pivot @ 1.3036.
• Lastly, price is inside the kumo cloud, which is a support zone.

From the above, we have 5 confirmations of a strong support, taking into account multi-timeframe supports as well. As we enter a long position, we can place our stop loss at the monthly support pivot @ 1.3036, which is also just below the kumo cloud. A break below this level disqualifies the long position.

For the take profit levels, we can use the Kumo Shadow, which are the kumo clouds behind the current prices. Prices often face resistance going into these “shadows”. As you can see in the chart, the top of the Kumo Shadows are used as the first and second take profit levels.

This bullish trade went up over 300 pips as seen below. With a stop loss of 12 pips, that’s a 25:1 reward to risk ratio, a classic trend following success!

This trade idea was kindly contributed by one of our clients, FX Hilton.

Well, why do you want to make money? To buy a nicer home for my family. Now, why do you want that?

Stop here for a moment. Think about everything you are doing, every first thought you have when you get out of the bed. Human beings can do many things for many reasons but as the chart above shows, we ultimately want happiness.

Won’t it be great if we spend some time soul searching ourselves, and get straight to happiness? Or some shortcuts there?

So many people say things like “if I make a million I will be happy, if I can be the xxx position at the xxx job I will be happy.” Why should happiness be conditional upon some other factor? If you do not meet that criteria does that mean you are never really happy?

A lot of us spend our time learning the science of trading, for example trading strategies, trading systems, investing formulas. But until we are happy trading and investing, we will never be masters at it.

There are broadly 3 Types of Happiness

In the picture above, we see the smiley faces to the right – that indicates how long the happiness lasts once you take the activity away.

• Rockstars are people who go to the casino or make bets and gambles. They get high when they make money, but this happiness quickly fades away when they stop the activity.

• Flow happens when you are doing something and you lose track of time. This is when you are totally engaged and the happiness lasts longer. For us at AsiaPacFinance.com, Flow happens alot when we are researching and testing trading strategies, or when we are working out at the gym. The more time you spend in the flow, the happier you become.

• And the third and longest-lasting happiness effect is when you are doing something which means more than the result. This is the reason why many successful people donate a large chunk of their wealth to helping others, it gives their lives more meaning and purpose, and makes them happier. On one extreme, you see people giving up everything to serve a higher calling, because it makes them happy. Anything else will be shortchanging their happiness.

Trading is not a sprint, it is a marathon. If you knew you were running a marathon, won’t you want to understand the science of it, instead of running randomly around the parking lot?

The media enjoys worshiping market wizards who struck it big in the shortest period of time, because these stories excite people. But really, understand that your trading career is long term, and your approach to every individual trade will change. You will stick to your rules more, you will study your performance and find ways to systematically improve so you finally get to your destination. If you were running a marathon, you would pace yourself and not go all out at the start, the latter causes people to burn out or give up.

We have heard of so many people quit trading or investing. They say things like:

“I learnt nothing from the seminar” – these people wanted to be spoon-fed. They paid money expecting the Holy Grail which we have explained here, does not exist.

“I lost money” – these people give up too easily after a setback. They associate the period of loss with the activity of trading and investing. They wanted a quick fix.

What is your higher purpose in life and how does trading fit in? We hope we have led you on the path to happiness by planting these seeds in you. Feel free to share your answers below.

So long as the fund manager beats the index, he has done his job. Even if the index goes down, but he goes down by a lesser margin, he is successful. And what do financial advisers tell you when mutual funds go down in value? They ask you to purchase more or “average down”, which we think is silly. Catching a falling knife is never a good idea.

Recently we came across a platform which could very well be an absolute return option. Well, at least the idea is.

If you visit Zulu Trade, you will see a very interesting platform, which allows retail traders to follow “expert traders”. So traders are ranked based on how well they trade over time, and you have a table of top performers, which allows anyone to mirror their trades automatically. And the results have been good, much better than mutual funds:

The top 5 traders yielded over 37,000 pips in the past year. That’s over a 100 pips a day! And you know in forex, one pip can be anything from $1 to $10 to $100 depending on your account and position size. Which leaves us to wonder, isn’t it better to just invest in these top traders rather than lock our money into some mutual fund which aims to beat some index?

Perhaps you can select the top 10 or 20 traders for some diversification, and create your own little hedge fund with these traders trading for you. Perhaps you may even want some diversification from your own trading!

In many ways, investing in these top traders is similar to buying into a mutual fund. You rely on past performance, and have no control over the fund manager’s decision. But the results from the chart above is plain staggering.

Check it out and let us know what you think.

Source: http://thechartstore.com

Open forex trading broker account here.

For Stocks and News

We like the Bloomberg app for our iPhones, which is free and offers tonnes of useful information. For example you can select news feeds, look up prices of every listed stock, commodities and currencies, and also monitor your stock portfolio. Just one look and you can tell the dollar or percentage gain of every stock in your portfolio. It is great for keeping up to date with your portfolio, global news, as well as checking out new stocks.

Recently, it has even added Bloomberg TV within the app. So you can watch real time news streamed straight into your phone. Keeping up to date with markets can now be done easily on the move, just watch out for cars on the road while you are at it!

For Forex Charts & Trading

We like the MetaTrader 4 Mobile app. It allows you to overlay 30 different indicators onto your mobile forex chart. It even has our favorite Ichimoku Kinko Hyo Indicator. So you can monitor your trades on the go.

These are the 2 apps which are not only free, but we find extremely useful. There are probably other useful apps out there which we have not had a chance to discover. If you do, drop us a comment below and share the app!

Yale economics professor Robert Shiller — who correctly called both the dot-com and housing bubbles — designed the “cyclically adjusted price-to-earnings ratio,” or CAPE metric. Instead of just using the past 12 months to calculate a traditional P/E ratio, CAPE takes into account the inflation-adjusted earnings of the past 10 years. This reduces wild  swings in studying P/E trends.

To calculate P/E10:

1. Look at the yearly earning of the S&P 500 for each of the past ten years.
2. Adjust these earnings for inflation, using the CPI
3. Average these values (ie: add them up and divide by ten), giving us e10.
4. Then take the current Price of the S&P 500 and divide by e10.

Here’s what the market’s CAPE has looked like since 1881.

As with most trends, prices tend to revert to their mean. The mean P/E ratio based on CAPE is 16.42. This translates to the S&P P/E ratio being 40% above the historical mean, suggesting overvaluation.

Scary as it sounds, this does not mean P/E ratios cannot continue to go up. Overvalued stocks can still continue to rise, the key ingredient for that to happen is increasing earnings growth forecasts, which allows for P/E expansion well above historical averages. If earnings forecasts do not improve, P/E ratios may very well revert to their mean.

Open forex trading account here.

• Gann HiLo Activator (GHA)
• Ichimoku Kinko Hyo (Only the Kijun Sen line)

Logic of the system:

Kijun Sen represents price equilibrium in Ichimoku Kinko Hyo  analysis, meaning prices often retrace to this line, especially after deviating too far from it. This system aims to profit from such retracements, by trading reversion to the mean.

The highest probability reversions happen after a strong trend – that’s when price is usually furthest from the Kijun Sen, and trend reversals are more common. To determine such zones, we utilize another indicator called the Gann HiLo Activator.

In this example of a bear trend, the GHA (blue) is below Kijun Sen (red), with price below GHA.

You can see above that prices were in a bear trend before starting to revert and counter trend. When does this happen?

From our observations, this counter trend trade is triggered when price crosses the GHA line towards the Kijun Sen. That is the trade we are interested in.

Buy Condition: Prices crosses GHA from below, towards Kijun Sen.

Stop Loss: The last swing low

Take Profit: When price touches Kijun Sen

Sell Condition: Prices crosses GHA from above, towards Kijun Sen.

Stop Loss: The last swing high

Take Profit: When price touches Kijun Sen

Why we like this system:

1. The problem with many trading systems is that you often see a trade start off in your favor, and watch profits disappear because you do not know when to take profit. This system has clear take profit and stop loss levels.

2. Because it has clear take profit and stop loss levels, you can decide whether a trade is worthwhile based on the reward:risk ratio. If price is far from the Kijun Sen (relatively high reward), and near to the last swing high/low (relatively low risk), it’s a good trade.

3. Most traders do not have the patience to ride trends for 20 bars. Retracement plays are shorter so this system is more aligned with the “impatient” human nature.

That’s all folks. Try this system and let us know how it works for you, or if you have ways to improve it.

We look at the weekly DOW charts using the Ichimoku Kinko Hyo indicator and it is clearly very bullish. Tenkan Sen (pink line) is above Kijun Sen (turquoise line), Chikou Span (green line) is above price and Kumo, and the future Kumo cloud is thickening and sloping up.

You will notice that the thick Kumo cloud supported prices during the last quarter of 2011, and ever since prices broke above the Kumo, there has been no u-turn. The bull run looks inclined to resume. However, there are two concerns for the bulls:

1. The Kumo cloud all the way into June 2012 is relatively thin, offering weak support.

2. Tenkan Sen is very far from Kijun Sen, the latter representing price equilibrium. Prices tend to retrace towards equilibrium, especially when the Kijun Sen is a flat horizontal line as pictured in the chart.

For the bulls, it is probably wiser to wait for a retracement to the Kijun Sen for a higher reward:risk bullish trade, while bears should wait for a breakdown below the Kumo cloud.

Start forex trading account here.

We visit the EURUSD daily chart and noticed a head and shoulders pattern in the making.

A head and shoulders pattern looks like a human head with 2 shoulders on either side. The shoulders are lower than the head and are often of equal height to each other. The blue line extending horizontally across is the neckline, which connects the 2 low points.

This is a top reversal pattern, or a bearish signal. Of course, this trade setup is still in the making and is only confirmed if prices follow the direction of the red arrow, breaking below the neckline. The pattern is however void once prices break the high of 1.3484.

You can expect many traders to go short if prices break below the neckline level of around 1.3017.

We look at the USDCHF Daily charts using Ichimoku Kinko Hyo.

Kijun Sen (red line) has been horizontal for the past month, indicating a range bound price action that is consolidating. As Kijun Sen is the equilibrium line, we see price hovering close to it, especially when it is horizontal.

Next we notice strong resistance offered by a thick Kumo cloud extending all the way into April 2012. In addition, the top of the Kumo is flat, forming a kumo ceiling which is an indication of strong resistance as well. Therefore, it is unlikely for USDCHF to make a bullish break, as we see how prices failed to break resistance in early March. 0.9251 is a key resistance level.

We can expect prices to enter the Kumo cloud and test this key resistance level, but pressure is to the downside.

Open forex trading account here.

A good technical analyst is one with an arsenal of charting tools, but that in itself is quite useless. One needs to be able to identify patterns and using the appropriate tools. In this article, we explore triangles.

A triangle shows 2 converging trend lines, connecting at least 4 points, the price highs and lows. One line is sloping down, while the other is sloping up, because prices are making lower highs and higher lows. The longer this patterns takes to form, the stronger the breakout.

Prices can break out in either direction, up or down. In the chart above, we see prices making a bearish breakout. The price objective used is typically the height of the triangle “base”, indicated by the vertical arrows above. Stop loss levels can be placed at the other side of the triangle.

While triangles can prove effective, the challenge we face is that there is a certain level of redrawing of the triangle. Sometimes prices make new highs and lows, distorting your triangle such that you have to redraw your triangle. So what was initially a breakout by definition, was not a breakout.

It will be better to wait for a triangle which took a long time to form, that reduces the chances of having to redraw the triangle, as prices will be very close to the “apex” by then. This method of trading is also highly subjective and discretionary.

Open forex trading account here. 

Many traders do not trade systematically. Position sizes are random, based on gut feel, and often risk too much of trading capital. In this article, we teach you how to position size quickly and most importantly, effectively.

Assume the following:

• Trading System: (10,20) Moving average crossovers
• Trading Capital Balance: $10,000
• Risk Per Trade (Maximum Loss): 2% of account = $200
• Currency Pair Traded: EURUSD

*Each trade in this system risks only 2% of the trading account.

In the chart above, you see a bullish moving average crossover in the centre, which triggered a buy trade. As you are entering the trade, you ask yourself, how much should I buy such that I am risking only 2% of my account? This is an important question!

Let’s take a meaningful stop loss level – for example the last swing low, which is 48 pips away. If price were to break the last swing low, it voids the bullish trend which you are trading. So you decide that 48 pips and you are out of the trade.

Now proceed to this website. Key in as follows:

• In which currency is your trading account held? USD (your account currency)
• Account Balance: 10,000
• Percentage Risk of Account Balance: 2
• Stop Loss In Pips: 48
• Which currency pair are you trading?: EURUSD

HIT CALCULATE BUTTON and you get the following results:

Calculated Results

• Amount at Risk $ 200.00
• Position Size 41,667 units
• Standard Lots 0
• Mini Lots 4
• Micro Lots 41

There you have it. If you buy the above position sizes, you will be risking 2% of your trading account, which gives you perfect control over your losses.

For discussion purposes, assuming you took profit at 68 pips, your profit in percentage terms is as follows:

Percentage Profit = (Take profit pips)/(Stop Loss pips)* Stop Loss %

= 68/48 * 2% = 2.8%

So you will make 2.8% on this trade at a potential loss of 2%.

What’s your reward to risk ratio? 64/48 =1.4

You have learnt above, how to determine your position size based on a meaningful stop loss and pre-determined risk per trade.

Open forex trading account here. 

Forex Trading for retail traders is still in it’s infancy, at slightly over a decade old. However, brokers are gunning for market share, and customer service has also improved tremendously in recent years. One of the key considerations for us in selecting a forex broker is the methods of funding the forex account. There are the conventional ways of bank transfer and internet transfer, but our most preferred method is by credit card. Here’s why.

When you fund a forex account with your credit card, it is instant. Meaning you click the submit button and you can start trading almost immediately. So it is fast and convenient.

Secondly, you are trading on credit, meaning you are using the bank’s money to trade. Let’s say you end the month profitable, you actually made money with no money, or rather with the bank’s money.

Last but not least, you get all the credit card rewards, as if you made a huge purchase.

The other methods do not give you the above advantages. They are slower, require you to have cash upfront, and do not reward you with credit card points.

Therefore we like brokerages that allow for credit card funding.

Loansharks are known to charge ridiculously high interest rates to anyone willing to use his life as collateral. They will kill you if they don’t get their money back. This practice is of course illegal in most countries, but the lure of easy money breeds underground loansharks.

However, it seems as though anyone can be like a loanshark now, and openly so. Peer to Peer lending over the internet has flourished in recent years. Many of such services such as Prosper.com are funded heavily by venture capitalists, and this company has transacted $315m loans as I type. That’s $315m of money lent from person to person. And the average interest rate according to the website? Over 10%…… Not bad huh?

Such websites even encourage you to make such loans to diversify your portfolio. Everyone becomes a bank suddenly, earning interest on loans. And of course on the other end you have someone desperate for money and you can help them.

While this seems very interesting, and sure it does diversify your portfolio, we are not comfortable with this “asset class”. The biggest problem is that unlike loansharks, we cannot go after their lives if borrowers fail to pay up. There is no collateral! It is really a question of how much trust you have in the person which leads you to lend him or her money, over the internet.

And your risk appetite of course. At 10% interest rates, that’s $31.5m of profits distributed by this one company alone so far.

With the rise of financial websites providing trading tips and tools (like ours), and books such as “deleteyourbroker.com”, many investors feel that the broker is redundant. Sure, we can all conduct our own analysis and execute trades on the platform ourselves, who needs the broker?

That’s true to a certain extent. Which is why the brokerage industry has turned into a commodity business for the most part – lowest commission wins customers. This article is to teach you how to use your stock broker. They are actually very useful!

As a retail investor, few of us have access to institutional research reports, especially those of companies which we are interested in. This is because global research houses sell these reports and no one is allowed to distribute it freely. Such reports are useful for view points of analysts, especially when they just release their analyst target prices, which can move markets. Well anyway, your broker has access to these reports. Say you have a portfolio of stocks that you want to monitor, or a new company you want to check out. Asking your broker for research reports on these companies is a good start.

As mentioned, the brokerage business has become a commodity. And brokers have to get innovative in serving their clients – that’s you. Another very useful analysis these stock brokers can do for you is comparables analysis. So if you are interested in REITs for example and want a table comparing all the REITs in your market for you to see which gives you the highest yield, your broker can do it for you.

So do tap on your stock brokers for this added advantage. Some leechers actually sign up with numerous brokerages just so they have 10 stock brokers at their service. While that is sneaky, know also that brokers keep track of how much commission you are generating for them. Sooner or later, they will realize that you are not generating much commissions for them and will ignore you.

So pick a good and resourceful stock broker, stick to him, get research and analysis from him, and give him some business for a sustainable relationship!

Is it not a life skill? With inflation rates so high, the money we earn is losing its value everyday. Saving cash may not be the wisest thing to do for retirement. Yet, millions of people around the world have no idea how to start, and deem investing to be risky. Well, doing nothing is riskier since you are doomed to suffer the effects of inflation.

This thought led us to recall what we learnt in school. Physics, biology, literature….sure the society needs to give everyone a chance at discovering their talents. But many of these talents do not help us survive! Do you even remember how to solve those physics questions today? Or when was the last time you picked up that musical instrument to play?

We are not against learning those subjects. We are just pondering why schools do not teach investing, which is essential for survival. Investing and trading should be in the rungs of swimming and languages. But of course, schools primarily groom individuals to be “rats”, training them to climb the corporate ladder well.

For this reason, there is a whole financial industry created, formed my financial advisors and relationship managers, to teach you what you did not have a chance to learn in school. Everyone should have an insurance policy, but few know how to scrutinize the terms of policies, and are often misled into overspending on recommendations from financial advisors.

In conclusion, we advice everyone out there to not only teach your children this life skill, but to learn as much as you can about finance and investing, everyday. The human race has gravitated towards money as a measure of value. It pays to understand the system inside out, and not be trampled upon because you lack the knowledge.

It is our goal to keep you up to speed in this area.

Retail investors and traders tend to seek the one get- rich- quick trading system, also known as a Holy Grail. We at AsiaPacFinance.com spent some time researching into this, and would like to announce that there is no such thing. If there is please tell us!

While a system may prove extremely profitable in a particular year or time-frame, it could fall flat on its face the next period. If you consider the many hedge funds in history that have outperformed the market, many of them also went bust soon after. The big brand names that survive do so because they have a team which constantly adapts their strategies and portfolio to market conditions.

There are numerous trend following strategies, just like there are mean reverting strategies. The “holy grail” mindset is to know when to use which. A trend following strategy suffers in a ranging market and a mean reversion strategy suffers in a trending market. Some of you may be wondering, why not combine both? That’s one way to diversify but you will probably get mixed results.

Therefore, you first need to select a trading system, and understand in what market conditions it will not work. Then find out about the market conditions so you know when to sit out of the market. For example if you are a surfer who rides waves. You need to know when the waves are coming, if not you might as well sit out by the beach. Staying out in the water only exposes you to sharks.

Most traders are impatient and want to be in the market all the time. There will be periods in the market where your trading system will fail to perform. Knowing when to stay out reduces your downside, while allowing your strategy to reap its profits. It is for this reason we do not recommend black boxes or blindly following other traders, because you will not be able to decide when to pause your trading, not knowing how the system is designed.

Most of these people selling trading black boxes will release new versions every now and then because they sell systems that back-fit historical performance. So they fine tune a system that would perform well on historical prices, and sell it to you for the coming year, and repeat the process every year. Chances are, they are as clueless as you are as to the future performance of their blackbox system.

In conclusion, we encourage you to understand the systems you choose or create. Then find out in what market conditions they do not work. You either sit out of the market or find another strategy which works in opposing market conditions to diversify. This will give you better control over what to expect from your system and more importantly, how to improve and adapt to market conditions.

As adults, we all wished we had started investing earlier. We grew up eating a Mcdonald’s happy meal. Today it’s share price is approaching $100, while 20 years ago it was only just above $10. Sure, hindsight is 20-20, but you have to agree that 20 years is a decent amount of time to overcome most recessions.

In the past, recessions normally occur every 7 years. In recent times, it seems to be getting shorter. This is because mankind has devised all sorts of financial instruments to speed up the economic cycles. So back to the earlier paragraph, 20 years is enough to recover from a few recessions.

Legendary investor Warren Buffet bought his first stock when he was 11 years old. Well obviously someone bought it on his behalf, since he was below the legal age to transact. He probably had the right environment to groom his interest in finance and investing.

So what can parents today do to give their kids a head start in the finance world? Of course you have to lead by example and demonstrate interest first. Not to mention be prepared to answer any questions the kid has. So here are the steps to growing a Warren Buffet Kid:

Step 1:

Get interested in investing and make it your lifestyle to be inquisitive and read up about the markets. If you demonstrate little interest or knowledge, it is likely your child will follow suit.

Step 2:

Forget toys and bicycles. Buy your child stocks for his birthday. You can pass him a notepad telling him each page is worth $1, while you keep the stock in your account, on his behalf. Be sure to return it to him when he’s old enough. (Don’t use it to cover your portfolio losses!) Of course explain to your child that this stock will increase in value over time, while his toys decrease in value over time etc. He will appreciate your efforts when he sees his stock appreciate over 10 years.

Step 3:

The stocks you buy for your child should pay out dividends. Make sure you pay him those dividends, and let him buy the things he likes with the cash. He will soon appreciate what the stock is doing for him – giving him dividends in cash!

Step 4:

Kids like to compete when they play games. Create a demo account for your child, be it stocks or forex. Challenge your child to outperform you in returns. If he wants to win you bad enough, he will learn what it takes to do so. You can throw in incentives if he wins. And if he loses even better, he gets to learn from his mistake and gain experience from a young age.

Step 5:

Encourage your child to start a small business such as a lemonade stall, or sell sandwiches to your neighbours. Explain his business strategy to him and guide him to think through ways to market and increase profits. He will quick’y hone his business acumen which will help him in choosing companies to invest in future.

The above definitely requires the parent to have some basic knowledge of investments and finance, and that’s what this website is for!

Many of us measure our investing and trading success based on the amount of dollars we put into our pocket. However, we often fail to consider the dimension of time.

Time, unlike money, depletes with certainty in our life time. Some people work really hard to earn big bucks, while at the same time shortening their life spans from the stress and lack of sleep.

Is money worth anything without time? We submit to you that the value of your money and how it benefits you, is a function of how much time you have in this world. The more time you have, the more valuable your money. For 2 reasons: Firstly you have more time to enjoy it, and secondly, your money has more time to compound.

Therefore, in addition to chasing returns on the market, let’s also consider having more “Return on Time”. Now, how is this relevant to trading and investing?

Let’s compare 2 traders. Trader A stares at his screen all day, and sometimes is not able to sleep because he has to watch his position.  His trading style is manual and discretionary, so as long as he’s not looking at the screen, he cannot trade.

Trader B has a systematic way of trading based on rules he has backtested and programmed into a system on his computer. The system execute trades automatically when certain rules are met. Trader B does not like to look at the charts because he feels his emotions affect his decision making. His time is spent fine-tuning his system and managing risks. With the spare time on his hands, Trader B hits the gym and starts an internet business.

In the above example, Trader B is having a higher Return on Time. By outsourcing his trading to a system and choosing a systematic trading style, he can get healthier at the gym, and even create another source of income in his free time.

We encourage you to not only seek ways to increase your dollar returns, but think out of the box and create time for yourself. With this additional time, you can explore new investment opportunities or develop new trading systems. As you get healthier and more stress-free, you think better and become alert to changes in investment trends.

For newbie traders and investors, do not be penny wise pound foolish. Some newbies try to save money by reading years of books and websites, in search of the holy grail. They end up going no where and losing a lot of time.

If you find a structured and reliable program, do not be afraid to spend some money for the knowledge. It can accelerate your learning curve and save you much time.

This is a question that has probably crossed everyone’s mind at some point in their lives.

For those of us fortunate enough to attend school, society encourages a culture of getting the highest paid job, for example working for an investment bank, or management consulting. We also have the risk averse culture of encouraging kids to be doctors or lawyers. These are the traditional methods of getting your first million. For those people who are fortunate enough, we are happy for them.

But really, what happens to the 99% of people who “did not make it” to the above million dollar jobs? How can they make their first million?

There is hope for everyone. The 2 other categories where people most commonly make their first million is in Sales, and Investments. And very often, they continue to make even more compared to traditional high-paying jobs. Let’s explore each of these 2 categories.

Sales

Sales is a skill which can be mastered by anyone with a desire to. Some people are natural salesmen, but others can easily learn and master this skill. Sales in itself is a large industry, you could be selling for an MNC, you could be an independent real estate agent, or you could be an entrepreneur etc. The key element of sales is that there is no ceiling on the upside, and rewards are proportional to results. Unlike regular employment where your salary and bonus is decided by your boss, you have complete control over how much you can make. The critical factor is in offering value to prospective customers. Give people enough value and you will be compensated for it.

Investments

Investments is another large industry and most people carry out some form of investment in their lives. This involves buying something, and later selling it at a higher price, pocketing the difference. Common investments are shares in companies, art, wine, small businesses, commodities and real estate. You are probably thinking you need money for this and you are correct. Many investors like real estate because they can borrow money from the bank to invest in the asset. At the end of the day, Investors make money with money.

The wealthiest people in the world often perform a combination of Sales and Investments. Even the highest paid doctors and lawyers own their own practice, meaning they invested in their own business as a professional, and sell their services to clients.

In conclusion, anyone can make their first million by mastering a combination of sales and investments. If that is your dream, start learning all you can about these 2 skills and practice as much as you can.

Physical bookstores are shutting down all over the world, being replaced by Kindles, iPads and the e-books they carry. Not only is digital content more convenient, it is also a lot cheaper. Traders and investors used to browse and purchase physical books to learn strategies, but they are increasingly ditching physical books for digital ones ones.

A sub-trend of the above are websites and blogs which provide tonnes of trading and investing knowledge, just like this one you are reading from. Much of this content is free, but what they often lack are credibility, quality and structure. Same for forums and other user contributed content.

So far we have only discussed learning from reading. However, as Founders of AsiaPacFinance.com, we ourselves are discovering much better ways to learn, and that is through videos. Videos engage your ears and eyes concurrently, allowing you to absorb information much more efficiently. We also find watching a video less tiring compared to reading, and allows you to multi task on less interesting parts. In addition, humans learn better from pictures. While most books are 80% words, videos are 80% pictures and visuals, which allows our minds to better absorb concepts.

The next dimension we explore in terms of learning is technology. 5 years ago, the laptop was amazing. You can carry learning with you everywhere you go. Now it’s even better – Surfing and learning is possible with smart phones. With high speed mobile internet streaming high definition videos right into your palm, so people can learn trading and investing in between meetings, on the commute home, and even over lunch. Technology has solved the convenience factor.

Without even considering expensive $3,000 weekend physical seminars, the fast sweeping trend is that traders and investors are improving their finance knowledge through videos/ online courses, and many are receiving this content across platforms. So they may learn on their mobile while on commute home, and resume on their desktop at home.

Physical libraries and seminars may be history soon.

The news anchor was shelling out so much bad news I could feel my heart cringe. These people, together with mass print media, truly make a living out of digging up every possible financial problem, and “warning” people of the worst case scenario. Bad news, which triggers fear, tends to sell for some psychological reason.

To add salt to the wound, they often invite 2 “experts” of opposing views. These professionals would have prepared facts to back up their views and throws those at you, leaving you – the retail investor, where you started.  Speaking of facts, we all know how fund managers mostly under perform their benchmarks, which means we are listening to people who are wrong most of the time.

But let’s get positive here.

What we can learn from the above mess is a better understanding of the market, in terms of how the various economic factors integrate and correlate. These news anchors and their guests do give explanations which we can learn from.

Beyond that, it is highly recommended you have your own views, and conduct your own analysis. You may very well outperform those media experts.

Something does not feel right when we look at the daily DOW chart below.

Right on top we see a horizontal blue line indicating the psychological 13,000 resistance level, which the DOW has failed to break so far.

Diagonally across we see a strong blue support trend line supporting prices.

And then we look at the RSI and we see a clear divergence. Based on this indicator, when prices continue to make new highs and the RSI is making lower highs, there is a bearish divergence – a warning of potential trend reversal.

We are also near the apex of the triangle drawn by connecting the support and resistance levels, indicating that a strong price action is about to take place.

Not even considering the negative economic fundamentals, this chart seems to highlight an opportunity for a short trade once price breaks below the trend line.

Yahoo and Google Finance do contain a wealth of information for stock investors. However note the following:

• Financial information is not their core business so we do not know how reliable the data is, or how frequently it is updated
• Many stocks in Asia are not found on these 2 sites, and even if found, data is often incomplete

We like using the Bloomberg website for a quick overview of fundamentals. Well, Bloomberg’s core business is in providing reliable and up to date financial data, so they have large resources dedicated to this function round the clock. They even have a pretty iPhone app so you can track markets.

In the white box where you see “Search News, Quotes and Opinion”, you can type in the name of the stock you are seeking, Wait for the drop down options then click on the counter you want.

You will be brought to a concise overview page showing key numbers and ratios. The financials section for income statement, balance sheet and cashflow display not only the data, but a clear diagram which gives a quick snapshot of financial performance. Last but not least, they also display related news and press releases on the company.

So instead of getting lost in financial reports from multiple sources, you can utilize Bloomberg for a quick feel of the company’s fundamentals, before diving into detail.

If you have more tips and resources, do share with the community below.

Equity markets have managed to post gains in 7 of the first 8 trading days of 2012.What does it mean for the rest of the year?

Since 1900, there have been only 8 prior instances of the market gaining in 7 of the first 8 days. Of those, the market continued to rise from day 9 to Year End, 7 of 8 times (exception was 1987). The average gain from day 9 to Year End was 12%, and the Full Year gain was 16%.

The S&P 500 has risen 21% since its low on October 3rd. Such a move has been surprisingly common—since 1900, there have been 63 prior instances of a 20% gain within four months.

Historically, after such a rapid gain, the market typically has had a “short-term pause” (next 3 months), gaining only 1.2% on average (but a win ratio of 63%, and only an annualized gain of 4.8%).

But after digesting those gains, the 6-month and 12-month returns were substantially better. The returns were 6.3% and 8.5%, respectively, with a win ratio of 68%/70%.

Basically, the analysis suggests that the headline performance of the index takes a short-term pause, but the trajectory is higher.

Article adapted from J.P. Morgan’s Circle of Life Report.

CAGR (Compounded Annual Growth Rate) is the imaginary number that describes the rate at which an investment would have grown if it grew at a steady rate. You can think of CAGR as a way to smooth out the returns.

Very often companies disclose that their sales or earnings grew at a CAGR of x% over 5 years. This means assuming the growth is constant, it would be growing at x% every year. The formula is as follows:

Suppose you invested $10,000 in a portfolio on Jan 1, 2005. Let’s say by Jan 1, 2006, your portfolio had grown to $13,000, then $14,000 by 2007, and finally ended up at $19,500 by 2008.

Your CAGR would be the ratio of your ending value to beginning value ($19,500 / $10,000 = 1.95) raised to the power of 1/3 (since 1/# of years = 1/3), then subtracting 1 from the resulting number:

1.95 raised to 1/3 power = 1.2493. (This could be written as 1.95^0.3333).
1.2493 - 1 = 0.2493
Another way of writing 0.2493 is 24.93%.

Thus, your CAGR for your three-year investment is equal to 24.93%, representing the smoothed annualized gain you earned over your investment time horizon.

As you can see, the formula only uses the ending value and the beginning value. This can be misleading because the CAGR figure can “hide” any losses in the years between the first and last. Investors however, are looking for consistent growth and performance. Therefore, even if a company states a healthy CAGR figure, you should observe its sales and earnings every year, to make sure the CAGR was not simply boosted by the latest performance due to one time events.

Hyflux, once a darling stock of the Singapore Stock Exchange, has seen its share price halved a few months ago.

Looking at the weekly charts, you can see how the “shooting star” candlestick pattern (highlighted in blue oval) signaled a market top, and prices headed south from then on. The bearish momentum was further confirmed in August 2011 upon a head and shoulders breaking of the neckline (blue horizontal line).

We have seen a retracement this year towards the neckline but the company probably needs more positive earnings expectations to drive its prices higher. As of this writing, it is already trading at 25.0 times earnings, at such depressed prices. For it to recover to its 52-week high of $2.22 would require a valuation of 38.6 times earnings.

Such high valuations are most often reserved for growth or technology stocks. To put things in perspective, Apple is trading at 15.5 times earnings, and Google is trading at 20.9 times earnings.

*All figures sourced from Bloomberg as of March 2, 2012

• Gann HiLo Activator (GHA)
• 10 Period Exponential Moving Average

The area enclosed by the above 2 lines is known as the “Poison River”.

Enter Long Condition: When EMA(10) crosses above GHA

Exit Long Condition: When price touches Poison River

Enter Short Condition: When EMA(10) crosses below GHA

Exit Short Condition: When price touches Poison River

This system has no take profit because we want ride trends as far as they run. Stop loss can be placed in the Poison River.

Price touches the Poison River in 2 common scenarios:

1. The trend is ending and a reversal is coming up
2. Price is starting to enter a range and a whipsaw is coming up

Therefore, whenever price touches the Poison River, look for an opportunity to exit. If you are in the money, take profit. If you are in a paper loss position, look for a break-even opportunity and exit. If not, exit when an opposite buy/sell signal is triggered.

If prices are lingering in the Poison River, stay out of the market. This system aims to be conservative in capital protection, yet rides strong trends to the maximum.

Let us know how this system works for you, especially if you know of any ways to increase the win ratio.

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In Berlin June 1922, Alia Schmidt paid 3 German Marks for a really nice loaf of bread. A very quick six months later, the same loaf of bread cost her 700 German Marks. The German decision to print money caused inflation to skyrocket. No one was happy and Mrs. Schmidt had to stop eating bread.

In Tokyo 1994, Makishi Satou paid a whopping 217 Japanese Yen for a delicious McDonalds hamburger. A very long 18 years later, Mr. Satou is still enjoying hamburgers, yet he is only paying 216 Japanese Yen for this very same delicacy.

The Japanese decision to print money resulted in zero inflation. Yet, despite a full belly, Mr. Satou and others are not at all happy with their money printing experience and the subsequent -77% decline in their stock market and the -90% fall in their property market.

Today, future economic historians are lucky enough to both see and experience what will happen as Europe (lead by Germany), Japan, Great Britain and the United States fully engage in the biggest, coordinated, money printing experiment in the history of the Universe. In its simplest form, only three scenarios are possible:

1) Money printing has absolutely no impact on prices rising or falling
2) Money printing results in a return to the 1922 German experience
3) Money printing results in a return to the modern day Japan experience

The elimination of scenario 1, naturally leaves us with a tug of war between a hyper-inflationary World or a deflationary World . Both outcomes are certainly extreme, yet what else could you expect when we have the World’s biggest central banks implementing extreme monetary policies in the form of money printing?

Like 1922 Germany, today inflation may ultimately be caused in an individual country as a result of a severe decline in a single country’scurrency. We could also see a severe global rout of inflation precipitated by the collective and excessive money printing ways of the World’s 4 major central banks in the US, Europe, Britain and Japan.

In both of these scenarios, we expect gold bullion to do very well. In addition, stocks and commodities will undoubtedly return better than cash and bonds.

Alternatively, investors must understand that people and countries are de-leveraging as they are starting to pay down their debt, and banks are not allowing their excess money to re-enter the economy. This combination is creating slower growth which could make the World a little closer to 1990 Japan.

In this situation, bonds and cash will perform significantly better than stocks and commodities. However, should this occur you should also be prepared for a continuation of additional money printing which inour opinion only further increases the likelihood of a financial blunder. This key risk supports a position in gold bullion in the portfolio as well.

This is an excerpt from IceCap Asset Management’s February 2012 Newsletter.

The strategy is designed to catch corrections in markets that have shown evidence of increased momentum, with the average directional movement index (ADX) and a 20-day exponential moving average (EMA) providing the setup.

The indicators you need for this strategy are:

3-10 oscillator. It is the difference between a 3-day simple moving average and a 10-day simple moving average. Plus, there’s a second line which is a 16-period simple moving average of the 3-10 line. You can simply alter the settings for an MACD (moving average convergence-divergence indicator), changing the moving average type from exponential to simple and the moving average lengths to 3, 10 and 16. For forex traders, we provide the MACD-SMA indicator here.

14-period ADX (average directional movement index). This indicator is used to gauge trend strength.

20-period Exponential Moving Average

This diagram shows an example of a long trade

Her rules for going long are as follows: 

1. Wait for the ADX to rise above 30

2. Buy the first retracement to the 20-period EMA

3. Look to exit on the push to new highs

The best setups also have confirming factors such as the 3-10 oscillator making new momentum highs.

Her rules for going short are as follows: 

1. Wait for the ADX to rise above 30

2. Buy the first retracement to the 20-period EMA

3. Look to exit on the push to new lows

The best setups also have confirming factors such as the 3-10 oscillator making new momentum lows.

This strategy is definitely interesting to us. With the clear take profit level of the last high/low respectively if you buy/sell, you can consider setting a stop loss level of the same absolute magnitude, for a 1:1 reward to risk ratio. With such a reward to risk ratio, you will require a higher win ratio.

Let us know how this system works for you, especially if you know of any ways to increase the win ratio.

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1. Oil is hitting $110. This increases the cost of consumption for many corporate and consumers.

2. Gold is looking bullish, an indication of risk aversion. Inflation is a concern and gold is a store of value.

3. Insiders around the world are selling stakes in companies.

Let’s look at the weekly STI chart. It paints a picture of retracement:

• Price failed to break above the kumo cloud
• Flat future kumo cloud
• Price is too far from the kujun sen equilibrium (turquoise line)
• Price failed to break the 38.3% Fibonacci retracement level (blue circle)

There is significant profit taking on the streets as investors await some major good news. Wait and see? We shall see.

There are good advances, and there are bad advances. We look at the daily S&P chart today and it is screaming a bad advance, since mid January.

As you can see above, the RSI indicator has been in the overbought region since the start of 2012. That is not a problem as the RSI tends to remain in the overbought zone during strong bull trends.

The problem is the RSI divergence. While prices are making new highs, the RSI indicator is making lower highs. This indicates to us that the S&P is running out of steam and potential reversal is likely.

Generally, stocks in Singapore are compared against the 2 most common indices: MSCI Singapore Index or FTSE Straits Times Index (STI). What is the difference?

The MSCI Singapore Index seeks to measure the performance of the Singapore Equity Market. It is a capitalization-weighted index that aims to capture 85% of the (publicly available) total market capitalization. Component companies are adjusted for available float and must meet objective criteria for inclusion into the Index. As at the time of this writing, there are 32 stocks in this index:

• DBS GROUP HOLDINGS
• SINGAPORE TELECOM
• UNITED OVERSEAS BANK
• OCBC BANK
• KEPPEL CORP
• GENTING SINGAPORE PLC
• WILMAR INTERNATIONAL
• CAPITALAND
• SINGAPORE EXCHANGE
• FRASER AND NEAVE
• SINGAPORE AIRLINES
• SINGAPORE PRESS HLDG
• CITY DEVELOPMENTS
• NOBLE GROUP
• JARDINE CYCLE & CARRIAGE
• GOLDEN AGRI RESOURCES
• HUTCHISON PORT TRUST
• SEMBCORP INDUSTRIES
• SINGAPORE TECH ENGR.
• SEMBCORP MARINE
• CAPITAMALL TRUST
• GLOBAL LOGISTIC PROP
• OLAM INTERNATIONAL
• ASCENDAS REAL ESTATE INV
• COMFORTDELGRO
• YANGZIJIANG SHIPBUILD
• KEPPEL LAND
• UNITED OVERSEAS LAND
• CAPITAMALLS ASIA
• STARHUB
• COSCO CORP SINGAPORE
• NEPTUNE ORIENT LINES

The FTSE Straits Times Index (STI)is also a capitalization-weighted stock market index . This means that larger stocks would make more of a difference to the index as compared to a smaller market cap company. (E.g. Capitalland (4.88%) will need to move “2 times more” as compared to Singtel (9.78%) in order to shift the STI). It is regarded as the benchmark index for the Singapore stock market. The Straits Times Index (STI) is the most globally-recognized benchmark index and market barometer for Singapore. With a history dating back to 1966, it tracks the performance of the top 30 companies listed on the Singapore Exchange ranked by market capitalization. As at the time of this writing, the 30 stocks in this index are:

• Singapore Telecom
• DBS Group Holdings
• Oversea-Chinese Banking
• United Overseas Bank
• Wilmar International Limited
• Capitaland
• Jardine Matheson
• Hong Kong Land
• Keppel Corp
• Noble Group
• Singapore Airlines
• Singapore Exchange
• City Developments
• Fraser and Neave
• Singapore Press Holdings
• Jardine Strategic
• Golden Agri-Resources
• Singapore Technologies Engineering
• Genting Singapore
• CapitaMall Trust
• Jardine Cycle & Carriage
• Olam International
• CapitaMalls Asia
• SembCorp Industries
• Sembcorp Marine
• ComfortDelgro Corp
• Neptune Orient Lines
• StarHub
• SMRT Corp
• SIA Engineering

In conclusion, they are similar!

Finance is a large topic on it’s own. You have the traders who want to master charts, you have investors who want to fish for undervalued stocks, you have the economists who study chunks of data to draw macro conclusions, and you also have the venture capital investors who finance ideas based on projected growth. With so much information to digest, how is a retail investor going to improve his finance knowledge? Where does one start?

Learning Finance is akin to Learning a language. In other words, you learn from listening, reading, writing, and practicing. The idea is to just start anywhere, and progressively the dots of information will link up. On some days you can read about financial ratios, on others you can listen to news about oil prices, or you may discuss with friends about company growth and dividends. All these factors are linked in multiple ways, as the global investment universe is related. There will be many questions along the way, so we offer you 3 suggestions:

1. Ask us/ discuss on our Facebook discussion page

2. Type in terms that you do not understand into Investopedia

3. Type in terms that you do not understand into Wikipedia

Through exposing yourself to finance, frequent discussion and Q&A, you will be able to solidify your knowledge of finance. Just like a rolling stone, you will start to gather speed and seek more information. Now, reading can be a boring and intimidating task for many, so we recommend videos from famous sources:

1. CNBC

2. Bloomberg TV

The news anchors normally feature prominent investors and you can learn from listening to them speak.

Last but not least, follow us because we are committed to making you a better trader and investor. In addition to our online trading courses, subscribe to our newsletter as we keep you updated on global financial markets.

The key is to get started on any topic. Invest in knowledge before markets!

The Gann Hilo Activator looked interesting to us based on our review here. However, a trader will not know when to take profit in real time just trading the Gann Hilo alone.

A reactive indicator which highlights trend exhaustion will be useful for both taking profit, as well as a warning for whipsaws. We experimented with the Heiken Ashi and it seems to get the job done.

Legend for the Video above:

• White Line: Price
• Blue Line: Gann hiLo Activator
• Green and Red Candles: Heiken Ashi

How we trade this Long:

Conditions for Long:

• White Line above Blue Line
• Green Heiken Ashi

Conditions for Exit Long: Appearance of single Red Heiken Ashi bar, or you can wait for 2 consecutive Red Bars. This is a sign of bull trend exhaustion.

How we trade this Short:

Conditions for Short:

• White Line below Blue Line
• Red Heiken Ashi

Conditions for Exit Short: Appearance of single Green Heiken Ashi bar, or you can wait for 2 consecutive Green Bars. This is a sign of bear trend exhaustion.

If you see Green and Red bars alternating repeatedly, it is Christmas and time to relax, and stay out of a whipsawing market. This is indicated by the red rectangular range box in the video.

Get Gann Hilo indicator here and Heiken Ashi here.

Please comment below and let us know what other indicators can work together with this strategy.

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Get this indicator – smoothed version here (.ex4)

Get this indicator – normal version here (.mq4) - the normal version is more reactive to price with bars changing colors more frequently.

In the Video above, the silver moving line is the price. The blue and red indicators are the Heiken Ashi bars. Blue indicates bullish momentum, while red indicates bearish momentum.

This indicator will probably work well in combination with another indicator. It reduces “fake-outs” and fake reversals while keeping you in trends with momentum indicated by the color of the bars.

Heikin Ashi is a type of trading chart that originated in Japan (heikin ashi translates as average bar). Heikin Ashi charts are similar to candlestick and bar charts in that they show similar information (the open, high, low, and close of the time frame), but Heikin Ashi charts calculate the information differently.

Heikin Ashi charts calculate their own open (HAO), high (HAH), low (HAL), and close (HAC), using the actual open (O), high (H), low (L), and close (C), of the time frame (e.g. the open, high, low, and close, of each five minutes).

Calculation:
HAO = (HAO-1 + HAC-1) / 2
HAC = (O + H + L + C) / 4
HAH = Highest(H, HAO, HAC)
HAL = Lowest(L, HAO, HAC)

Heikin Ashi charts are used in trading in the same manner as standard candlestick or bar charts (i.e. chart patterns are used to indicate price movements). However, Heikin Ashi charts have an additional aspect in that the direction of the bar (i.e. its color for candlesticks) is supposed to indicate the overall direction of the market, while ignoring the intermediate direction (e.g. false changes of direction).

Please comment below and let us know what other indicators can work together with this one.

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Get this indicator here (.ex4)

This indicator in our view is a great replacement for the traditional moving average. It significantly reduces whipsaws compared to a standalone moving average line, and some traders actually trade this line “naked”.

They go long when price breaks and closes above the line, and go short when price breaks and closes below the line, effectively a trend following system that always takes on a position. While this looks good, another indicator should be employed for locking in profit.

We believe this indicator can help traders in the following:

• Serve as a short term support and resistance line
• Can be used for scalping breakouts of this indicator line
• Can serve as a filter for other trend following systems

Please comment below and let us know what other indicators can work together with this one.

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Get this indicator here (.mq4)

The moving average crossover is one of the most common and famous trend following systems. The logic is that a trend forms when a faster moving average crosses the slower moving average.

A cross above is bullish, a cross below is bearish. This indicator makes it even easier to understand as arrows are drawn to indicate an uptrend or downtrend forming.

As with all trend following systems, you will probably have to add in a trend filter to minimize whipsaws. Nonetheless, the arrows are a lot neater and prettier compared to the constant 2 lines of moving averages.

In the video above, we used 5 period and 20 period exponential moving averages. You can change the periods and type of moving average.

Please comment below and let us know what other indicators can work together with this one.

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Get this indicator here (.mq4)

We all know the mysterious behavior of nature and mass psychology according to the Fibonacci numbers and ratios. Fibonacci Retracements are most commonly used by traders to identify retracement levels, which become significant support and resistance zones. Here’s one indicator that draws these lines for you automatically.

This MT4 indicator automatically updates fibo levels using lowest low and the highest high in the currently visible portion of your chart.

This indicator also draws two trendlines, 1) resistance (from the highest high to the high that creates the trend-line with the highest slope), and the corresponding opposite for the  2) support line.

So you get Fibo retracement lines and trend lines all drawn automatically for you.

A beige rectangle shows the amount of the move not yet retraced. Certainly a convenient tool for Fibo lovers.

Please comment below and let us know what other indicators can work together with this one.

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A gap is a change in price levels between the close and open of two consecutive days. Gaps are identified as blue circles in the following charts.

Break away gaps often appear at the completion of an important price pattern. When it appears, it signals the beginning of a significant market move. Such moves should ideally appear on heavy volume. Upside gaps usually act as support area on subsequent market corrections.

Run away gaps are a sign of market strength, and usually appear after a trend has been established for a while, and suddenly prices jump up further. This is a situation where the market is moving effortlessly on moderate volume. Run away gaps also act as support on subsequent corrections.

Exhaustion gaps happen when a trend has been around for a long time and it is near the end of a market move, then prices jump forward in a tired attempt to push forward. This quickly fades and prices turn lower within a couple of days.

One reversal pattern which is interesting is the Island Reversal. This is identified when prices gap up, and the next few days trading is in a narrow range, and this is quickly followed by a gap to the downside. This is an indication of a market reversal.

Get this indicator here (.mq4)

ATR Ratio is the ratio between fast Average True Range (ATR) and slow ATR.

ATR ratio often reaches high values after quick and strong price movements. Low indicator values often correspond with long flat periods that can be observed on the market tops, and during consolidation. It can be intepreted according to same rules as other volatility indicators.

In case the indicator value climbs above the silver horizontal line, it is time to buy or sell. Significant price movements occur when the ATR ratio is above this horizontal line of value 1.

High ATR ratio price levels often correlate with high volatility. Low ATR ratio price correlates with low volatility, as the prices stabilize or move along the channel flat movement up to the possible breakout point.

We feel that this indicator should not be used as the only or primary criteria for entering trades, but it is very useful as a filter to keep you out of consolidating or ranging markets. If you have a trend following system, try adding on the ATR ratio indicator as a filter.

Please comment below and let us know what other indicators can work together with this one.

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Get this indicator here (.mq4)

This indicator reminds us of the Parabolic SAR but it is different in design and purpose. The primary aim of this indicator is to signal whenever trends alternate.

A green dot indicates the start of a bull trend, while a red dot indicators the start of a bear trend. This indicator is a killer when trends happen, but as with most trend following indicators, you do have instances of whipsaws. Therefore, it will be better to add on an additional trend filter for double confirmation.

Please comment below and let us know what other indicators can work together with this one.

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Get this indicator here (.mq4)

For those of you who love candlesticks, this indicator is a gem. You no longer have to spend time and effort memorizing and interpreting patterns bar by bar. This indicator shows us what we need to know: up arrow for bullish candlestick patterns, and down arrows for bearish candlestick patterns.

This indicator seems to indicate the following patterns:

• Bullish Engulfing
• Bearish Engulfing
• Dark Cloud Cover
• Hanging Man
• Hammer
• Inverted Hammer Up
• Inverted Hammer Down
• Shooting Star Up
• Shooting Star Down

Due to the nature of candlesticks, we find this indicator more useful for the understanding of short term (in terms of bars) price action.

Please comment below and let us know what other indicators can work together with this one.

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This indicator is pretty intuitive. It displays a histogram below the price chart.

Buy – when the histogram is green.
Sell – when the histogram is red.

When Long, the trading ideas are:

• As long as each new green histogram bar keeps rising, stay in a trade, no worries there.
• Once the green histogram bar fails to make a new high – tighten you stop / or place a trailing stop while holding on to a trade.
• Once the green has changed to red – exit. Also you’ll exit earlier if the Stop Loss is hit.

When Short, the trading ideas are:

• As long as each new red histogram bar rises, stay in a Short trade.
• Once the red histogram bar fails to make a new high – tighten you stop / or place a trailing stop while holding on to a trade.
• Once the red has changed to green – exit. Also you’ll exit earlier if the Stop Loss is hit.

Please comment below and let us know what other indicators can work together with this one.

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Get this indicator here (.mq4)

These arrows provide early signs of price exhaustion after a strong run. After a strong bullish run up, red downward arrows provide early signs of bulls exhaustion. Conversely, after a strong bearish run, blue upward arrows provide early signs of bears exhaustion.

From the name of the indicator, we deduce that the cluster of arrows indicate price exhaustion through overbought (red arrows) and oversold (blue arrows)  regions.

While we do not find this indicator helpful for entering trades, they do provide price action information which is helpful when we are already in the trade – telling us prices are going to consolidate in the near term.

Please comment below and let us know what other indicators can work together with this one.

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Get this indicator here (.mq4)

If we had a choice, we would name this indicator “Traffic Lights”. Even without a driving licence, you know how to navigate this indicator. Buy on green, Sell on red, and for amber – it depends what kind of driver you are.

As with most trend following indicators, the challenge here will be to avoid whipsaws. Nonetheless, we like the simplicity of this indicator as it does it’s job with one line, plus clear visuals.

Please comment below and let us know what other indicators can work together with this one.

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The name of this indicator seems to suggest the indicator lines go round prices. The default colors are cyan for bullish, and red for bearish.

We would go long on cyan, short on red. It resembles many trend following indicators we have come across, which also means this system might be prone to whipsaws.

Feel free to download this unique indicator onto your MT4 platform.

And share with us below how you would improve the accuracy of this indicator – i-Round Price.

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This indicator paints Demark’s version of pivot lines, drawn based on previous price highs and lows.

Each colored line represents support and resistance levels. We noticed that when prices cross the middle blue line, they tend to reach the next levels: yellow line for buys and red line for sells.

In addition, similar to a bollinger band breakout, we also noticed that strong breakouts occur when prices break past the extreme green lines on both sides; on top and below.

Feel free to download this unique indicator onto your MT4 platform.

And share with us below how you would improve the accuracy of this indicator – Demarker Pivots.

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Chart from Goldman Sach’s research report

China stocks are looking relatively cheap, reaching levels last seen during end 2008

The chart shows the 12 months forward PE ratio of CSI300. It is currently at levels which is one standard deviation below.

Singapore – 8 February 2012 – The average cost of “formal trading seminars” anywhere around the world is US$3,000 for a number of lessons. And the industry has created Superstar- Traders- turned- Millionaire- Coaches, painting the dream of easy riches to literally anyone out there. One company, Chart Nexus, even goes to the extent of having local celebrities Apple Hong and Nat Ho advertising their status as trading alumni from Chart Nexus.

Another Company, AsiaPacFinance.com, sees a flaw in the way the retail trading industry has portrayed itself. “Trading is not for everyone, and there is no one size fits all trading system. It is a disciplined process of self discovery, and finding a trading method that works for you. We believe that is why most people give up after attending weekend courses, hoping for a quick solution,” says the Founders.

In addition to shattering the industry with over 150 online trading courses for a mere US$25, AsiaPacFinance.com realizes the limitations which physical seminars bring. Indeed, many aspiring traders live in parts of the world where trading education is simply not accessible, nor affordable. The Founders add on, “Having a comprehensive library of online trading  courses and tools is the only way to break down barriers between traders and trading education, and we want to give everyone access to world-class content that is constantly increased and updated. After all, markets are ever changing but a library of knowledge will stand the test of time.”

About AsiaPacFinance.com

AsiaPacFinance.com’s goal is to be the primary independent source of reliable and actionable trading ideas. They provide online trading courses and trading tools for a growing audience of self-directed traders. AsiaPacFinance.com covers the Asia Pacific markets from its regional headquarters in Singapore.

For more information, visit www.asiapacfinance.com.

Multi time frame analysis is a very important aspect of technical analysis. When indicators show the same trend direction over multiple time frames, it generally suggests a higher probability of trend continuation.

In the field of time frame analysis, some argue that larger time frames will dominate smaller ones, while others say that smaller time frames harmonize, and will overcome larger time frames.

We think that this is a rich field for exploration, but the only conclusion that we have made is that alignment between time frames tend to enhance a signal’s potential. And this is a more important conclusion, then the former debate.

Let’s look at the S&P chart as of today. We begin with the daily timeframe chart:

Clearly the S&P is bullish, with a great setup looking to resume. The kumo is thickening and sloping up, Tenkan Sen is above Kijun Sen, Chikou Span is in clear skies, and prices are clear of any Kumo shadows. While the daily chart is bullish, a trader should find out how the longer time frames are doing. Perhaps there is an oncoming train/trend that we are walking into? We want to make sure the larger time frames paint a similar story. Let’s look at the S&P weekly chart as of today:

Well, it looks like a bullish set up as well. Senkou Span A is above Senkou Span B, prices have a clean kumo break, and Chikou Span is in clear skies too. There is therefore multi time frame alignment when we compare the daily and weekly charts, increasing the trader’s bullish conviction.

Assume the daily chart is bullish, but the weekly chart is only in a bear trend retracement, we will be very wary of a bear trend resumption and may not want to hold on to a bullish daily trade for long. Some traders may wish to wait for multi time frame alignment for a higher probability trade.

What can we expect in the coming weeks?

With that in mind, the weekly chart also warns of a retracement soon, since price has deviated very far from the Kijun Sen. Price is also running into resistance at 1370. Consolidation is expected.

When you enter a trading position, you will ask yourself where to place the stop loss level. And when the trade works in your favor, you will ask yourself how to meaningfully trail your stop loss to protect profits.

Fortunately for us, there are numerous stop loss strategies to help us with these 2 questions. We will discuss the Parabolic SAR stop loss method.

The Parabolic SAR is a technical indicator that is used by many traders to determine the direction of an asset’s momentum and the point in time when this momentum has a higher-than-normal probability of switching directions. Sometimes known as the “stop and reversal system”, the parabolic SAR was developed by the famous technician Welles Wilder, creator of the relative strength index, and it is shown as a series of dots placed either above or below an asset’s price on a chart.

In the chart above, we see this indicator as the purple dots trailing prices. In a bull trend, the dots appear below prices; and above prices in a bear trend. As such, it is very useful as a stop loss indicator.

Upon entering a long position, a trader would move up his stop loss level to the dots, which follows prices closer over time. The 2 horizontal black lines you see are the levels which were “taken out”, after trailing the respective dots.

You can see how the Parabolic Stop Loss can serve as a convenient indicator to place stop loss levels. Note that this stop loss indicator works best in trending markets, as it can “whipsaw” as well.

To construct the commodity channel index (CCI), compare the current price with a moving average over a specific period. Next, normalize the oscillator values by using a divisor, based on mean deviation. The CCI fluctuates, in a constant range, from positive 100, to negative 100.

>Positive 100 represents overbought situations, and <negative 100 represents oversold situations. 100 and -100 are represented by the dotted lines in at the bottom of this EURUSD Chart. The CCI line is in turquoise, oscillating between 100 and -100.

Trend lines (in black diagonally) can be drawn on the CCI. Notice that divergence happens, when the CCI makes lower highs, while prices are still making higher highs. This is an indication of a potential reversal, and we see CCI turning before prices did. This is useful for traders timing the markets.

Cautiously Bullish

We apply Ichimoku Analysis on the S&P 500 weekly chart below. Cautiously bullish is what we would term it.

We are Bullish for these reasons:

• Medium strength tenkan sen- kijun sen Crossover
• Chikou Span is into clear open space above price and cloud
• Price bullish Kumo break

We are cautious for these reasons:

• Future kumo is thin, sideways and twisting, indicating highly likely consolidation period
• Price is still below a long term trend line

Expect Consolidation.

The moving average convergence divergence (MACD), shows 2 lines.

• The faster (blue) line, called the MACD line, is the difference, between 2 exponentially smoothed moving averages of closing prices
• The slower (red) line, called the signal line, is usually a 9 period exponentially smoothed average of the MACD line.
• The default values are 12, 26 and 9
• A crossing by the faster MACD line below/above the slower signal line is a sell/buy signal. This is indicated by the vertical blue line periods in the S&P 500 chart below.

• An overbought/oversold condition is present when the lines are too far above/below the zero line. See rectangular boxes below.

Crossing above, and below, the zero line, is another way, to generate buy and sell signals.

Divergences appear between the trend of the MACD lines, and the price lines.

A negative, or bearish divergence (see blue arrows below), exists when the MACD lines, are well above the zero line and start to weaken, while prices continue to trend higher. This is often, a warning of a market top.

A positive, or bullish divergence, exists when the MACD lines, are well below the zero line, and start to move up ahead, of the price line. This is often, an early sign of a market bottom.

The histogram, consists of vertical bars, that show the difference, between the two MACD lines. The histogram, has a zero line, of its own.

When the MACD lines, are in positive alignment, meaning the faster line over the slower, the histogram is above its zero line. Crossings by the histogram above and below its zero line coincide with actual MACD crossover buy, and sell signals.

Another use of the histogram, is spotting when the spread, between the two lines, is widening, or narrowing. When the histogram is over its zero line, but starts to fall toward the zero line, the uptrend is weakening.

Conversely, when the histogram is below its zeroline, and starts to move upward toward the zero line, the downtrend is losing its momentum. The histogram turns provide earlier warnings that the current trend is losing momentum.

Turns in the histogram back towards the zero line always precede the actual crossover signals. Histograms turns are best used, for spotting early exit signals, from existing positions.

In general, when the oscillator reaches an extreme value in either the upper or lower end of the band, this suggests that the current price move may have gone too far, too fast, and is due for a correction or consolidation.

Traders should be buying when the oscillator line is in the lower end of the band, and selling in the upper end. When it’s value reaches an extreme reading, near the upper or lower end of its boundaries, it implies that the Market is being oversold, or overbought.

Divergence, between the oscillator, and the price action, when the oscillator is in an extreme position, also helps the trader time the market.

Traders also use the Crossing of the midpoint line. This can give important trading signals in the direction of the price trend. Some traders ascertain the overall trend, and use oscillators, on smaller time frames, to time their entry better.

During trading ranges, oscillators work well, until such time when the market breaks upside on overbought conditions, and breaks downside on oversold conditions. It is generally well regarded to place less emphasis on oscillators at the beginning of trends, and place greater emphasis at tails ends of trends.

We will start by discussing, the “Momentum”. It measures, the velocity of price changes, as opposed to the actual price levels themselves. It is measured by continually taking price differences for a fixed time interval.

The commonly used 10 day momentum is shown here on EURUSD, as the blue side way moving line:

Traders like to use the mid horizontal green line, to generate buy and sell signals:

• A crossing above the mid line, would be a buy signal
• A crossing below the mid line would be a sell signal

We indicated such opportunities with the purple vertical lines above.

When the closing price, is greater than that 10 days ago, meaning prices moved higher, then a positive value is plotted above the green horizontal line.

Momentum is measuring the rate of change. If prices are rising, and the momentum line is above the mid line (green), and rising, this means the uptrend is accelerating. The logic is the same as momentum in physics.

If the up sloping momentum line flatten out, this means that the new gains being achieved by the latest prices, are the same as the gains 10 days earlier. Prices still advance, but the rate of ascent, has leveled off.

When the momentum drops towards zero, the uptrend in prices, is still in force, but at a decelerating rate. Momentum line leads price action.

The rate of change is a ratio of the most recent closing price, to a price a certain number of days in the past. If the latest price, is higher than the price 10 days ago, resulting rate of change value will be above 100. If the last close is below 10 days ago, the ratio would be below 100.

Construction

Two trading bands, are placed around a moving average, 2 standard deviations, above and below the moving average, forming the trading band.

In the chart below, we see the bollinger band plotted on the S&P 500. The solid brown line in the center of the channel is the 20 period moving average. 2 standard deviations from this line you see the 2 brown dotted lines. These 3 lines together form the Bollinger Band.

The common period, to use for the moving average, is 20 periods. 95% of the price data, will fall between the two trading bands.

Price Targets

Prices are considered to be over bought, when they touch the upper band. And oversold, when they touch the lower band. Traders Use the upper, and lower bands, as price targets.

If prices bounces off the lower band, and cross above the 20 day average, the upper band becomes the price target.

If prices bounces off the upper band and cross below the 20 day average, the lower band becomes the price target.

Volatility

The width of bollinger band expands, and contracts, based on the last 20 days volatility. When price volatility is high, the distance between the 2 bands will widen. There is a tendency for the bands to alternate between expansion, and contraction. When the bands are far apart, it is often a sign, that the current trend, may be ending.

Moving averages, and its variations, are some of the most commonly used technical analysis tools. It is a trend following indicator, and as such, never anticipates, it only reacts. Some traders, see the moving average, as a curving trend line.

The above chart is the EURUSD daily chart with the 20 SMA (Green) and 55 SMA SMA (Green) plotted onto candlesticks. You will notice that the Shorter term averages, Green in this example, are more sensitive to the price action, while longer term averages are less sensitive. Shorter term averages follow prices much more closely.

Using 2 moving averages, a buy or sell signal is produced when the shorter average crosses above or below the longer average, respectively. In the chart above, we see a sell signal where the purple vertical line is, and the green 20 SMA crosses below the red 55 SMA. As of this writing, this simple strategy is up over 500 pips.

The popular combinations are the 5 and 20 periods averages, 10 and 50 periods averages, 20 and 55 period averages.

Moving averages should be used in conjunction with other confirmation indicators to reduce whipsaws. Also, with the important trend following rule, always let winners run, and cut losers short.

Once the resistance trend line is broken, it now forms a support level. A new support line can be drawn by connecting the recent price lows upwards. Watch trading videos on AsiaPacFinance.com and learn how to improve your trading with trend lines.

The red sloping line is a resistance lines which told us to sell. As every trading textbook will tell you, multiple confirmations increase your probability, so we entered a short position when the blue line below crossed below zero. The vertical red line is a very clear instruction to sell.

Just one trade, and 2 months later the strategy is up over 900 pips. Easy to use and powerful, you can get this strategy, all the indicators you see, and more online trading videos here.

What do we have into the middle of January?

A bullish breakout of the S&P 500. Using Ichimoku analysis, we note the following bullish signs:

1. Price has broken above the October high of around 1290

2. Price has broken above the kumo cloud

3. Tenkan Sen is above Kijun Sen

4. Chikou Span has broken out into clear skies

5. Future kumo is sloping up and thickening

The question you may have is, what next?

We have drawn a blue diagonal trend line which will serve as support. Technical analysis on the daily chart suggests bullish momentum, although we know fundamentals continue to be fragile.

Price can be expected to bounce along the trend line. Should it break below the trend line, expect turbulence into the future kumo. And if it breaks below the kumo, the bear trend will begin.

What about the outlook in Asia?

From a Fundamental perspective, P/E ratios indicate undervaluation, below their long term averages as shown here:

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Few if any Thai broker here so far write/research about listed green energy companies as none of the larger capitalized companies are pure green energy plays at present. Hence it seems for the local broker stock analysts its just off their radar screens, solely and only on lack of large market capitalization.

Contrast this to the US/EU where green energy (also called renewables), are increasingly a huge topic du jour, discourse besides enormous investments. Most famously and totally uncontested is the KEELING measurements/curve which demonstrates uncontestable alarming regular increases over past decades in global carbon monoxide.  The debate is largely over as its rightly become a front burner issue now -on how to reduce its gravity.

The bigger investor issue this year may not be EU, gold or politics or the price of oil, nor inflation. The big issue will increasingly so be green energy which principally means for our purpose here 3 words: lower carbon monoxide! The new frontier now is cleantech! The days of dragging ones feet on this issue are over!

Green energy stock picks inThailandhave their own challenges and are limited to smaller capitalized choices, but they are recession proof, non-Western market correlated, Thai growth industry with no question exponential growth.  The only reason why these are off the screens of broker analysts or fund managers, are because of their smaller size.  As for a pure energy play you got to look beyond just “big”.

Green’s have zero pollution or are at least carbon neutral versus natural gas which still emits some carbon monoxide, (CO2). Thailandalong with 192 countries signed on inCancun(2010), to actually reduce CO2 over the next many years and this, evenwhile the Thai economy keep growing. Which means the economy consumes every more energy.  The prime minister just last week projected the Thai economy will grow 7% this year and the country’s largest energy company published a report thatThailandwill experience lower domestic gas extraction, staring in 2017. Even before so, if the Thai economy regains its high growth potential.  Regardless, CO2 must come down here as well.  Green energy is the answer.

For the reasons stated, few brokers/analyst seem to care thatThailandat the country’s center, is about to construct one if not the biggest Wind energy project inSE Asia-all to be completed before year end.  .Thailandhas a stated government policy on mandating 20% electrical green energy, by year 2020.

China, despite low overall wind levels is now the leading global new wind energy electric producer. Also, by some measuresChinaemits more CO2 emissions then theUS! Chinais taking this subject now very seriously!  The US for its part, after years of foot dragging, has pledged under the Cancun agreement to reduce CO2 emissions 17% by 2020, as compared to 2005 and this despite their electric energy growth being 1.4% a year. ChinaandIndia, withThailandin between, are hugely concerned as global warming may start melting some of theHimalayasand so may in time cause immense droughts in years to come to both countries.

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“Wind has reached a stage where it is no longer really an alternative. Its  becoming a conventional energy source-still relatively small and facing its own constraints and challenges, but increasingly visible on the landscape of electric power and surely still on the fast track to growth.”  *

“Wind energy is becoming the largest and fastest growing sources of renewable energy in the world today…..A standard turbine today turns out a hundred times as much electricity as one did in 1980”.*  

 *  From the book:   “The Quest”  “Energy Security and the remaking of the Modern World”  By Daniel Yergin, winner of the Pulitzer Price. (Penguin Books, 2011)

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A fair comparison on what appear to be the leading green companies listed on the SET.

Below I compare what I would see as the 2 very near pure play green energy companies inThailand.  With this I mean where their forward focus is to see well more then half their future revenues coming from building, engineering, related activities, part owning, all in green/renewable industry. Both companies are as far as I know as pure plays as it gets here; and with high expected profitability this year and beyond.

The main difference between them is the size of their market capitalization and as you will see, their respective p/e ranking and dividend yield. It shows again -and then some- how mostly larger market cap. size makes a stock here twice as expensive -along with 1/3 of the dividend yield.  Can this be anything but a huge market valuation distortion, which brokers, stock promoters and most analysts here however never mention!

Market cap is highly cherished by institutional investors. But not all of us have this drawback!  Retail rational investor for the most part just don’t care if a stock trades 1 million or many millions per shares in an average day.  Short term traders and institutions do and so broker research is highly biased on that, not investor merit as seen from an individual investor point of view. 

GUNKUL ENGINEERING PUBLIC COMPANY LIMITED (GUNKUL, 16.50) is a mid cap. stock here which claims to be moving full speed ahead evolving into a green energy company, notably with multiple solar projects and ambitious wind energy projects planed forMyanmar. In January ’12 GUNKUL was added to SET 100 index.

Some reports boast they will be in time selling their various new green energy projects to a local fund, or to some newly approved infrastructure fund?  The Thai SET/SEC has for years stated they will allow such new tax favoured non property funds, but to date there are only property funds in place.  One benefit of such a fund is that if it passes 90% of its earnings as dividends, it then enjoys tax advantages.

Gunkul earned  84.9 million Baht or 0.21 Baht per share for the cumulative first 9 months this year. Their third quarter showed a loss of  25 million due to the massive floods/delays and taxes. Some analyst projections report the company can earn 200 million Baht next year, or 0.50 Baht per share, but this appears too rosy of an outlook?  Key risks into this year are GUNKUL’s dependence on a few state-owned electricity agencies, its foreign trading activities withMyanmarand delays in its solar power projects.  Also import tax payments which appear on the increase.  As we know large wind projects take a long time in planning.

According to TISCO broker, which brought this company pubic in 2009:

“ 2011-13 earnings forecasts revised down. The Thai Revenue Department insists that GUNKUL needs to pay a 30% tax rate on sales of imported solar panels to its subsidiary and other customers…flooding in many provinces has delayed GUNKUL’s plan to build 10 small power plants with a combined capacity of 56.9MW ”…Tax payments will continue next year we expect GUNKUL to face more heavy tax payments in 2012 as GPS will continue its construction of solar power plants next year. Another subsidiary, G Power Gen (GPG), will also build a solar power plant in 2012 and we expect GUNKUL to use the same method as GPS in booking revenue, implying further tax payments.”

Assuming to be generous that GUNKUL can earn after tax 200 mill. Baht for ‘11, their earnings per share should so be around 0.50 Baht -as the company has 400 mill. shares outstanding.  At their current price of 16.50, this values the stock with a high p/e of 33. (16.50 divided 0.50).  If the company pays a dividend at 40% of net profit, which its stated dividend policy is, the dividend yield on the current market price, comes to a miniscule 1.2%.

Despite upbeat projections not sure GUNKUL can keep a “50% earnings growth for some years to come” as some reports claim and even less so, with no capital increases.  AlsoMyanmarprojects are likely more uncertain & risky/delays then similar projects inThailand. GUNKUL has good connections and trading history there andMyanmarhas very high potential yes, but its another “going to”, and we know these take time.

You can see a most recent management interview with GUNKUL at the Bangkok Post article at this link:

http://www.bangkokpost.com/business/economics/273905/gunkul-pursues-growth-in-the-next-level

You can see Gunkul’s good web site at this link, (but for me their investor relations links where not working):

http://www.gunkul.com/Home/Index.php?language=en

For Gunkul mostly solar plants will drive earnings growth over the next few years.
Solar projects use less land, are less high tech and much easier to start and complete then others, like wind energy. Hence there is potentially more competition in those because its relatively easy for competition to join in on the boom.

In December ’11, Gunkul announced that it might launch a joint venture with the Electricity Generating Authority of Thailand (Egat), the Provincial Electricity Authority (PEA), and foreign investors to develop its wind-power project in Burma worth Bt60 billion. The company last month signed a memorandum of understanding withBurma’s government for the project with a capacity of 1,000MW for export toThailand.  No assurance on how long that will take to complete or what the delays maybe?

The company will conduct a feasibility study for six months after the signing of the MoU and take another six months to install the wind turbines to measure the wind currents.  The statistics will be collected for one year before beginning plant construction. The project is expected to produce electricity within three years. (Vs. Demco which is at the end of this year).

Gunkul has a few broker research reports out. The company was IPO (went public) in the 3 Q. of 2010.  Its first trade date was October 19 ’10.  Like DEMCO, GUNKUL has given “Opportunity Day” presentations, which are broadcast live from the Stock Exchange of Thailand (SET) and after this archived.

See this link:   http://www.set.or.th/set/oppdaybyperiod.do?language=en&country=US

DEMCO PUBLIC COMPANY LIMITED  (DEMCO 3.54)  is a company with over 20 years of advanced electrical experience -and then some.  You can see their web site at this link:  http://www.demco.co.th/main.html

This 4 years ago listed SET company has some 105 engineers on its payroll and vast experience in sophisticated electrical engineering processes, substations, underground systems etc.. Click on their web sites’ link “Work experience” to appreciate the sophistication of their professional endeavour over the past 20 years.

Besides being awarded a few Solar projects this year the company now has a record backlog of over 9.3 Billion Baht. Solar does not feature dominantly in those. Besides its growing core business, in August of last year,  DEMCO undertook the start of construction (besides a 27% ownership) in what will by far beThailand’s largest wind energy project. The West Huay Bong 3 and West Huay Bong 2 project, these are combined a total 12.5 Billion Baht investment , where DEMCO itself will oversee & build as the plant manager, the 2.7 Billion Baht construction part.

As the company states in its SET news release on December 29 2011.

“Therefore, the company can start construction and realize the revenue since August 1, 2011 and the West Huay Bong 3 project will be finished in October 2012 and the West Huay Bong 2 project will be finished in December 2012.”

DEMCO has stated in various and regularly held SET “Opportunity Day”  presentations, that it expects a gross profit margin on this alone of around 12-14%.  The weakness of the EURO currency vs. the Thai Baht  recently only makes this more likely in my view, as some procurements are coming fromEurope  (like SIEMENS Wind rotars). The company stated 2 weeks ago that the Huay Bong 3 project is already 40% complete and the Huay Bong 2 which just started is 5% complete.  Completion dates for both are right on schedule: to be before end year 2012.  The Thai floods had not affected any of this. Their projects are happening now, not “going to”.

DEMCO also recently stated that flooded substations by industrial developers near Bangkokin late 2011, has brought them new high margin business on this as well.  Newly awarded solar projects and repairing flooded substations is the new good margin business in addition to their Wind mega project -and their core business.

In its latest company presentation “Opportunity Day” on November 29, DEMCO stated:   “Our company expects revenues to grow 55% this year over last, or to a new record. Then, grow another 50% over that in year 2012” or, for a yet another new record, to 6 Billion Baht for calendar 2012.”  DEMCO has held regular  “Opportunity Day” presentations all along but few analysts show up, purely and only due to smaller market cap., as noted.

Based on this one can visibility see DEMCO’s 4Q. ‘11 net profit to near double as compared to the 3 Q., on expected 1.7 Bill of revenues. Realize this is over the already excellent reported 3 rd Q. of 0.12 Baht per share profit. Based on this, I realistically expect around 0.40 per share for all of 2011. (Remember their wind project is in full motion and so revenues/profits guaranteed).

The company reported 53 million Baht profit in the 3^rd quarter -and 86 million cumulative for the first 9 months of 2011. Again: a 0.38 to 0.40  Baht per share profit is reasonable to expect for calendar 2011 as this massive wind project has now been in full construction with good progress on both phases, since early August (phase 1) and December 2011 (phase 2).  Year 2012 should show further growth on that, due to its massive backlog and the company reaffirming its revenues growing another 50%, as quoted above.

This year there will be some share dilution due to warrants# 3 converting at the end of this month. The warrants are convertible at only 2.69 per share, so it is expected some 80 to 90% will convert.  Hence around 90 million more shares will be outstanding.  (But realize the company also has some 30 million shares in Treasury stock, which it bought back last year on the open market, so this reduces total outstanding shares.)

Next June 2012, the company has indicated it may invoke a rights offering which would likely see its shares outstanding increase by another 1/3.  But we also know from their extraordinary shareholder meeting hand-out last June (which we attended) and from the Asia Plus financial advisor document, that due to their new 27% ownership of AEOLUS (which owns 60% of this mega wind project), DEMCO will reap 200 million Baht in dividends from this, starting in calendar 2013.

Compare the expected dividend yield of both these increasingly “green” companies:

Based on their stated payout ratio of 40%, same as Gunkul, one could expect a 0.16-0.18 Baht dividend from DEMCO this year, or near a yield of 5% on the current stock price of 3.54.  This as compared to 1.2% on Gunkul, as 40% of its 0.50 EPS, is 0.20 Baht per share, on the 16.50Bathcurrent stock price!  (Note that DEMCO for long pays dividends twice a year.)

Now compare the p/e valuation of both these to be “green” companies.

The expected year 2011 trailing p/e ratio of DEMCO (3.54) is only 8.5, based on the near assured earnings of 0.40 per share, as explained above.

The expected year 2011 trailing p/e ratio of GUNKUL (16.50)  is 33,  based on the consensus earnings estimate of 0.50 per share for last year.  Note that TISCO whom brought them public, expects GUNKUL to earn 0.53 per share for last year, based on its latest November 11 research report but it warns on tax uncertainty. Hence there seems a bit more uncertainty on GUNKUL then DEMCO, regarding 2012 earning visibility.

For year 2012 it gets a bit more complicated for DEMCO as there is share dilution due to warrants #3, which are this month being converted.

Conservative DEMCO management has in December stated a further 50% revenue growth for this year to 6 Billion Baht.  If we can assume a 6% net profit margin, this would come to 360 million Baht in net profit after tax. But I think their net profit margin is likely to revert to its mean of around 7%, because the wind project has a stated 12-14% gross profit margin and its solar and other core business is similar -or higher.  (Substations command a fat 18% gross profit margin. Also see notes below).

DEMCO’s outstanding shares will likely increase to 550 million shares this year, as I assume most warrants will convert. Hence, 360 mill. Baht. divided by 550 million shares comes to a projected earnings per share (EPS) of 0.65 for year 2012.

Note, there are also warrants #4 outstanding but these will not convert until 2013. If the company does have a right offering later this year, further dilution will set in, but then again 200 million Baht in dividends will flow to the company in addition to its core earnings, due to its acquired 27% ownership in Aealous.  Wind Energy Holding, the majority shareholder of AEOLUS, has in addition several more wind farms planned and is waiting for EGAT approval (Power Purchase Agreement). The grand target is 1,500 mw. The 2 projects mentioned above are just the first step.

If I modestly assume a 0.50 earnings per share for this year, due to dilution effect, I still come with a calendar 2012  p/e for DEMCO at only 7.  This is a modest estimation because as noted the company bought back 30 mill. shares of its own stock a year ago.

GUNKUL, according to reputable broker TISCO, expects to earn 0.99 per share in 2012, but maybe TISCO is too conservative?  Even assuming GUNKUL can earn 1.10 per share next year, its p/e still comes to 15 or just more then double that of DEMCO.

GUNKUL as noted has some tax as well as execution risks, as many of their projects are “going to”. This vs. DEMCO, which is in full swing and near half completed on their massive Huay Bong 3 and Huay Bong 2 projects.  Further for DEMCO, both gigantic RATCHABURI ELECTRICITY GENERATING HOLDING PUBLIC CO.,LTD, a major Thai Utility company, and CHOBU of Japan, a major Japanese utility company, each own 20% of this mega wind project, so further giving credibility to all this.  (DEMCO has stated the expected Internal return  (IRR) on this wind project is just above 15%. The company has conducted 3 year certified wind studies before starting this.)

As noted, some here have stated that GUNKUL may sell in time some or all of its green energy projects bundled up to a fund for a nice profit?  Surely DEMCO as well can sell its massive wind energy venture to a fund, domestic or foreign. Where largess often commands a premium!  (DEMCO has a far larger green energy project on hand and already purchased half of its 27% stake in the Aelous, the company which will own 60% of this gigantic wind project. (Huay Bong 3 and Huay Bong 2). )

To me DEMCO has a very undemanding valuation for such a growth company well removed from recessionary feared US/EU -and with entrenched large contracts in hand. All bank financing has been 100% secured since May of 2011.  Mgt. re-affirmed that the 2 wind projects are not and cannot be delayed -and are fully expected completed before this years end!

All sounds very upbeat with little competition and little execution risk as the company has the manpower in hand and much of the preparation work has been is done.   Realize that projects like these require lots of preparation work and once this is done carry little execution risk for an experienced company like DEMCO.

DEMCO’s seniors/founders are ex-part of the very senior ex-executive team from EGAT and so have all the contacts and history and knowledge there, going back for decades. I think they are more experts in what they do then GUNKUL, or anybody else here for that matter.

The big difference is that DEMCO is not in the top 100 SET stocks, commands a market cap of around half -as compared to GUNKUL and to date only has one broker report published (last November). On the other hand, GUNKUL shares are 59% closely held by the biggest shareholder and 70% held by the top 5 biggest shareholders, vs. DEMCO’s top 5 shareholders own 40% of the outstanding shares. Hence GUNKUL shares are considerably more closely held.

The question remains -well shown- through this example:

Why should GUNKUL trade at a forward year 2012 expected p/e of  33 vs. less then 10 for DEMCO?  Does it all look so much brighter for GUNKUL beyond 2012?   I don’t think so and certainly not 3 times more. Similar, why is DEMCO’s expected dividend yield 3 times more then GUNKUL?  

As we see, it mostly has to do with relative size of their market cap. (mkt. cap.)  and so shows yet again how in Thailandat least,  you often pay twice as much for a stock and then some, yet, get half the dividend yield -minus some.  Just on account of the size of a company.  But don’t expect any broker here to explain that folly.

Maybank Kim Eng’s * top team there is transparent in that it discloses that it only looks at the 150 most liquid stocks or something like that, but then does not state the fact this constraint/ limitation alone, makes for a far more expensive universe.  Fact is an often very large premium is paid for relative share liquidity and mkt. cap.

Not mentioned anywhere is that liquidity and mkt. cap. is very relative and which to retail investor is often insignificant.  As there is enough liquidity for the amount these investors invest.  The question goes begging:  Why pay far more for something which is not your requirement, or you don’t care about??

Individuals the world over know -in this day and age- that largesse does not necessarily make it always better.  Maybe this limitation and Thai broker aloofness is one core reason why Thai retail client numbers have not been growing here for a decade -despite income per person (GDP, per capita)  which has doubled over the past ten years.

This article is written by Paul A. Renaud, you can contact him at www.thaistocks.com

Some side notes:

–The only reason DEMCO had a p/e ratio of 50 a couple of quarters back is because they were gearing up this massive new wind project (s). I.e. hired many new engineers and invested allot of time, resources and energy into all that. Also its core earnings got hit post the ’08-09North Atlanticinduced financial crisis. Mostly it was the long start up procedure on their massive wind project -now in the making- which dented earnings down and so shot up the p/e ratio back then.

–DEMCO’s large “completed but unbilled work” amount of 1.1 Bill. should drop this year as 40% of this comes from the official electric authority awaiting final testing which has been done. This should/could further increase earnings this year but I have not included this in my projections.

–The wind adder rate is guaranteed on DEMCO’s existing mega project as is spelled out in the Financial Advisor document from last June! Think about it, no way would the multiple Bank consortium give DEMCO a 600 mill. baht bank loan, which was only part  of the 12.6 bill Baht total wind project financing without this. If this adder rate falls apart for any reason on past fully approved projects nobody in their right mind would ever invest in any green projects here, as the whole financials would just collapse. It preposterous to think the adder rate would change for their exciting approved mega project.  (This is very different and gets confused with such changes inEurope -which have to do with feed-in-tariffs by retail users).

There are two other listed green companies but they are micro cap’s and one of the first one listed here is operating at a loss and the second one has a turbulent history.

SPCG PUBLIC COMPANY LIMITED  and  SOLARTRON PUBLIC COMPANY LIMITED

* Maybank Kim Eng is the first ranking broker here which promotes itself and to clients as a retail broker. It was recently 50.2% acquired by Maybank of Malaysia. Maybank Group isMalaysia’s largest financial services group. The Maybank Group has over 1,750 branches and offices in 14 countries, with 40,000 employees serving over 18 million customers.

• In 5 out of the last 11 decades, the US market has set an important long-term bottom in a year ending in “2″
• Since 1900, 19 out of 30 presidential election years ended bullish with an average performance of 18.3% in the DJI
• The Decennial Cycle, one of the most stable and solid cycles for equities, signals a market bottom nearing.

Since 1886 the market has followed a natural cycle with a fair degree of accuracy every 10 years – commonly referred to as the decennial cycle.

The decennial cycle has had an amazing track record in forecasting recessions, share market crashes and periods of abundant growth. Essentially the decennial cycle looks at the market in 10-year blocks such as from 1900-1909, 1910-1919, 1920-1929 and so on until you reach the current year 2011.

Once the 10-year block has been formed it will then look at each year in isolation. So for example, it can then reveal what has been the average performance of year “7” in each set of 10 years – i.e. 1907… 1987… 2007 and so on.

The decennial cycle is only interested in one year’s performance, so was the year “7” on average a positive year or a negative year since 1886?  What is interesting about the decennial cycle is that it tells us about the past and how can we apply this to the future. So what does a decennial cycle look like?

On average, years 0, 1 and 7 are generally the worst periods to an investor if you are trying to go long in the market via an index exposure, but far more beneficial if you are trying to short the market or profit from a falling market. You only have to think about years such as 2007, 1987, 1907 for prime examples of fallen markets or crashes.

Did you also know that in most cases recessions on average occur around the start of the decades like 1930, 1981, 1990, 2001? This make sense then that the share market performance during these periods of times tends to be flat to poor for an upwards or bull market orientated investor. In these instances, one needs to be far more nibble in which assets they hold in the pockets of opportunity as opposed to the total market.

So how would one make money out of this period of time? Well from a traders perspective range trading would possibly by an ideal strategy during this particularly time period for 0 and 1 year. Possibly also looking at short or taking advantage for falling markets will also need to be a strong focus in ones kit bag of tricks. For long only investors focused only on the upside, one would need to be in pockets of opportunities rather than just an index exposure to maximise potential upside opportunities.

The safest periods of time to invest for an investor focused only on the upside would be from years 2 to 6. In fact, between 2002-2006 this held very true with strong upwards movement up year after year.

Our brain is split into 3 parts. The conscious brain is the only part we can directly access. The nonconscious brain processes emotions and drives most of our behaviour, including keeping our hearts beating and our lungs breathing.

Because we live in an information rich world, our brains are designed to take conscious information and turn it into unconscious information. For example, when learning to drive a car, we have to consciously think about every action when we are new to driving. But after a few weeks of driving, it becomes automatic and our subconscious brain does the job for us.

This applies to trading as well. Depending on which trading strategy we newly employ, we initially use much of our conscious brain to make decisions. With practise, a great portion of this decision making becomes subconscious, and we can more quickly and accurately select profitable trades.

We give more weight to information that we are conscious of, but our subconscious brain has over 200,000 times more processing capacity than our conscious brain. The subconscious brain learns from its past experiences and mistakes, while the conscious brain relies on short-term memory.

Before you give up on your trading system or indicator, do allow yourself some time to practise and gain experience. Once your subconscious takes over, things get easier.

1. Little or no income

2. Mountain of debt

3. Increasing commitments and liabilities

What can a person do to get out of this mess? Sounds like some of the governments out there but no I’m serious, if you were in such a serious situation, what can you do?

Forex Trading or Stocks Investing? Not really, you do not have sufficient ”risk capital”.

Start a business? Definitely not one which requires a minimum lease. That leaves you with an online business. This is possible. No money for stocking up inventory? You can sell affiliate products. Your job then, is to work hard in creating content to increase traffic to your website, so that you can earn from selling affiliate products.

If you have a particular skill or qualification, you can seek a higher paying job. But my guess is that was already your first choice and it’s not working. With the advent of the internet, there are other ways to work for money over the net.  Sites such as freelancer and fiverr offer you opportunities to be employed for projects on the internet. Find out what jobs are in demand, and pick up the relevant skills.

Begging/ Lottery/ Casino/ Online poker are definitely no-nos, unless you want to risk losing your clothes.

In conclusion, after working out your budget and setting goals, possible ways for you to get more money will be to start a website selling affiliate products, or pick up skills which are in demand so that you can gain (additional) employment.

If you guys have comments, suggestions, questions, feel free to comment below this article, someone may benefit from your wisdom.

1. It costs a fraction of the price.

2. You do not have to travel all the way to a physical seminar.

3. You can learn at your own time, at your own pace.

4. If you are unsure about any terms, Google is right there waiting for you.

5. You can learn over and over again. Most people only pick up a certain % of information on hearing it the first time.

6. You can find the exact strategy/ system/ company to learn from, no need to compromise on vendors and quality.

7. Quality is consistent.

8. You can watch together with your friends.

9. You can test your understanding with the quizzes, usually included.

10. With a detailed course outline, you know exactly what you can benefit from. No guesses.

If you are interested in technical analysis online trading courses for all asset classes, including forex and stocks, do visit AsiaPacFinance.com’s store!

1. Forex

2. Commodities

3. Equity Indexes

4. Liquid Stocks

5. Others

Take a look at this chart of Genting, one of the most liquid stocks on the Singapore Stock Exchange:

This is the daily chart. As you can tell, the stock trades everyday, depicted by the existence of a candle stick in every period. Technical analysis will be meaningful on such a stock, as historical data is “complete”.

Now take a look at a less liquid stock, Old Chang Kee, a curry puff provider, also listed on SGX:

You can tell immediately that this stock is not very suitable for technical analysis, due to the absence of trading and price data on most days. While you can still draw indicators and make deductions, they are less accurate. Since trading is about stacking odds in your favour, applying technical analysis on illiquid stocks is not a good idea.

In conclusion, technical analysis can work on penny stocks, provided they are liquid and actively traded.

As 2011 draws to an end, it is clear that Singapore stocks did not perform well, as evident on the bear trend shown on the MSCI Singapore Index’s daily chart.

During Oct 2011, prices rallied to test the 100D moving average. This failed attempt to break above the 100D moving average is followed by further downside movement.

The near term support level on the MSCI Singapore Index is 282, which is the 50% retracement level between the Mar 2009 low and Nov 2010 high points.

The resistance level is the 100D moving average represented by the green line.

As Dec is typically a slow moving month due to lesser trading activities, it is common to see markets move into a consolidating phase. This is seen by the triangle chart pattern forming. Click here to watch trading videos on technical analysis.

As we move into 2012, it is very important to observe how markets are re deploying their funds. The price action next month would give us an idea of how the market views the economy going forward. It is critical for traders to observe how prices react around key levels mentioned earlier.

The bear momentum is far from over.

It is prudent to expect prices to navigate closer to the Kijun equilibrium (pink line) in a mean reverting manner. Often, a flat horizontal pink line is indicative of mean reverting price action. This is consistent with the consolidating phase we are observing now.

However traders must be agile and react to signs of breakouts occuring. As the saying goes, do not stand in front of the oncoming train!

And it’s no surprise. Countries are made up of people who produce value and contribute to GDP. When people are paid for their labor, they need a safe place to keep their money, and hopefully earn some interest on it. The obvious choice would be to put money with banks, who then lend out peoples’ money to other people, earning interest on their money, which then contributes to their book value.

But what happens when you have this:

People take money out of banks, banks have lesser capital to loan out, banks have lower book value and profits. Banks have to comply to risk measures and reduce risk taking, so they start to lay off workers to cut cost. And all this obviously damages the market indices since financial institutions make up a bulk of the stock market.

The graph above depicts outstanding consumer financings, and the takeaway is the sharp drop in growth rates in both the mortgage and non-mortgage segments. The outlook for banks will improve once people and businesses start borrowing more from them, and once people start making more income to lend to banks. This does not happen overnight.

Technical analysis has been used for hundreds of years. It can be applied to any market, an advantage over fundamental analysis. Technicians believe that the study of market action will tell all and that each and every fundamental aspect will be revealed through the actions of investors entering or exiting positions. Market action includes many sources of information — price, volume, open interest, and volatility.

Technical analysis is based upon three main premises;

1) Market action discounts everything
2) Prices move in trends
3) History repeats itself

Technical analysis has been proven to be an effective tool for investors and is constantly becoming more accepted by market participants. When used in conjunction with fundamental analysis, technical analysis can offer a more complete valuation, which can make the difference in executing profitable trades.

For a deeper understanding on technical analysis, do check out our Online Trading Courses.

Trend Indicators

Trend indicators reflect three tendencies in price movements: Up moves, Down moves and Sideways price moves. These indicators help define prevailing directions/ trends of the price moves by smoothing price data over a certain period of time. In simple words, Trend indicators allow us to visualize Trends in the market.

• Ichimoku Kinko Hyo
• Advance Decline Line (ADL)
• Average Directional Index (ADX)
• Average Directional Movement Index Rating (ADXR)
• Commodity Selection Index (CSI)
• Directional Movement Index (DMI)
• Double Exponential Moving Average (DEMA)
• Heiken Ashi
• Moving Average Convergence and Divergence (MACD)
• Moving Averages: EMA, SMA and WMA
• Parabolic SAR
• Percentage Price Oscillator (PPO)
• Point & Figure
• Triple Exponential Moving Average (TEMA)
• Triple Exponential Moving Average (TRIX)

Momentum Indicators

Momentum indicators show the strength of trends by recording the speed of prices moving over certain time period. At the same time, Momentum indicators track strength and weakness of a trend as it progresses over a given period of time: the highest momentum is always registered at the beginning of a trend, the lowest – at its end point.

• Accumulative Swing Index (ASI)
• Advance Decline Ratio (ADR)
• Aroon Indicator
• Aroon Oscillator
• Chande Momentum Oscillator
• Commodity Channel Index (CCI)
• Intraday Momentum Index
• Centre of Gravity
• Linear Regression Slope
• Mass Index
• Momentum Indicator
• Price Oscillator
• Qstick
• Random Walk Index
• Rate of Change (ROC)
• Relative Momentum Index (RMI)
• Relative Strength Index (RSI)
• Smoothed Indexed Rate of Change (SIROC)
• Stochastics
• Stochastic RSI
• Stochastic Momentum Index
• Ultimate Oscillator
• Williams %R
• Williams’ Accumulation-Distribution

Volatility Indicators

Volatility indicators show the size and the magnitude of price fluctuations. In any market there are periods of high volatility (high intensity) and low volatility (low intensity). These periods come in waves: low volatility is replaced by increasing volatility, while after a period of high volatility there comes a period of low volatility and so on. Volatility indicators measure the intensity of price fluctuations, providing an insight into the market activity level.

• Average True Range (ATR)
• Bollinger Bands (BB)
• Chaikin Volatility (CHV)
• Donchian Channel
• Keltner Bands
• McGinley Dynamic indicator (MDI)
• Moving Average Envelopes
• Starc Bands

Volume Indicators

Volume indicators are used to determine investors’ interest in the market. High volume, especially near important market levels, suggests a possible start of a new trend, while low volume suggests traders uncertainty and/or no interest in a particular market.

• Acceleration Bands
• Market Facilitation Index
• Chaikin Money Flow (CMF)
• Chaikin Oscillator
• Accumulation Distribution Oscillator (ADO)
• Volume Oscillator (PVO)
• Demand Index
• On Balance Volume (OBV)
• Money Flow

Cycle Indicators

A cycle in the market is determined by a series of repeating patterns. These patterns are, as a rule, dedicated to certain market events, such as seasons, simple day counts, event-to-event sequence, market theories and formulas and so on.

• Detrended Price Oscillator (DPO)
• Elliott waves
• Schaff Trend Cycle
• Fibonacci
• Fourier Transform
• MESA Sine Wave Indicator

Other Indicators

• Andrew’s Pitchfork
• Auto Regression Bands
• Candlesticks
• Coppock Indicator
• Erlanger Put / Call Ratio
• McClellan Oscillator
• Pivot Points
• Projection Oscillator
• Renko Charts
• Rex Oscillator
• Trend Lines
• Zig Zag

Classic Trend Day – A large opening gap created a vacuum on the buy side. The market opened at one extreme and closed on the other. Note how it made higher highs and higher lows all day. Also, volatility increased in the latter part of the day–another characteristic of trend days.

A trend day can occur in either the same or the opposite direction to the prevailing trend on daily charts. The critical point is that the increased spread between the high and low of the daily range offers a trading opportunity from which large profits can be made in a short time.

Traders must understand the characteristics of a trend day, even if interested only in intraday scalping. A trader anticipating a trend day should change strategies, from trading off support/resistance and looking at overbought/oversold indicators to using a breakout methodology and being flexible enough to buy strength or sell weakness. A trader caught off guard will often experience his largest losses on a trend day as he tries to sell strength or buy weakness prematurely. Because there are few intraday retracements, small losses can easily get out of hand. The worst catastrophes come from trying to average losing trades on trend days.

Fortunately, it is possible to identify specific conditions that tend to precede a trend day. Because this can easily be done at night when the markets are closed, a trader can adjust his game plan for the next day and be prepared to place resting buy or sell stops at appropriate levels.

The Principle of Range Contraction/Expansion

Several types of conditions lead to trend days, but most involve some type of contraction in volatility or daily range. In general, price expansion tends to follow periods of price contraction, the phenomenon being cyclical. The market alternates between periods of rest or consolidation and periods of movement, or markup/markdown. Volatility is actually more cyclical than is price.

When a market consolidates, buyers and sellers reach an equilibrium price level — and the trading range tends to narrow. When new information enters the marketplace, the market moves away from this equilibrium point and tries to find a new price, or “value” area. Either longs or shorts will be “trapped” on the wrong side and eventually forced to cover, aggravating the existing supply/demand imbalance.

In turn, the increase in price momentum attracts new market participants, and pretty soon a vicious cycle is created. Local pit traders, recognizing the one-way order flow, scramble to cover contracts. Instead of price reacting back as in normally trading markets, “positive feedback” is created — a condition in which and no one can predict how far the price will go. The market tends to gain momentum rather than to check back and forth.

Tick Readings for Short-term day trading – Volatility conditions are important to quantify even if you are a short term day trader. In a normal consolidation market, overbought/oversold type indicators, such as intraday tick readings, can work well for S&P scalps.

We can tell when the market is approaching the end of contraction or congestion because the average daily ranges narrow. We know a potential breakout is at hand. However, it is difficult to predict the direction of the breakout because buyers and sellers appear to be in perfect balance. All we can do is prepare for increased volatility or range expansion!

Most breakout trading strategies let the market tip its hand as to which way it wants to go before entering. This technique sacrifices initial trade location in exchange for greater confidence that the market will continue to move in the direction of trade entry.

The good news is that breakout strategies have a high win/loss ratio. The bad news is that whipsaws can be brutal!

Conditions Preceding a Trend Day

Several key price patterns can serve as alerts to the potential for significant range expansion:

• NR7 — the narrowest range of the last 7 days (Toby Crabel introduced this term in his classic book, Day Trading With Short-term Price Patterns and Opening-range Breakout);
• A cluster of 2 or 3 small daily ranges;
• The point of a wedge-type pattern (which usually exhibits contracting daily ranges);
• A Hook Day (wherein the open is above/below the previous day’s high/low — and then the price reverses direction; the range must also be narrower than the previous day’s range; leads traders to believe that a trend reversal has occurred, whereas the market has instead only formed a small consolidation or intraday continuation pattern);
• Low volatility readings, based on such statistical measures as standard deviations or historical volatility ratios or indexes;
• Large opening gaps (caused by a large imbalance between buyers and sellers);
• Runaway momentum (markets with no resistance above in an uptrend or no support below in a downtrend. This condition differs from the above setups in that volatility has already expanded. In a momentum market, however, the huge imbalance between buyers and sellers continues to expand the trading range!)

Fading extreme tick readings can be dangerous – On a trend day, a countertrend strategy of fading extreme tick readings could result in substantial losses.

Ave. True Range highlights range contraction/expansion – The 3-Day Average True Range Indicator highlights how cyclical the phenomenon of range contraction/range expansion is. Volatility tends to be more cyclical than price.

Trading Strategies

A breakout strategy, or intraday trend-following method, can best capture a trend day. Wait for the market to tip its hand first as to which direction it is going to trend for the day. Rarely can this be determined by the opening price alone. Thus, most breakout strategies enter only after the market has already begun to move in one direction or the other, usually by a predetermined amount.

Add the following techniques to your repertoire. All of them will ensure you participate in a trend day.

• Breakout of the Early-morning Trading Range. The morning range is defined by the high and low made in the first 45-120 minutes. Different time parameters can be used, but the most popular one is the first hour’s range. Wait for this initial range to be established and then place a (1) buy stop above the morning’s high and a (2) sell stop below the morning’s low. A protective stop-and-reverse should always be left in place at the opposite end of he range once entry has been established.
• Early Entry. Toby Crabel defined this as a large price movement in one direction within the first 15 minutes of the opening. The probability of continuation is extremely high. Once one or two extremely large 5-minute bars appear within the first 15 minutes, a trader must be nimble enough to enter on the next “pause” that usually follows. With many of these strategies, the initial risk can appear to be high. However, a trader must recognize that as the trading volatility increases so too does the potential for good reward.
• Range Expansion off the Opening Price. A predetermined amount is added or subtracted from the opening price. Though Toby Crabel also described this concept in his book, it was really popularized by Larry Williams. The amount can be fixed, or it can be a percentage of the previous 1-3 days’ average true range. With resting buy and sell stops in place, the trader will be pulled into the market whichever way price starts to move. Entry, often made in the first hour, can be made earlier than the breakout from the first hour’s range. In general, the further price moves away from a given point, the greater are the odds it will continue in that same direction. The ideal is continuation in the direction of the initial trend once the trade is entered.

Volatility tend to increase as a trend matures – Trend days also frequently occur in runaway momentum markets. There is little range contraction evident in the latter part of this trend move. Rather, emotions run high as the imbalance between supply and demand reaches an extreme.

• Price Breakout from the Previous Day’s Close. This strategy is similar to the above, but with buy and sell stops based on a percentage of the previous 1-3 days’ range added to the previous close. The advantage to using the closing price is that resting orders can be calculated and placed in the market before the opening. The disadvantage is the potential for whipsaw if the market moves to fill a large opening price gap.
  (Another version of a volatility breakout off the open or closing price is the use of a standard-deviation or price-percentage function instead of a percentage of the average true range. All the above methods can be easily incorporated into a mechanical system.)
• Channel Breakout. One of the more popular types of trend-following strategies in the nineties, Donchian originally popularized the concept by employing a breakout of the 4-week high or low. Later, Richard Dennis modified this into the “Turtle System,” which used the 20-day high/low. Most traders don’t realize that simply entering on the breakout of the previous day’s high or low can also be considered a form of channel breakout. (Another popular parameter is the 2-day high or low.)

Exit Strategies

One of the easiest and more popular ways to exit a breakout trade is simply to exit “Market-On-Close. ” The ideal trend day closes near the opposite extreme of the day’s range from the opening. This strategy keeps the trader in the market throughout the day, yet requires no overnight risk. Most breakout strategies actually test out better for trades held overnight because the next opening will so often gap in a favorable direction. Thus, another simple strategy is to exit on the next morning’s opening.

Instead of a strategy based on time, such as the close or the next day’s open, one can also use a price objective. One popular method is to take profits near the previous day’s high or low. One can also determine a target based on the average true range.

For the classic market technician, point-and-figure charts can provide a “count” which establishes a price target. This method is valid only if price breaks out of congestion or a well-defined chart formation.

Trade Management

In general when testing volatility breakout systems, the wider the initial money-management stop, the higher the win/loss ratio. With breakout strategies, the initial trade must be given room to breathe.

However, a discretionary day-trader will learn that the best trades move in his favor immediately. In this case, move the stop to breakeven once the trade shows enough profit. The stop can be trailed as the market continues to trend, but not too tightly. Because a great majority of the gains can occur in the last hour as the trend accelerates, try not to exit prematurely.

When trading multiple contracts, scale out of some to ensure a small profit in the event of a reversal. However, do not add to a position: The later the trade is established, the more difficult it is to find a suitable risk point.

A Few Words on Volatility Breakout Systems

Trading a mechanical breakout system can provide invaluable experience. The average net profit for the majority of these systems is quite low, so they may not guarantee a road to riches; but they serve as a terrific vehicle to gain a wealth of experience in a very structured format.

If you are going to trade a mechanical system, you must be willing to enter all trades! It is impossible to know which trades will be winners and which ones losers. Most traders who “pick-and-choose” have a knack for picking the losing trades and missing the really big winners. The hardest trades to take tend to work out the best! With most systems, a majority of the profits come from less than 5% of the trades.

Though most breakout methods have a high initial risk point, their high win/loss ratio makes them easier to trade psychologically. You might get your teeth kicked in on the losers, but, fortunately, big losses do not happen very often. Also, if trading a basket of markets, as one should with a volatility breakout system, diversification should help smooth out the larger losses.

To summarize the main benefits of trading a breakout system:

• It teaches proper habits, in that there is always a well-defined stop;
• You get lots of practice executing trades;
• It teaches the importance of taking every trade;
• It teaches respect for the trend.

Additional Considerations when using Breakout Strategies

• Overall average daily trading range (must be high enough to ensure wide “spread”);
• Volume and liquidity;
• Seasonal tendencies (e.g., grains are better markets in spring and summer);
• Relative strength;
• Commercial composition.
• Volatility Breakout System – An equity curve for a simple volatility breakout system that enters on range expansion off the previous day’s CLOSE and exits the next day. Once again, the market opened on one extreme of its range and closed on the other. It made a steady pattern of lower highs and lower lows all day.

Volatility Breakout System – This volatility system is based on range expansion off the OPENING price and then exiting on the next day’s close. Over the long run, entering on range expansion off the opening price or off the previous day’s close does equally well. In this case, entering on a breakout off the opening price resulted in a higher equity peak at one point but a larger drawdown later.

This article reprinted with the kind permission of LBR Group

 The Money Flow Index(MFI)
The Money Flow Index is a volume-weighted version of the Relative Strength Index. The indicator compares the total transaction values traded on days with upward price movement to the transaction values traded on days with downward price movement.

The steps involved in calculating the Money Flow Index are:
■Decide on the time window or lookback period of interest
■Calculate the Typical Price for each of the periods i.e. (High + Low + Close) / 3
■Determine the total transaction amount or Money Flow for each period i.e. Typical Price * Volume
■Determine the Positive Money Flow amount: i.e. accumulate a Positive Money Flow amount for each of the periods, within the time window, when the Typical Price moves up from the previous value
■Determine the Negative Money Flow amount: i.e. accumulate a Negative Money Flow amount for each of the periods, within the time window, when the Typical Price moves down from the previous value
■Determine the Money Flow Ratio: i.e. Positive Money Flow / Negative Money Flow
■Determine the Money Flow Index: i.e. 100 – 100 / (1 + Money Flow Ratio)

MFI is most valuable when a security is in a relatively quiet phase of volume and price development. This can best be illustrated with the following example, which proved to be highly profitable, and which arose for Martha Stewart Living (MSO) in late August 2005. The setup for the trade is displayed in Figure 1. Notice especially the price congestion during most of August 2005 in which price activity was confined to a very narrow range between $26 and $27. During this period of price stagnation there is clear evidence of accumulation taking place in the MFI chart segment below the price chart. Also noticeable is the manner in which the steepness of the MFI slope stands in contrast to the much gentler slope of the RSI slope. On August 25th the stock broke out on heavy volume and over the next four sessions moved from $26 to $34.

It is the dissonance or divergence that is revealing and which provides short term trading cues. The pattern can provide us with the foundations for a reliable template or pattern recognition algorithm using the MFI. When price has been trading within a very narrow range for several periods but there is unmistakable evidence of positive money flow indicating accumulation, be prepared for a potentially major price breakout. This is essentially a short term pattern in that one is not monitoring for any longer term evidence of accumulation but rather looking for a trading opportunity that should arise typically within a ten to twenty day period. In the case of MSO the trader who had observed the unusually positive MFI prior to the breakout on the 25th could have achieved a 25% return within four trading sessions.

Another example of a very similar setup can be seen in the chart for AMGN (Figure 2) at the end of June 2005.

There is again evidence of accumulation during the month of June 2005 as highlighted in the steepening slope of the MFI especially visible during the second half of June. Also very noticeable in Figure 2 is the fact that the stock moved sideways within a very narrow range for the remainder of the month of June. All three exponential moving averages, the 20, 50 and 200 day EMA’s, had converged at or close to the $60 price level. When reviewing longer term charts for AMGN it can be seen that this price level has proven to be fairly pivotal for the stock historically and certain institutions will have specific filters and screens set up to take a closer look at a stock that is trading at an area of important chart support. Also significant perhaps is that the period under review in the chart coincides with the end of the second calendar quarter, which is a period during which portfolio managers are overhauling their holdings and often engaging in some new acquisitions and portfolio cosmetics. The fact that there was little day to day volatility during this period suggests that the stock was probably not featuring as a priority for many day trading desks and it is precisely this relative calmness of this period of trading that is the hallmark of the pattern we have found to be so useful.

On July 5th, following a long holiday weekend the stock broke out from the period of price congestion with a 2.7% upward move to $62.51. This was then followed by a series of further upward moves including the major upwards gap on July 20th which enabled the stock to close above $80 representing a 33% advance from the price breakout at the beginning of July. There is a revealing dissimilarity between this chart and the one for MSO that we previously examined which in some ways would have made the AMGN opportunity more attractive. As can be seen from Figure 2, the price breakout for AMGN was less abrupt and traders that understood the dynamics that had lead to the July 5th upward move still had plenty of opportunity to climb aboard for the substantial short term profits that were to be realized within three weeks.

In each of the examples there is one key factor that becomes evident upon closer inspection of the charts which is the fact that in each case the price action is subdued just prior to the breakout and yet there is a very noticeable increase in the MFI values. An additional, not mandatory, requirement for the pattern is that the price has entered a zone where it is close to one or more of its key moving averages or an area of previous chart support. This suggests that the optimal circumstances for using the MFI indicator is in what we would call quiet markets. When a stock is thrusting or experiencing strong trend days there are too many dynamics at work for a meaningful segregation of the up volume and the down volume. So how can the value of a money flow based analysis be salvaged for more volatile trading conditions? The approach that is proposed here is based on the notion that we adopt a selective screening process to the actual data that we examine in terms of our segregation of positive and negative volume sessions. This can be achieved using a technique of comparative quantiles analysis.

Money Flow Based on Comparative Quantiles Analysis (CQA)

The term quantile is a generic term from statistics and the best way to explain it is to look at a specific example of a quantile – the median value of a price series. To take a simple example if we have 101 closing prices in a data series and we rank them from lowest to highest, the exact mid point of the ranking (i.e. the 51st closing price) will have be the median value. The median value implicitly requires a ranking of the data unlike the mean value which simply sums the values and divides by the number of values. Unlike a moving average a quantile approach requires a continual ranking of price data and then selecting the value that lie on the boundary of the percentile or quantile that one wishes to focus on. One of the main advantages of the median is that it is less sensitive to the inclusion of outliers.

The first intuition at this stage to help explain the CQA approach is to introduce the notion that quantile values can be extracted from two different but related sets of data points such as closing price and volume from a particular stock’s history. When we use a moving time window approach where we look back at (say) the previous 20 data points for that specific series, we can then determine whether the current data point is above the quantile threshold, below it, or possibly equal to the specified quantile value. As soon as that marker has been established many different realms of analysis become possible such as a comparison between what may be happening in the upper quantile with respect to price but the lower quantile with respect to volume or the range for the session. It is for this reason that we call the methodology comparative quantiles analysis (CQA). Before we can properly introduce the methodology we need to take care of some preliminary issues and define some key terminology including the true range, closing position with the true range, signed volume and accumulation windows.

True Range

The True Range is expressed quite simply as the greater value of the following:

The current high less the current low.

The absolute value of the current high less the previous close.

The absolute value of the current low less the previous close.

It is worth tracking this value in all trading sessions and then one can derive an average true range value for a specified look-back period or window.

Closing Position Bias

 The closing difference is the difference between the closing price for the current session and the closing price for the previous session. It will be a signed value depending on whether the stock gained or declined relative to its previous price. The closing position bias is simply the signed closing difference divided by the true range and reflects where the current closing price is in relation to the range of trading as delimited by the most recent two sessions. If the value is +1 then the stock closed up from the previous session and at the high for the day, if the value is -1 then the stock closed down for the day and at the low for the day. Intermediate values provide a useful barometer of the “strength” of the close. To take another instance a value of 0.5 would indicate that the closing price was above the previous close and is to be found at a level equivalent to the point three quarters of the true range whereas a value of -0.5 would suggest that the close was at a point below the previous close and at one quarter of the true range.

Signed Transaction Volume

The sign value attributed to the volume (i.e. whether it is positive or negative) depends on whether the closing bias is above or below certain thresholds. Our normal procedure is to set the threshold for attaching a negative sign to the volume at values for the closing bias which are less than -.0.5 since the stock not only closed down but also in its lower quartile (i.e. the 25 percentile value) with respect to its intraday range. The upper threshold for qualifying as a positive volume session can then be set where the closing bias is above 0.5

which shows not only that the stock closed up but was also in the upper quartile of its true range. There will then be an intermediate zone that approximately corresponds to the middle quartiles for closing bias that can either be considered to have a neutral volume sign or a zero value which effectively means that they do not register in any accumulation. The next issue relates to what should be the actual value to accumulate within the positive and negative camps. As we have seen the value which is used in the Money Flow Index, is determined by multiplying the session’s volume by the typical price for the session. In our own calculations we have found that the following value has proven to be most useful in indicating turning points: Closing Price x Signed Volume (which can be zero) * True Range for the session (in dollar terms). By including the true range value the signed volume that is used in the CQA methodology takes on a weighting that is commensurate with the degree of intraday price movement.

Accumulation Window

This term is used frequently in the CQA methodology and specifically in regard to the money flow analysis it represents the period during which the signed transaction volume is to be accumulated. In the case of the co-occurrences between events in different quantiles it is similar to the above but enables us to count the number of occasions on which events

registered in the designated quantile for one variable overlap with those for a second variable’s quantile.

 Case Study – Newmont Mining (NEM)

To demonstrate the features of the quantile based approach to volume analysis and highlight the manner in which it allows us to anticipate price turning points, both positive and negative, we will examine the gold mining stock Newmont Mining (NEM).

Figure 3 covers the weekly closes for Newmont Mining from January 2005 to June 2006 and shows the more obvious turning points in price development for the stock. From its low in May 2005 at around $35, NEM moved up to the $60 level in late January 2006. There was a corrective period in October 2005 but the price action following that, at the end of 2005 and throughout January of 2006, was very positive. The price topped out at the end of January when a more severe corrective episode began.

Figure 4 is the first of our quantile based diagrams and it maps the same period as the price chart covered in Figure 3. The four corrective episodes have been indicated in Figure 4 by A, B, C and D. What can be seen in Figure 4 is that where the red and blue columns are most closely aligned corresponds with the more bullish price phases for NEM, and as the red and blue columns are diverging from each other, often associated with the red columns descending below the zero line, NEM is correcting. There is a very close match between all of these points that have been arrowed in Figure 4 with the observed weakness in NEM. The May 2005 weakness at point A is clear as is the temporary setback in November 2005 marked at point B. Most critically the more serious correction that appears at the end of January (point C) is anticipated by the red columns moving below the zero line at the end of January 2006 prior to the price high which actually occurred at $61.83 on February 1st. If one had adopted the crossover below zero as a trading trigger point for a short trade one could have entered a short trade on February 1st when the closing price was $61.60 which would then have yielded a ten percent profit within the next ten trading sessions. The final corrective phase is marked at point D on Figure 4 and corresponds to the late April/early May slump and it also coincides with a substantial non-alignment of the red and blue columns.

Newmont Mining (NEM) : Upper Quantile Based Signed Volume AnalysisBased on period from March 2005 to August 2006- 50000000500000000 1/03/2005 01/05/2005 01/07/2005 01/09/2005 01/11/2005 01/01/2006 01/03/2006 01/05/2006 01/07/2006 Cumulative Volume [20 day window]Signed Volume registered only when price is in upper quantile Signed Volume registered only when true range is in upper quantileThese periods are where the blue and red columns areleast aligned and coincide with corrective episodes. These periods show the most coherently bullish periods for the stock as the blue and red columns are most closely aligned ABCD.

Collection Source: trade2win.com

Breakout systems can actually be considered another form of swing trading, (which is a style of short term trading designed to capture the next immediate move). In other words, the trader is not concerned with any long term forecast or analysis, only the immediate price action.

Volatility breakout systems are based on the premise that if the market moves a certain percentage from a previous price level, the odds favor some continuation of the move. This continuation might only last one day, or go just a little bit beyond the original entry price, but this is still enough of a profit to play for. A trader must be satisfied with whatever the market is willing to give.

With a breakout system, a trade is always taken in the direction that the market is moving at the time. It is usually entered via a buy or sell stop. The bit of continuation that we are playing for is based on the principle that momentum tends to precede price. There is also another principle of price behavior that is at work to create trading opportunities. That is, the market tends to alternate between a period of equilibrium (balance between the supply and demand forces) and a state of disequilibrium. This imbalance between supply and demand causes “range expansion”, (the market seeking a new level), and this is what causes us to enter a trade.

There are several ways to create short-term volatility breakout systems. I have found that different types of systems based on range expansion test out quite similarly. Therefore, whichever method you choose should be a matter for your own personal preference.

In designing a system, one can choose to place an entry stop off either the opening price or the previous day’s closing price. This entry stop can be a function of the previous day’s range or a percentage of the previous 2.10-day range, etc. Mechanical exits can range from using a fixed objective level to using a time function such as the next day’s open or close. Most of these systems function best when a very wide stop is used.

Another way of trading the breakout mode is by using “channel breakouts” which is simply buying the highest high of the last seven days in the case of a 7-period channel or the highest high of the last 2 days in the case of a 2-period channel breakout. In the case of an inside day breakout pattern where one buys the high or sells the low of the previous bar, a 1-period channel breakout is actually being used for the trigger. The most famous long-term breakout system adapted by Richard Dennis for training the “Turtles” was the 4-week channel breakout originally designed by Richard Donchian. Other breakout systems can be based on chart patterns (i.e., Curtis Arnold’s Pattern Probability System), trendline breaks, breakouts above or below a band or envelope of prices, or variations of simple range expansion functions.

Training Benefits for the Novice Trader
Derived from Trading a Volatility Breakout System:
Trading a short-term breakout system can be one of the best exercises to improve your trading.

• First, it teaches you to do things that are hard to do – buying high or selling low in a fast moving market! For most people, this feels quite unnatural!
• Second, it always provides a defined money management stop once a trade is entered. Not adhering to a defined money management stop is the most common cause of failure among traders.
• Third, it teaches a trader the importance of follow-through once a trade is entered, as most breakout systems perform best when the trade is held overnight.
• Last, it provides a great means for traders to improve their execution skills. Most volatility breakout systems are fairly active compared to a long-term trend following system. A trader can gain skill in placing orders in a diverse number of markets. Having a mechanically defined entry point is sometimes just the thing needed to overcome a trader’s fear of pulling the trigger. The order is placed ahead of time and the market then automatically pulls the trader into a trade if the stop level is hit.

Even if a person prefers to ultimately enter orders using discretion, trading a mechanical volatility breakout system can still be an invaluable exercise. It should at least increase a trader’s awareness of certain types of price behavior in the marketplace, especially if one is conditioned to entering on counter-trend retracement patterns. It can’t but help impress upon one the power of a true trend day.

Pros and Cons of Trading a Breakout System:
Like most systems, volatility breakout systems will clean up in volatile or runaway markets but tend to thrash when conditions get choppy or volume dries up. I believe they are still among the most profitable type of system to trade, and I also feel they will continue to be profitable in the long run. They are “durable” and “robust”, though they tend to deteriorate when too large of an order is placed (i.e., greater than 50 contracts). However, so that you do not get the impression that there is a Holy Grail of systems, the following considerations should be kept in mind:

Entries can be nerve-racking, especially when the market is in a runaway mode. The best breakouts won’t give you retracements to enter on. You are either on board or you are not! If you conceptualize that the best breakouts turn into trend days, and are most likely to close on the high or low for the day, then it is not so difficult to enter. Usually it is best to have a buy/sell stop already resting in the marketplace.

Sometimes a market gaps open outside your initial entry level. These often turn into the best trades. They can also turn into the most aggravating whipsaws. Big gaps test out that one should still take the trade, but they will definitely add more volatility to your bottom line. If your trade gets stopped out and an new signal is given in the opposite direction, this reversing trade usually more than makes up for the first loss.

Whipsaws are a drag but they are also inevitable when trading a breakout system. Many times I have bought the highs and sold the lows. It takes a great deal of “confidence in the numbers” to trade this type of system. System testing should always be done for a minimum of 3 years, preferably 10. Be sure to then examine out of sample data to see how the system performed.

On balance, a volatility breakout system can be traded on most all markets. However, a market might be very profitable one year and yet perform mediocre at best the next. A portfolio of 10 to 12 markets seems to work well. The problem with trying to trade too many markets at once is that it can become quite difficult to keep up with the activity level if your parameters are fairly sensitive. Many times in systems development, people overlook what one person can realistically manage.

Enhancing a Basic Volatility Breakout System:
Adding filters can sometimes create further enhancements. Examples of types of filters include: indicators to determine whether or not a market is in a trending condition, seasonality, days of the week, or degree of volatility contraction already present in the market. Periods of low volatility in the market can be defined by a contraction in true range, a low ADX, or a statistical indicator such as a low historical volatility ratio or a low standard deviation.

A system then might look something like this:

1. Initial volatility condition = true
2. Buy or Sell on a stop based on the current bar’s open, plus or minus a percentage of the previous day’s range.
3. Initial Risk management stops once a trade is entered.
4. Exit strategy.

Types of variables which can be used in a simple range expansion breakout system:

1. Period – is the breakout based on a function of the previous day or the previous 10-day period, for example?
2. Range – does it use the average range for that period or the largest, smallest, or total range?
3. Percentage – what percentage of the range is used? It is possible, for example, to use 120% of the previous 3-days’ total range.
4. Base – is the range function added to the previous day’s close or the current day’s open. This function may also be added to the high or low of the previous bar or a previous period such as the last 10 days.

As a general rule of thumb, the greater the percentage factor used, the greater the percentage of winning trades will be. However, the overall system may be less profitable because fewer trades are taken.

Once again, an example of an initial condition might be: Enter a trade only on a day following the narrowest range of the last 7 days. Or, take a trade only if the market has made a new 20-day high or low within the last five trading days. Whenever you add a filter to a system, be sure to compare the results to a baseline and examine the difference in activity level.

EXIT STRATEGIES:

1. Time based (2nd day’s close, 1st day’s opening)
2. First profitable opening (Larry Williams)
3. Target or objective level (1 average true range, previous day’s high/low)
4. Trailing stop (displaced moving average, parabolic, 2-day high/low)

RISK:
Controllable Risk – the amount of risk which can be predetermined and defined by a money management stop.

Types of money management stops:

1. fixed dollar amount
2. function of average true range
3. price level (i.e., bar high/low)

Uncontrollable Risk:

1. Overnight exposure (close to open risk). You cannot exit a position when the market is not trading. Thus, you are subject to adverse gaps, which can be exaggerated by news or events.
2. Slippage risk. Fast market conditions or thin, volatile markets often cause a trader to get filled at prices much worse than expected.

In general, the numbers behind most systems are very dependent upon capturing a few good trades. You can’t afford to miss the one good trade that can make your month.

Here are some tips for trading this or any other system:

1. Gain confidence by first trading a system on paper.
2. Make sure you can successfully trade a system mechanically before attempting to add any discretion.
3. Track your actual performance against the mechanical system at the end of each day, rating your success by whether you can match the system’s performance.
4. Monitor performance over an adequate sample, perhaps 100 trades or a set number of weeks. Do not let a down week or trade deter you.
5. Manage the exits rather than filter the entries. It is impossible to tell in advance which trades will be the good ones. The one entry skipped might be the BIG ONE, and one can’t afford to miss it. Managing the exit means two things: The first, learn when it’s okay to let that occasional great trade run an extra hour or two before getting out; the second (which really depends on one’s skill level), learn to recognize a bit sooner when a trade is not working and exit just before the stop is hit.
   All systems display subtle nuances and insights into the market’s behavior over time.
6. Keep a notebook of your observations and patterns you notice. In this way you truly “make the system your own”.
7. Never be concerned about how many other people are trading systems. If slippage seems excessive, it often suggests a significant breakout from a triangle or period of congestion. Remember: Something had to drive the market far enough to penetrate the breakout point in the first place!

If you are interested in reading more on the principle of range expansion/range contraction, Toby Crable pioneered some of the finest research in this area. I would strongly recommend his book Day Trading with Short Term Price Patterns and Opening Range Breakouts. The research in this book provides one of the most solid platforms for developing volatility breakout systems based off the opening price. Toby is a CTA who now manages over 100 million dollars based on some of these techniques. Another excellent value is Curtis Arnold’s book, PPS Trading System. He discloses a different type of system based on breakouts of traditional chart patterns as identified in Edwards and Magee’s book Technical Analysis of Stock Trends (another classic book which should be in every serious market technician’s library!). Curtis’s original system sold for over $2,000. The book is essentially the same thing and sells for less $50!

My style is based on the “Taylor Trading Technique”, a short-term method for trading daily price movements that relies entirely on odds and percentages . It is a method as opposed to a system. Very few people can blindly follow a system, though many find it easier to be discretionary in a systematic way.

Because this short-term swing technique generates frequent trades, it is important to know the “correct plays,” to lock in profits, and to seek the “true trend.” Taking a loss is merely playing for better position. One trades strictly for probable future results, not for what the market might do.

To know the “correct play” is to know whether to buy or sell first, to exit or hold. Trades are based on “objective points,” which are simply the previous day’s high and low. Movement between these two points determines the “true trend.”

When swing trading, adjust your expectations. The lower your expectations, the happier you will be and, ironically, the more money you will probably make! Entries are a piece of cake, but you must also trust yourself to get out of bad situations and trades. It is important to use tighter stops when trading swings and wider stops when trading trends.

This method teaches you to anticipate! Never react! Know what you are going to do before the market opens. Always have a plan–but be flexible! “See” your stop (support or resistance) before initiating a trade. Know how to trade out of trouble situations and get off the hook with the smallest possible loss.

Finally, never trade in narrow, dead markets. The swings are too small. Never chase a market. Rather than worry that you’ve missed a move, think instead, “Oh, boy! I’ve got oscillations and volatility back…”

Basic Rules for Swing Traders

But first–the rules! Because of the short-term nature of this technique, swing traders must adhere to some very basic rules, including:

But first–the rules! Because of the short-term nature of this technique, swing traders must adhere to some very basic rules, including:

• If the trade moves in your favor, carry it overnight–the odds favor follow-through. Expect to exit the next day around the objective point. An overnight gap presents an excellent opportunity to take profits. Concentrating on only one entry or one exit per day relieves the pressure.
• If your entry is correct, the market should move favorably almost immediately. It may come back to test and/or exceed your entry point a little, but that’s OK.
• Do not carry a losing position overnight. Exit and play for better position the next day.
• A strong close indicates a strong opening the following day.
• If the market doesn’t perform as expected, exit on the first reaction.
• If the market offers you a windfall of big profits, take them to the bank on the close.
• If you are long and the market closes flat, indicating a lower opening the following day, scratch or exit the trade. Play for better position the next day.
• It is always OK to scratch a trade!
• Use tight stops when swing trading (wider stops when trading trend).
• The goal always is to minimize risk and create “Freebies.”
• When in doubt–get out! You have lost your road map and your game plan!
• Place your orders at the market.
• When the trade isn’t working, exit on the first reaction.
• ANTICIPATE!

“Trading the Swing”

How does one anticipate entry? The following may be indicators of a buy day or a sell day:

Classic Trading Cycle

The Count

Start searching for a buying day 2 days after a swing high or, conversely, a shorting day 2 days after a swing low. Ideally, the market will move in complete 5-day cycles. (In a strong trend, the market will move 4 days in the primary direction and only 1 in reaction. Thus, one must seek entry 1 day earlier.)

“Check Mark” on the Test

The potential entry is sought opposite, or contrary to, the previous day’s close. If looking to buy (sell), one first wants the market to “test” the previous day’s low (high), preferably early in the day, and then form a trading pattern that looks like a “check mark” (see examples).

This pattern sets up and establishes a “double stop point” or strong support. If entering a market with only a “single stop point” or support formed by today’s low only, exit on the same day–the trade is clearly against the trend.

Close vs. Open

The close should indicate the following day’s opening. When a market opens opposite what is expected or indicated by the trend, one may first look to “fade” it–but must take profits quickly. Then look to reverse!

Support (Resistance)

Is today’s support (resistance) higher or lower than yesterday’s?

Swing Measurements

Where is the market relative to the last swing high or low? Look for swings (up or down) of equal length, and for retracements of equal percentage.

Additional Considerations!

No matter in what time frame, always look for supply at tops and support at bottoms. Penetrations should be accompanied by volume and activity.

Expect trends, either up or down, to last for either 2 or 4 weeks.

The following conditions are fairly reliable indicators for the start of one of these trends (I personally skip the first buy or sell swing when one occurs because the move ensuing could be quite strong):

• Narrowest range in the last 7 days
• 3 consecutive days with small range
• The point of a wedge
• A breakaway gap
• A rising ADX (14-period) above 32

Practice

Because a certain amount of confidence in any technique is required to trade it consistently, paper trading can cultivate the faith necessary to recognize and trade pattern repetition. Although the temptation to try too many different styles and patterns always exists, one must strive ultimately to trade in just one consistent manner–or at least to integrate techniques into your own unique philosophy.

System Characteristics

Certain points about trading short-term swings deserve note. Understanding the nature of short-term systems can help you recognize the psychological aspect of trading.

When consistently following a short-term system, you should expect a very high win/loss ratio. Though the objectives with this style of swing trading appear conservative, you will almost always incur “positive slippage”.

In all systems, winners are skewed. Even though making steady profits, 3-4 really big trades may actually make the month. It is vitally important to always “lock in” your trades. Don’t give back profits when short-term trading.

You may be astonished at just how big some winners may be from catching the swings “just right!”

Decision-Making

I feel it is important to address this topic. Every time you make a trade, you make a decision. The more decisions you make, the more you increase your self-esteem.

You grow with each decision, yet each decision has a price–you must discard a choice, and you must commit. Conditions are always imperfect! You must allow yourself to fail. Allow for human limitations and incorrect choices. Reserve compassion for yourself and your limitations.

There is so much instantaneous information available to all market players today. It is OK to use intuition and to listen to that little voice inside your head, “Does the trade feel right?” If in doubt, get out…!

Golden Rules

Finally, I want to leave you with what I believe are two Golden Rules, applicable to all traders but, of essential importance to short-term swing traders:

• NEVER, ever, average a loss! Sell out if you think you are wrong. Buy back when you believe you are right.
• NEVER, NEVER, NEVER listen to anyone else’s opinion! Only YOU know when your trade isn’t working.

Sometimes it is nice to reexamine a simple concept when there appears to be overwhelming volatility in the markets. Mechanical systems and patterns are helpful and even necessary for the structure they impose in organizing data, but even Richard Dennis in his original course discussed ways to “anticipate” entry signals, exit trades early, and filter out “bad” trades.

Learn to follow the market’s price action and read the signals it gives. This can become a strict discipline in itself and the result will be greater confidence that a trade is or is not working.

Tape Reading

“Trading technique is simply the ability, through study, observation, and experience, to recognize the signals in each of the several phases of market movement.”
- George Douglas Taylor

Tape reading long ago referred to the practice of studying an old-fashioned ticker tape and monitoring prices, volume, and fluctuations in order to predict the immediate trend. (It does not mean you have to have the ability to read the prices scrolling across the bottom of the screen on CNBC!) Tape reading is nothing more than monitoring the current price action and asking: Is the price going up or down right now? It has nothing to do with technical analysis and everything to do with keeping an open mind.

Even the most novice observer has the ability to see that prices are moving higher or lower at any particular moment or, for that matter, when prices seem to be going nowhere or sideways. (Markets do not always have to be going somewhere!) It is also fairly easy to watch a price go up and then tell when it stops going up – even if it turns out to be only a momentary pause.

I’ve known hundreds of professional traders throughout my career. I don’t want to disappoint you, but I know of only two who were able to make a steady living for themselves with a mechanical system. (I am not counting the well-capitalized CTA’s who are running a money-management program with “OPM” – other people’s money.) All those other traders used some type of discretion that invariably involved watching the price action at some moment – even if just to move a stop up or down.

If you can learn to follow the price action, you will be two steps ahead of the game because price is faster than any derivative. You may have heard the saying, “The only truth is the current PRICE.” Your job as a trader will become ten times easier once you accept this. This means ignoring news, opinions, and personal biases.

Watching price action can actually be very confusing if you go about it like a ship without her sails up in an ocean squall. You will get tossed back and forth with no sense of direction and no sense of purpose. There are two main tricks to monitoring price action. The first is to watch the price relative to another “reference point.” This is why many traders use a “pivot point” – and it works! It is the easiest way to tell if the market is moving closer to or further away from a particular point. This is also why it is often easier to get a “feel” for the market once you put a position on – your “reference” point tends to be your entry price.

Some reference points, such as a swing high or the day’s opening price, will have much more significance than those points involving some type of calculation. (Some numbers might have special meaning for those who calculate them, and who am I to argue if they work.) I like to concentrate on pivot points that the whole market can see. To sum up so far, when watching price, we want to know the following: how fast, how far, and in which direction. It takes two points to measure these things. One will always be the current price, the other a pivot point.

* Do not watch price for the sake of watching price. Watch price with the intent to do something or to anticipate a certain response!

Responses

“The study of responses … is an almost unerring guide to the technical position of the market.”
- Rollo Tape (Richard Wyckoff), 1910

The second main trick to monitoring price action is to watch for the market’s response to a particular condition … in other words, anticipating a particular behavior. For example, if the market has been at a very low volatility point and just begins breaking out of it’s particular trading range, one might anticipate that the price would begin to accelerate in an impulsive manner and not run into immediate resistance. Or, on a directional play, if the price is moving in an impulsive manner in a trending market and then pauses to catch its breath on a mild reaction, one would expect it then to continue on in the direction of the trend. When there is a particular behavior to anticipate, it is easier to watch the price to see if it acts according to one’s expectations.

Is the market failing to break on bad news? Is it finding support after a series of advances? Does it run into an invisible overhead wall and sharply back off, implying strong resistance? These are market responses to certain conditions. Tape reading is like playing a tennis game and watching to see how your opponent hits the ball back.

Part of studying price behavior and gaining experience as a trader is gradually learning what actions to anticipate. Then you must learn what the market’s most probable response or outcome should be. It will always be easier to anticipate an event or response which happens 70% of the time than to be looking for that which happens only 30% of the time.

However, it can also be a profitable strategy to recognize when a given signal or expected response is failing. Sometimes a failed signal can be more profitable than the normal expected response. For example, a classic failed response might be a scenario wherein price was consolidating in a pattern of higher lows and lower highs – a classic triangle pattern. One would expect a breakout from a chart formation to have some follow-through. However, if price only penetrates the lows by a small amount and then turns upward, picking up volume and momentum as it goes, and comes out the upside, a very significant reversal has probably occurred and there may be much more price advance to unfold.

One last trick to watching price action is to learn to think in terms of “handles,” or levels. Think of the S&P’s as reaching for the “1110″ handle, or the “low 1060′s” as a level. Each ten points is a defined level. Use big round numbers as reference points for levels. It doesn’t mean that you are placing orders at those numbers. It is just a simple way of organizing data that professional traders practice subconsciously.

Pivot Points

An astute trader will always have the previous day’s close in his head. He also knows the previous day’s high and low (prices he would have liked to have bought and sold but probably didn’t). He also knows the opening price, for that tells if the buyers or sellers are in control for the day.

The previous day’s high and low and today’s open have very strong psychological implications and are the most important “pivot points” to recognize. By concentrating on price action near these points, we can eliminate much of the hard work in tape reading. Many times the market will let us know right away if this is going to be an area of support or resistance.

The previous day’s high and low tend to overlap in congestion areas. Look to exit profitable trades immediately at these points in sideways markets. In trending markets, the price will run through these points a bit before pausing. When the market is strongly trending, the opening price becomes the most important.

If we are watching a high, low, or opening price as a pivot point, we are watching to see whether there is any impulsive price action as the market approaches the point or moves further away from it. What is “impulsive action?” I like to call it a “whoosh.” The market moves rapidly as if just coming to life for the first time. It is usually a series of ticks in one direction without a tick in the opposite direction. The market is tipping its hand. A sequence like this tends to consolidate or pause a bit before being followed by more impulsive action. This is quite easy to see in a market like the S&P’s if you look on a short-term time frame. If we quantify these “whooshes,” which we can do in several ways, we will see that the market tends to have continuation moves at least 2/3′s of the time. Not bad for arriving at a “positive expectation” simply by following price action.

In conclusion, tape reading is not watching every trade that passes by (a monotonous task) but rather keeping an eye out for unusual impulsive action, unusual volume, or just observing the way the price trades at significant levels. Each price swing has forecasting value as to what the next most immediate move should be. We then follow the price action to see if that move plays out.

Tape reading is at the heart of swing trading. When looking for short-term moves, price-based derivative indicators will be too late to be of value. Ultimately, traders should feel a great sense of freedom when they can rely on simple charts to formulate a game plan or a conceptual roadmap in their heads – and the movement on the tape to tell them their game plan is correct.

“Rather than maniacally trading volatile pairs multiple times in a single day, rule-based discretionary traders are now holding onto open positions longer, relying more on planning and patience rather than fast reflexes.”

Rule-based discretionary traders are among the best traders on this planet. The trading strategy I want to explain here is a rule-based discretionary system. Every trader will face both winning and losing streaks alternatively, so the key to trading successfully is to make more money during a winning streak than you lose during a losing streak.

It’s very disturbing that so many traders find it difficult to survive in the markets. The issue is; even if you’re disciplined, it’ll be difficult for you to survive with a worse expectancy system, i.e. a system whose risk is greater than the reward. Checking complex data ad infinitum isn’t sensible for simple markets either. Before I give the rules of the system, I’d like to make a mention that I’m doing this with the sanction of the head of my forex research group (a mad genius). This system has been with us for a long time and it’s what we use for long-term investments. Tthe probability of winning in the long run is very high and you can benefit from this system too trading along with me as I take buy and sell signals.

Details Of The Trading System

Timeframe: Daily charts

Pairs: EURAUD, EURNZD, EURCAD, AUDUSD &NZDUSD

Indicators: SMA& ADX (customized)

Stop loss: 200 pips from the entry price (optional)

Take profit: A trend is ridden until it changes significantly

Trailing stop: 50-pip trailing stop for every 100 pips gained, applied from 200-pip profit onwards.

Position size: 0.01 lots for each $1000

Risk: 2% per trade (in a case of stop application)

Risk-to-reward: Risk limited, reward unlimited

Trading style: Position trading

Trading Approach

Moving Average: The simplest way to spot a trend is to use the Moving Average. As the name suggests, this is simply the average closing price of a given pair over a specified period of time. Moving Averages are lagging indicators but they’re still extremely useful for emphasizing the direction of the trend. The rule is that when the next price closes above its Moving Average it is in a positive trend and vice versa. A position should be maintained until the price closes back below/above the Moving Average.

Average Directional Movement Index: Moving Averages are good for identifying the trend, but they aren’t so good for timing the entries and exits. One way to improve on the entries and exits is to combine the Moving Average with the Direction Movement Index. The DMI plots a positive DI line (+DI) measuring buying pressure and a negative DI line (-DI) measuring selling pressure. When the positive DI line is above the negative DI line it means the pair is in a positive trend and vice versa, with the crossover indicating a point of change. The simplest way of using this information is to take the cross as the signal to trade, so that when +DI goes above –DI traders should go long and when it drops back below they should switch to a short position. This type of analysis can be extended to include the Average Directional Index. The ADX is an oscillator calculated from two DI lines that show the strength as opposed to the direction of the current trend.

This system is effectively using the Moving Average to determine the direction of the trend and the DMI to get a good entry point by buying at the bottom of the chart or selling near the top. The combination of these 2 indicators helps to filter out some false signals. The 5 pairs we choose are more easily predictable than the major pairs. We don’t need to fall in love with any pairs as our aim is to make profits from trading. The movements on EURAUD and EURCAD in particular are easily predictable with over 70% accuracy. Another advantage is that we have fewer signals and pay much less spreads.

Stop Loss Issue: This strategy doesn’t primarily use stops, which increases the trader’s responsibility and the chosen pairs are also safer if compared to the majors. It even appeared that in the case of stops in the back-tested mode, too many winning trades would be curtailed and closed with a loss. Without stops, the strategy has been used successfully, plus if you stick to the position sizing recommended for this trading technique, you’d be fine. The use of stops is optional, but advisable if you think it’s against your psychology. A disciplined trader should exit a position as soon as it’s clear a trade is no longer going in the forecasted direction, and that’s exactly what’s intended. The ADX shows where a position should be entered or exited. Extreme losses occur mostly when a trader falls in love with the direction of a market, yet many a trader would continue to run a position despite a protracted change in the trend. If you thought the NZDUSD would fall to 0.6535, then at the later price of 0.6868, your assumption was wrong.

Some Recent Performances

Let me show you a few candid past performances of the Trend Setter Strategy.

Pair: EURCAD

Entry date: December 9, 2009

Order: Sell

Entry price: 1.5527

Trailing stop: 1500-pip trailing stop applied

Present date: June 11, 2010

Status: Open

Current price: 1.2513

Profit/Loss: 3004 pips

Pair: EURAUD

Entry date: February 12, 2010

Order: Sell

Entry price: 1.5376

Trailing stop: 600-pip trailing stop applied

Exit date: May 19, 2010

Exit price: 1.4106

Profit/Loss: 1260 pips

Pair: EURNZD

Entry date: March 16, 2010

Order: Sell

Entry price: 1.9299

Trailing stop: 700-pip trailing stop applied

Exit date: May 17, 2010

Exit price: 1.7776

Profit/loss: 1513 pips

In a bid to corroborate the fact that a Holy Grail doesn’t exit (but in position sizing, positive expectancy and discipline), let me show you this losing trade.

Pair: AUDUSD

Entry date: April 23, 2010

Order: Buy

Entry price: 0.7162

Trailing stop: N/A

Exit date: May 6, 2010

Exit price: 1.7106

Profit/loss: -57 pips

Note that with a possible application of a trailing stop; perhaps this loss could’ve been avoided. But I show you this so that you’d reasonably expect that every signal can’t be a winner. I promise I’ll include the results and trading signals of this strategy in my future analyses. If you follow my future articles, you’ll be able to trade along with me.

Despite any experience you might’ve had on the markets you need to be objective when developing a trading system, not subjective. While a recent painful loss may tempt you to change our plans, you’ve to ensure that you make plans based on statistically significant sample of events, and not one painful experience

Welcome to the forex world – a world of financial freedom.

Collection Source: trade2win.com

In the futures market it refers to the total number of contracts long or short in a delivery month or market that has been entered into and not yet liquidated by an offsetting transaction or fulfilled by delivery. Each open transaction has a buyer and a seller, but for calculation of open interest, only one side of the contract is counted.

The open-interest position that is reported each day for a given market shows the increase or decrease in the number of contracts for that day in the form of a positive or negative number.

It is one of the foremost tools for confirming trends and forecasting trend reversals in the futures market.

- Open interest rising along with prices is a bullish indicator that an uptrend is in progress and is likely to be sustained. It shows that new money is entering the market.

- Falling open interest and rising prices is a bearish indicator, suggesting that the rise is being caused by short sellers covering their positions. The upmove is unlikely to be sustained because new buyers are not entering the market.

- Open interest in a sideways market can suggest a breakout in either direction.

- A rise in open interest in a falling market suggests that a downtrend is in place. New money is entering the market through short sellers.

- When both open interest and prices are falling, this suggests that the longs are closing out their positions, indicating a trend reversal and an upward movement in price.

- Static open interest along with rising or falling prices suggests a possible market top or bottom and trend reversal.

Volume is often used along with open interest. Volume refers to the number of contracts that have to have been traded within a given session. Volume precedes price. The higher the volume traded, the more likely a trend will continue. Rising open interest confirms that new money is supporting the prevailing trend.

I want to start out by emphasizing that seasonality or cycles, by themselves, do not make good trading systems. However, they are great “tools” to add to your “Trading Toolbox.”

Seasonality in agricultural markets is a function of supply and demand factors that occur at about the same time every year. For agricultural markets, supply stimuli can be caused by harvest, planting, weather patterns and transportation logistics.
Demand stimuli can result from feed demand, seasonal consumption and export patterns.

Livestock futures, too, have seasonal tendencies. Hog and cattle seasonals tend to be caused by production, marketing, and in the case of hogs, farrowing.

Grains tend to follow the general rule of lower nearby futures prices at harvest more than other agricultural commodities.

Here is a quick summary of seasonals in several markets. (If you are interested in a more complete study of seasonality, there are entire books written on the subject.)

Corn:
This market’s seasonality can be divided into three time periods: late spring to mid-summer; mid-summer to harvest; and post-harvest. The most pronounced seasonal trend in corn is the decline of prices from mid-summer into the harvest period. Prices are often near their highest level in July because of factors associated with the old crop and uncertainty over new crop production. Even in years when a price decline begins before mid-July, it can continue after mid-July if the crop outlook is favorable. Harvest adds large supplies to the marketing system, which normally pressures prices to their lowest levels of the crop year. Prices usually rise following harvest. However, the “February Break” is a well-known phenomenon whereby corn prices usually show some degree of decline during the month of February.

Soybeans:
The July-August period is usually a bearish time for soybeans. Closing prices during the last week in July are usually lower than those of the previous week in July. Closing prices at the end of August are also usually lower than those at the end of July. Also, soybean prices in late January are usually higher than those in late December. Soybeans many times also succumb to the “February Break” seasonality phenomenon. Soybean meal and oil have the same seasonal tendencies as soybeans.

Wheat:
The seasonality of wheat prices works best when a trader is on the long side from the period of harvest lows to OctoberNovember. On the short side, from winterinto summer harvest tends to work well. Wheat has two prominent seasonals: One is a strong tendency to decline during late winter and spring as the harvest approaches. The other is to rise from harvest lows into the fall or early winter. Wheat prices begin a seasonally weak period by January or February, in most
years.

Live Cattle and Feeder Cattle:
Seasonality in feeder cattle prices depends on the seasonality in live cattle prices, along with annual fluctuations in feeder cattle supplies. In general, feeder cattle prices are strong from late winter through spring, drop during the summer, and stabilize at lower levels in the fall, before turning up in December. Live cattle prices normally trend higher from January through May. Prices for live cattle reach their seasonal peak in May and then usually begin a downtrend that extends through the end of the year. Demand for feeder cattle also begins to peak in May, and prices fall into July.

Live Hogs:
Seasonal marketing pressure increases during March and persists at increased levels during all or part of April. The reason for this is that August and September farrowings are usually larger relative to other farrowing months. Slaughter levels decline seasonally from March-April into July or August. Thus, prices could generally be expected to rise from March to May and decline from May into August.

Cocoa:
The yearly seasonal low tends to occur in January with the Bahia (Brazil) main crop, rather than in May or June with the Temporao (Brazil) crop, because of consumer demand. Consumer demand tends to rise into late fall and early winter, which boosts prices during that timeframe. As demand peaks and then begins to decline, cocoa prices fall into January. It’s important to note that seasonal tendencies in cocoa are not very strong.

Coffee:
The frost season in Brazil occurs during the May through early-August period. In anticipation of this frost, prices tend to rise from January into June. This seasonal tendency is not very strong, however, because coffee can come from other producing countries, such as Mexico. Still, the potential for a Brazilian frost should be monitored. The other seasonal influence is during the winter, when U.S. coffee consumption tends to rise.

Cotton:
Cotton is a market where the “trade” has very heavy participation and seasonals tend to be a function of heavy deliveries issued against the expiring futures contracts — December, March, May, July, and to a lesser degree, October. In November, the market tends to recover from harvest lows, and then in January the market tends to back off to lower levels.

Orange Juice:
Seasonal price movement of FCOJ (Frozen Concentrated Orange Juice) does not usually reflect the December-February freeze period in the southern U.S. Seasonal tendencies are caused by harvest, production (also called “pack”) and demand (“movement”). The most significant seasonal move in O.J. is that prices generally fall from November to January. Freezes cannot be completely ignored, however.

Sugar:
Prices tend to peak in November because of a combination of supply and demand. Production at this time is not complete, as the European crop is not yet on the market. Demand in the Northern Hemisphere, however, is usually at its peak in the fall.

In conclusion: I would classify seasonal tendencies as “secondary” technical indicators in my “Trading Toolbox.” I do follow seasonals, but they are not my “primary” trading tools. I have seen much hype in the marketplace regarding seasonals. I remember one summer hearing a radio advertisement from a futures brokerage that went something like this: “Colder weather is just around the corner and heating oil demand will increase. Thus, you should buy heating oil futures now, and profit from the increase in demand.” If only futures trading were that easy! Every professional trader and commercial firm knows that heating oil demand rises in the winter — and even in the summer months they have already factored that rise in demand into the prices of the farther-out (deferred) futures contracts. The same is true for other markets’ seasonal price patterns. The professional traders and commercials all know about seasonals in the markets, and position themselves accordingly. It is always good that we speculators have as much information on markets as possible. Seasonal price patterns are just one more bit of information to factor into our trading decisions.

The basic principle for swing trading is finding a market that is trapped in a sideways trading range (also called a congestion area), or in an up-trending or down-trending channel on the chart. On the chart, the trader must be able to distinguish some clear support and resistance levels that are boundaries of the congestion area or channel. When a market price approaches the support or resistance area boundary, the trader will establish a position: long if prices are moving lower and close to the support boundary, and short if prices are moving higher and toward the resistance boundary.

Swing trading techniques can be used in any chart time frame — daily, weekly, monthly and intra-day charts. However, the most popular timeframe for swing trading is the daily bar chart.

It’s important to note that the strength of the support and resistance at the boundaries is usually determined by the number of times the market has pivoted at the boundaries. The more times a market has reached a support or resistance boundary, and then reversed course, the more powerful is that boundary. Thus, a trader wants to find a well-established channel or trading range for which to attempt to swing trade.

An exception to this is a market that has been in a trading range, but is bound by one or two powerful spike moves, which also indicate a strong support or resistance boundary. In other words, some congestion areas that may offer a good swing-trade opportunity do not require several pivot points. Instead, those one or two spike levels would be determined to be a potentially good pivot area for a market.

The swing trader should still use tight protective stops. A good area to place a protective stop is just outside of a support or resistance boundary that makes up the trading channel or congestion area. For example, if a market in a trading channel is nearing the upper boundary of that channel, the swing trader would establish a short position and would want to place his protective buy stop just above the resistance level that serves as the upper boundary of the trading channel.

Interestingly, if the market keeps moving higher and breaks out above the channel, or congestion area, (stopping the swing trader out of the market) then that would likely be considered an upside “breakout,” which is a favorite trading set-up among many veteran position traders. This set-up would suggest establishing a long position if there was good follow-through buying strength the following session after the upside breakout from the congestion area or channel. The trader establishing the long position would place his protective sell stop just below the former upper boundary of the trading channel or congestion area that was just penetrated on the upside.

Fibonacci jumped into the technical mainstream late in the bull market. Futures traders had it all to themselves until real-time software ported it over to the equity markets. Its popularity exploded as retail traders experimented with its arcane math and discovered its many virtues.

Fibonacci ratios describe the interaction between trend and countertrend markets — 38%, 50% and 62% retracements form the primary pullback levels. Apply these percentages after a trend in either direction to predict the extent of the countertrend swing. Stretch a grid over the most obvious up or down wave, and see how percentages cross key price levels.

Convergence between pattern and retracement can point to excellent trading opportunities. Keep in mind that retracements work poorly in a vacuum. Always examine highs, lows and moving averages to confirm the importance of a specific level.

Discord between retracement and the underlying pattern generates noise instead of profit. Move on to a new chart when nothing lines up correctly. This divergence generates most of the whipsaw in a price chart. Alternatively, strong phasing between Fibonacci and pattern exposes highly predictive reversals at narrow price levels.

Let’s look at five tricks to improve your Fibonacci skills. Add these twists and turns to your toolbox and apply them to your next trade. I promise they’ll serve you very well in the years ahead.

First Rise/First Failure

First Rise/First Failure marks the first 100% retracement of a trend within your time frame of interest. It provides an early reversal warning after a new high or low. The 100% retracement violates the major price direction and terminates the trend it corrects. From this level, the old trend can reestablish itself if it breaks through the old 38% level. More often, traders will use that level to enter low-risk positions against the old trend.

Parabola Hunt

Parabolic movement tends to occur between the 0%-to-38% and 62%-to-100% Fibonacci levels in all trends. This tendency offers a great tool for finding the big moves when looking for trades. Watch for congestion to form at the 38% or 62% level. Then use a simple breakout or breakdown strategy when price moves past it. The next thrust can be dramatic, with price moving like a magnet back to an old high or low. Of course, the strategy only works when you can find these levels in advance.

Continuation Gap Extensions

You can often target the exact price a rally or selloff will end at by using the continuation gap as a Fibonacci extension tool. Identify the gap by its location at the dead center of a vertical price wave. Then start a Fib grid at the beginning of the trend and extend it so the gap sits under the 50% retracement level. The grid extension points to the terminating price for the rally or selloff.

Overnight Grids

Find an active stock and start a grid from the high (or low) of a session’s last hour. Stretch the grid to the opposite end of the next morning’s first hour low (or high). This defines a specific price wave traders can use to uncover intraday reversals, breakouts and breakdowns. The overnight grid also offers a way to trade morning gaps. The gap will often stretch across a key retracement level and target low-risk entry on a pullback.

Second High/Low

Many traders can’t figure out where to start a Fib grid. Here’s a trick to help you place it where it’ll do the most good. The absolute high or low in a price wave isn’t the best starting point for a grid most of the time. Instead, look for a small double bottom or double top within the congestion where the trend began. Swing one end of the grid over this second high (or low), instead of the first. This will capture a specific Elliott Wave that conforms to the trend you’re trying to trade.

BBs bend and twist in response to price movement. These undulations predict how far trends should stretch before central tendency forces them back toward a central axis. Complex relationships develop between price-band direction and price-band constriction. For example, a trend tends to pause when constricting bands oppose it. It takes great skill to predict the bands’ ultimate impact on price but is well worth the effort. More than any other tool, BBs pinpoint hidden swings and telegraph whether the profit door lies open or closed.

Bands may swing through relative highs or lows and then pull back into proportional retracement to start another trend thrust. Or they can enter extended ranges that meander back and forth without direction. Movement frequently stops dead in its tracks when price rises into a falling band or drops into a rising one. Sideways bands can appear in both rangebound and trending markets. Price often fails to reach new high or low territory until bands expand to clear the path. In many ways, Bollinger Bands predict time better than they predict price.

Buy Signal

The top Bollinger Band rises toward a test of the intraday high as Worldcom drops. This sharp divergence signals the eventual breakout after price finally reverses off of the bottom band. Watch band slope closely when bars return to test important highs or lows. It often reveals the time and force needed to push price through a S/R barrier.

The skilled eye watches constricted bands in real-time to estimate the buying or selling force required to push them out of the way. They work extremely well during the second test of an important high or low. When markets finally break out, expanding bars often shoot into the band’s edge where congestion forms a flag until the BB allows further movement. Bands constrict tightly around narrowing price in sideways markets. Apply NR7 methodology here to anticipate an impending positive feedback event.

Bollinger Bands signal early warning of trend change. Sharp price movement forces bands to expand outward. When these active markets finally turn sideways, the bands slowly tighten and roll toward price. Time passes and the BB door closes on rapid vertical movement. Experience enables the swing trader to quickly estimate the time required before bands will tighten and plan accordingly.

Strong buying or selling may push price well outside a band. A tall bar can even print completely through the barrier in extreme conditions. General tactics suggest that violent reversals often follow these major band violations. But trading against these events carries risk since markets can print a short series of these volatile bars before the reversal takes place. Also note that this price action rarely occurs during intraday markets, except at the open.

Reduce risk by dropping down to the next lower time frame and waiting for a reversal there before executing a countertrend position. Odds also improve if the thrusting bars run into other forms of S/R that allow cross-verification for the entry level. Stay defensive during the trade. Once price returns within the band’s limits, the underlying trend can reappear quickly unless the pullback generates other reversal signals. Look for Dark Cloud Cover or a similar candle pattern that fills any gap created by the bar outside the band. This complex setup can produce windfall profits if managed properly.

Swing traders work the quiet middle ground of Bollinger Bands for consistent profits. Build strategies that enter countertrend positions at one band and exit at the other. These swing setups face far less whipsaws than breakout entries at band extremes. Keep in mind that the center band presents a natural profit obstacle that needs special consideration when calculating reward: risk. Make sure a safe exit near this center point still produces a decent profit for the trade.

Multiple Support-Resistance

A broad range sets up profitable swing conditions for KLA-Tencor. This 13-bar Bollinger Band combines with simple horizontal S/R to uncover natural reversal zones at band extremes. Enter a countertrend position when the prior bar prints a candlestick reversal outside the band line. Wait for a break of the center band if no clear signal arises. Exit if price does not expand quickly in the other direction or if the signal fails and the candle shadow gets taken out. Watch S/R closely for positive feedback that will eventually carry price out of the sideways market.

Use multi time frame Bollinger Bands to avoid expensive trend relativity errors. Look at the same market through 3 different time frames. This corresponds to one above and one below the chart that aligns with the holding period. Each setting produces a different range of band extremes and relative price location within the indicators. Match reward: risk to the central time frame but observe all intervening S/R on the other charts. Consider whether the holding period allows enough time to mount barriers and reach targets at other band levels.

Keep in mind that all bands change dynamically in response to price. This allows continuous feedback that shifts target values with each bar. Experience with this powerful indicator helps swing traders anticipate how it will move. The longer that price travels sideways, the tighter the bands become. Trend change for the bands themselves first begins with a turn by the band closest to the prior price trend. For example, when an uptrend prints along a top band, expect this side of the indicator to turn down before its twin when price moves into a range or downtrend.

Combine Bollinger Band study with momentum-based indicators. This helps filter directional movement from rangebound markets and improves trade timing. Add MA Ribbons to price and display the MACD Histogram across the lower pane. Price often remains well within band constriction during the early phases of new positive feedback events. As these indicators show rising momentum, shift attention to natural pattern/band breakout levels and look for entry within narrowing bars.

It’s my opinion that successful trading for the long term is not possible without a sound understanding of both trader psychology and market psychology. Often individual traders focus so heavily on the results they are seeking that they forget that every other trader out there is doing the same thing: attempting to profit from price action. But it is the very nature of this conflict that creates price action because it is physically impossible for every executed trade to show a profit once each contract executed is liquidated. Futures trading is structured as a zero-sum environment.

This means that in order for a price to print, BOTH a buying order and a selling order must be matched at the current traded price; otherwise no trade happens and no new price will print. Therefore, the issue of potential price change from orders being placed and filled is what ultimately creates the price action traders are attempting to capture as a profit to their individual accounts. As competing orders are matched, resulting in EITHER more futures contracts initiating a new position or closing an old open position (regardless of profit or loss to an individual account) is the issue of VOLUME and OPEN INTEREST.

One of basics to better understanding VOLUME and OPEN INTEREST is to understand it from the point of view that it represents individual traders who all can’t be right as far a profit is concerned. Someone must liquidate to take a loss. Since most traders have a large portion of losing trades as their results over time; it follows that a lot of what is causing a price change MUST be losing trades being liquidated. By understanding that a large portion of VOLUME and OPEN INTEREST (when it changes) must mean a CHANGE in the value of someone’s account balance; it becomes a bit better to understand where and when a turn in the market might be coming. Why? Because the people who helped put prices where they are now may have left the market completely; someone else has taken their place or not—that person has a completely different point of view on the market price and he might be in the wrong place too. He will liquidate sooner or later as well. With that in mind, let’s discuss someone the basics of VOLUME and OPEN INTEREST.

VOLUME is the total number of contracts being trading for a period of time. You can think of VOLUME as the AMOUNT of orders passing through the market place as a total; most commonly calculated on a per day basis (daily VOLUME)

OPEN INTEREST is the total number of contracts that remain open and held through at least one trading day (Overnight at least) You can think of OPEN INTEREST as the number of contracts someone is willing to hold at least for a period of time needed to realize a profit or loss.

Prices do not have to move in order for EITHER VOLUME or OPEN INTEREST to change; but usually a change in EITHER VOLUME or OPEN INTEREST will create a price change or signal that a change in price is coming. The reason a change in VOLUME or OPEN INTEREST can signal a change in price or create a change in price is because as the price moves—that movement is creating an open-trade gain or loss to someone and sooner or later that someone will need to liquidate his position and leave the market. It doesn’t really matter what the individual result to any one account might be; the fact is—you can’t “win” forever or “lose” forever. Sooner or later everyone must liquidate. This is why VOLUME and OPEN INTEREST will change. Traders are initiating and then liquidating their positions. It is the CHANGE that signals where a potential price reversal might be developing.

When VOLUME is HIGH; individual traders in large numbers are participating.

When VOLUME is LOW; traders are not participating to a large degree.

When OPEN INTEREST is RISING; traders are opening positions and assuming the risk that price will create a gain for them over at least one day.

When OPEN INTEREST is FALLING; traders are closing positions (liquidating) and they are EITHER accepting their loss or taking their profit.

The study of VOLUME and OPEN INTEREST is the study of “Who is participating and are they getting in or out with a gain or loss?” Discerning what this means to potential price movement coming over the next period of time forward is where VOLUME and OPEN INTEREST can be a good clue as to whether a market is ready to fall in price or rise in price.

Common Potential Meanings from Volume and Open Interest Changes

Price Rising, VOLUME dropping and OPEN INTEREST dropping:

Market is running out of traders willing to open or hold an OPEN LONG. Traders are liquidating both loosing short positions and closing winning long positions. A higher probability the market is set to retrace in price lower at some point forward.

Should prices be falling when this scenario develops, the market has a higher probability of a price rise at some point forward.

Price Rising, VOLUME rising and OPEN INTEREST rising:

Market is attracting larger numbers of traders willing to open positions from the long side and hold them. Traders are more confident that prices will continue to climb in favor of a working long. This scenario is a good clue that UPTREND is secure and that the trend may continue further for a period of time.

Should this scenario develop while prices are falling, it is a good indication that DOWNTREND is secure and that the trend may continue for a period of time.

Price Rising, VOLUME dropping and OPEN INTEREST rising:

Market is attracting LATE buyers and EARLY shorts; market is vulnerable to a sharp correction but likely that that correction will be bought creating a buy point for UPTREND.

If this scenario should develop while prices are dropping, it is a good indication that a sharp rally against DOWNTREND will develop creating a sell point for DOWNTREND.

Price Rising, VOLUME rising and OPEN INTEREST falling:

Market has a lot of traders initiating from both sides but larger traders may be liquidating into the higher prices. The market may be vulnerable to large price swings as shorter-timeframe traders attempt to trade from both sides of the market but liquidating before end-of-day. Often a signal of a market turn near-term or continued volatility. More common at significant tops (or bottoms).

Should this scenario develop as prices are dropping, it is still the same quality of market action. Often this is a sign of a significant bottom.

It should be noted that a brief discussion of the basics of VOLUME and OPEN INTEREST cannot take the place of deeper study into market structure. V/OI is only one clue to potential market price action and no market condition is 100% definable from simply a brief understanding of the V/OI picture at any one point in time. V/OI is best used as confirmation tool when selecting price points that you personally expect the market to move away from creating a potential opportunity.

In closing, V/OI can be a powerful tool to help uncover good directional potential in any market you are trading. As someone serious about building a strong market presence you would be served best if you made a commitment to learning how this critical series of indicators can work. Next month, we will discuss the Commitments of Traders reports produced by the CFTC. Often misunderstood, when combined with a solid understanding of V/OI you have a good confirmation clue that something is changing across a broad range of market participants. Good Luck and Good Trading.

Percentage Range sell signals work poorly in a bull market. Of course, the tendency of %R will be toward the high side, touching 0% (overbought) during a bull market, as price exerts pressure in relation to preceding days and therefore stays towards the high end of the price range. A fall below 95% should be considered a buy signal in these circumstances.

In order to improve their track record with this indicator traders could refine buy signal by requiring that the indicator touch 100% (tremendously oversold) and stay below the 95% limit for at least half the length of their %R period. Then, when the indicator does move above 95% again, they know that this is indeed a believable signal rather than a flash in the pan. This additional filtering of the signal should help them in picking more profitable trades.

The inverse use for %R indicators is selling in a bear market. Traders can pretty much invert what has been said about buying in a bull market to see how much they would use it, substituting 0% on the overbought scale for 100% on the oversold side.

When to apply percentage range

Traders who are fairly familiar with and confident of the market’s general patterns and directions use %R carefully. As mentioned above, %R serves primarily to give overbought and oversold signals from a center of gravity point, depending on the market trend traders are currently in. The validity of these signals, of course, depends on traders being sure about whether they are in a trending markets, bull or bear, or a trading market.

In grossly bullish markets, traders must skew their indicators to ignore the overbought indicators and act on the oversold indicators

In bearish markets, they skew their indicators to ignore the oversold indicators and act on the overbought indicators.

Since correct application of the technique prescribe one action if there is a bull market and another if a bear market, traders must know whether they are in a bull or bear market in order to use it.

In trading markets with very tight ranges or during long periods of accumulation traders can use the indicator with a high degree of accuracy. However, potential profits are limited because of the shortness of the counter moves. Trading markets just do not generate enough one directional movement to offset costs of trading.

Since the method assumes signal points at the 95 and 10 %R levels, markets whose price pattern is relatively level can trigger this indicator. The range will be narrow over any given period because the market is in a trading mode, and the 95 and 10 %R areas may only be a short period of time apart, that is, nothing significant, and therefore the signals they give probably won’t have much meaning.

If the market changes so rapidly that traders don’t realise there has been a change in tendency they will of course be reading the wrong signals for %R indicators. They will be oversold in limit up situations and overbought in limit down situations. Using a little common sense here would allow their trading capital to last longer.

As mentioned before, %R was not really designed to stand on its own and therefore it is necessary to use other techniques in conjunction with it to do serious trading.

The main way to combine %R is with a trend following method, such as Moving Averages and Elliott Wave cycle analysis for determination of what wave the market might be in.

The carry trade, a strategy favored among hedge funds and investment banks, is now growing in popularity among retail forex traders. A number of forex brokers are currently offer trading in exotic currencies such as the Turkish Lira (TRY) and South African Rand (ZAR) yielding strikingly high interest rates. These exotic currencies present a high risk/high reward vehicle for use in a carry trade strategy.

The carry trade is an investment strategy that involves a basic arbitrage between interest rates. In any forex transaction you are simultaneously selling one currency and buying another. In doing so, you are borrowing at one interest rate and investing at another rate. The carry trade involves selling a currency with a low interest rate, then using the proceeds to purchase a currency with a higher interest rate. If you buy the GBP/JPY pair, you are buying the British Pound and selling the Japanese Yen. You collect interest on the currency you buy and pay interest on the currency you sell.

In buying a high interest yielding currency and selling a low yielding currency you capture the interest rate differential.  For example if the New Zealand Dollar has an interest rate of 8.25% and the Japanese Yen has an interest rate of 0.5%, an investor buying the NZD and selling the JPY will earn the interest rate differential of 7.75%. This return does not assume any leverage is used. At 5 times leverage the interest would yield 38.75% annually.

Between 2000 and 2007, one of the best carry trade pairs was the NZD/JPY. NZD interest rates have risen dramatically while JPY rates have remained very low. Japan’s lending rate of 0.5% is the lowest among industrialized economies. The global commodities bull market and anti-inflation policies of the Reserve Bank of New Zealand have contributed the NZD’s recent historic highs.

Figure 1: NZD/JPY Carry Trade (DealBook® 360 screen capture used by permission. © 2008 by Global Forex Trading, Ada MI USA)

The carry trade is normally used as a long term strategy, from 6 months to years, allowing the investor to weather short term market volatility.

The carry trade involves funds flowing from countries with currencies paying low interest rates to countries with high interest  yielding currencies. Typically the higher yielding currencies are higher risk investments and are associated with rapidly growing economies. The ideal time to position yourself in a carry trade is at the beginning of a rate-tightening cycle in the currency you are buying.

In a time of crisis such as the terrorist attacks of 9/11/2001, investors seek safe haven currencies such as the Swiss Franc. Times of uncertainty can create an ‘anti-carry’ climate with funds moving away from higher risk currencies.

The three main funding currencies for the carry trade are the US Dollar, the Japanese Yen and the Swiss Franc. The New Zealand Dollar (NZD), Australian Dollar (AUD) and the British Pound (GBP) have been the main recipient currencies of the borrowed funds in recent years.

In the forex market interest payments are made daily based on your position. Your positions are closed out and reopened by your broker daily, a process known as ‘rolling over’. Your account is then debited or credited based on the overnight interest rate differential.

The ability to leverage your position is a key element of the carry trade. The leverage available in the forex market allows you to multiply by many times the interest rate of return. In using leverage the level of risk is also increased exponentially. There of course remains the large risk that currency market moves will erase the profits generated through the interest rate differential.

If for example a terrorist attack took place in London the GBP/JPY could easily fall by 1000 pips.  The carry trade has the potential of generating a very high rate of return annually, but that gain (and possibly more) can be wiped out in a day. In order to offset risk in any one pair you can diversify carry trades among many different pairs, creating a carry trade basket.

Yen Carry Trade

The USD/JPY carry trade entered the spotlight when the Yen started trending downwards in 1995. From 1990 to 1995 the Bank of Japan had lowered the official discount rate from 6% to 0.5%., enabling low cost borrowing in the Yen.  From 1995 to 1998 the USD/JPY market soared from 80 to 147 Yen per dollar.

An increase in currency volatility was an important element in the unwinding of the USD/JPY carry trade. In 1998 when massive Yen carry trades had built up, the Russian Financial Crisis and the collapse of Long Term Capital Management triggered uncertainty and volatility in the market. Hedge funds scaled back their leveraged positions and the Yen began to appreciate in value.

Figure 2: Yen Carry Trade (DealBook® 360 screen capture used by permission. © 2008 by Global Forex Trading, Ada MI USA)

US Dollar as a Carry Trade Funding Currency

Falling US interest rates and increasing volatility in the Yen and the Swiss Franc are making the US dollar a more appealing funding currency. We may begin to see a major movement in borrowing from Yen and Swiss Francs into US dollars, adding further downward pressure to the already beleaguered US currency.

Exotic Carry Trade Currencies

Exotic carry trade currencies yielding enticingly high rates of interest include the Icelandic Krona, Brazilian Real, Turkish Lira, South African Rand, Mexican Peso and the Hungarian Forint.

The most commonly offered of these exotic currencies among retail forex brokers are the Turkish Lira, South African Rand and Mexican Peso. Below we’ll take a look at some of the fundamentals behind these high yielding emerging market currencies.

Turkish Lira (TRY)

The Turkish Lira currently offers the highest interest rate in the industrial world, with the Turkish Central Bank’s benchmark overnight rate standing at 15.25% as of this writing. One of the most popular carry trade strategies of 2007 was to go long TRY/JPY (borrowing Japanese Yen to buy Turkish Lira).

Turkey experienced significant economic gains between 2002 and 2007 in part due to increased foreign investor interest in emerging markets. The robust GDP growth rate during this period placed Turkey among the fastest growing economies in the world. International Monetary Fund (IMF) backed reforms starting in 2001 helped to improve economic stability. In January 2005, with the high inflation rates contained, the old Turkish Lira was replaced by the New Turkish Lira (dropping off six zeros). Prospective EU membership and economic reforms contributed to the rise in foreign investment. However, the Turkish economy is still has to overcome the challenges of a high current account deficit and high level of external debt. The Lira is also threatened by the possibility of political instability and the global credit crisis deterring foreign investment.

Turkey is a founding member of the OECD (Organisation for Economic Co-operation and Development) – an international organisation of thirty countries, that accept the principles of representative democracy and a free market economy. Turkey is also a member of the G20 industrial nations. The G-20 (Group of 20) is a group composed of 19 of the world’s largest economies, along with the European Union.

South African Rand (ZAR)

The South African rand (ZAR), is among the world’s most actively traded emerging market currencies. The Central Bank of South Africa’s overnight rate stands at 11% as of this writing.  The central bank of South Africa, raised interest rates four times last year to to contain inflation and contain consumer spending. South Africa has an abundant supply of natural resources and is another economy to have benefited from the global commodities boom. However, high unemployment, inadequate infrastructure and HIV/AIDS remain challenges yet to be overcome. While economic growth has been strong in recent years, power shortages from state-owned electricity supplier (Eskom) and global economic volatility suggest that real GDP may slow in 2008. The eyes of the world will soon be on South Africa as it hosts the 2010 FIFA World Cup.

Mexican Peso (MXN)

Banco de México’s overnight rate stands at 7.5% for the Peso. Mexico has a free market economy with a Gross Domestic Product surpassing a trillion dollars measured in purchasing power parity. The world’s 13th largest economy, Mexico is an export oriented, and the biggest exporter and importer in Latin America. Oil is the largest source of foreign income. As a result of  economic stability and the growth in foreign investment, the Mexican peso is now among the 15 most traded currencies in the world, and is the most traded currency in Latin America. Since the late 1990s the peso has remained stable trading at about $9 to $10 to the U.S. dollar.

While the Federal Reserve is expected to continue lowering interest rates to stimulate the U.S. economy, Mexico’s central bank is expected to keeping rates unchanged creating a widening spread between the interest rates (as of this writing).

Conclusion

The daily interest payouts and massive leverage available make the carry trade a fascinating, if high risk opportunity for investors, and a compliment to purely directional trading strategies. Exotic currencies offer further diversification to a traditional basket of carry trade currencies. However, rising inflation, volatile currency markets and uncertainty resulting from the sub prime credit crisis has let to a dangerous level of instability in the markets. The international credit crisis has dampened investors’ enthusiasm for riskier emerging markets. The return of an increased risk appetite among investors and diminished market volatility will set the stage for a steadier carry trade environment.

For example if the New Zealand Dollar has an interest rate of xx and the Japanese Yen has an interest rate of xx. If an investor buys the NZD and sells the JPY they will earn the interest rate differential of xx.
This return does not assume any leverage is used. At 10 times leverage the return on investment would be 10xx.

Yen Carry Trade has been a widespread strategy since the Yen started to trend downwards in 1995. In a carry trade, an investor borrows in a low interest rate currency such as the USD and takes a long position in a higher interest rate currency such as the Australian Dollar. While the dollar depreciated and the interest rate differential remained such as strategy is profitable.

The three main funding currencies for the carry trade are the US Dollar, the Japanese Yen and the Swiss Franc.

The main recipients of the borrowed funds included the Australian and New Zealand Dollars as well as a number of emerging market currencies.

US Dollar Index went from 120 to 80 in the period from July 2001 to Dec 2004-3.5 years and a loss of 33% – defines the period of the USD carry trade.

In any forex transaction you are simultaneously selling one currency and buying another – you are borrowing at one interest rate and investing at another rate.

A carry trade involving an exotic currency such as the TRY can produce large returns with little or no leverage used. The Turkish Lira has an interest rate of 17%. Investing in exotic currencies is much higher risk but gives you a 17% cushion (minus the interest rate you borrowed at)

First, let’s define spread trading: It is the simultaneous purchase of one futures contract and the sale of a different contract. The futures contracts can be different delivery months in the same commodity; or they can be two different commodities spread against each other. Or, they can be the same commodity traded on two different futures exchanges. The spread trader becomes simultaneously long one futures contract and short one futures contract. A spread is composed of two “legs.” One leg is the long contract position and the other leg is the short contract position.

A spread that is between different contract months in the same commodity is called an interdelivery spread. A spread between two different commodities is called an inter-commodity spread. Traders try to profit from spreads by the price difference between the two contracts. The spread trader is more concerned with the relative price between the two contracts, as opposed to the absolute price of the commodity.

Large commercial firms are often large spreaders and analyze and utilize commodity spreads in many different ways. Large speculative firms (the funds) also employ spread trading. The smaller speculators—the individual traders—are the least frequent users of spread trading. This is because of the complexity that tracking and analyzing some spreads can entail. However, there are simpler spread-trading techniques that individual traders can employ. It has been said that most spread traders rely heavily on fundamental analysis when employing their spread trades, while most speculative traders of straight futures rely more heavily on technical analysis.

As I said in the first paragraph, spread trading usually involves less risk than trading straight futures. Because storable commodities have “carrying charges,” spreads rarely go beyond a certain level that is known to veteran spread traders. This means a trader can initiate a spread and know to a fairly certain degree how mush risk is involved. There are some spreads that do involve higher volatility, such as inter-commodity spreads. Also, due to lower risk involved, margins required by brokers are less than margins required when trading straight futures.

Inter-delivery spreads are categorized as a “bull spread” or a “bear spread.” A bull spread is when a trader is long the nearby contract and short the deferred contract within the same commodity. The trader who puts on a bull spread is looking for the nearby contract to be stronger (price will rise faster) than the deferred contract. Conversely, if the price is falling, the bull
spreader is looking for the price of the nearby contract to decline to a lesser degree than the deferred contract. And, there is always the possibility that the nearby futures price will rise and the deferred contract price will fall. The bear spread is the reverse of the bull spread. The trader is short the nearby futures contract and long the deferred contract in the same commodity. The bear spreader is looking for the deferred contract to be the stronger mover up in price than the nearby, or the nearby contract to decline in price faster than the deferred. Bull and bear spreads can be used as a substitute for outright positions in a market. The advantage is less volatility and lower margin costs. The disadvantage is that spread trading does not usually accrue the amount of profit that is possible on a per-contract basis as does straight futures trading, when the market does move in your favor.

A special type of inter-commodity spread is the spread between a commodity and its products. A very common spread is the “crush spread” between soybeans and its products, soybean meal and soybean oil. This spread is considered to be a complex spread. Very few soybeans are used just as soybeans. Nearly all soybeans are crushed into two products, meal and oil. A soybean crusher makes his profit from the difference between the cost of buying the beans and the price of selling the products. This is called the “crush margin.”

Commodity spreads can be a valuable tool to the trader of outright futures who does not spread trade. For example, if the nearby futures contracts for corn are gaining in price relative to the deferred contracts, this generally indicates more demand or less supply, or both. It’s a strong signal that fundamentals are bullish and prices may well move still higher. However, if the nearby corn futures do not gain on the deferreds during an upmove, then the trader may surmise that the recent price advance has been technical in nature and not backed by bullish fundamentals, and that a sell off may be close at hand.

By looking at the spreads, a trader can also see which contract is trending the strongest, and decide to trade that contract as opposed to others that may not be trending as strongly.

Again, this feature just scratches the surface of spread trading in the futures markets. If you are interested in trading spreads, then I suggest reading a book or two on the subject.

The two basic points which the trader should look for in stochastic indicators are the aspects taken from the two elements contributing to stochastics: relative strength and moving averages. These major aspects are overbought/oversold indicators, which come from the relative strength side of the board, and crossover signals, which come from moving averages. Traders should first look for crossovers by the slower indicator of the faster one in these areas. These crossovers will give possible buy and sell signals.

Percentage D above 80% or below 20%, with crossovers of %K

Generally, a %D above 80% shows an overbought condition in the market, and a %D below 20% shows an oversold condition. When the %D indicator is between these two benchmarks, it does not have that much to say.

Above 80%, watch for %D crossing over the %K indicator from below/behind. This means that the average has caught up with the daily indicator, which shows that the latest prices are outpacing earlier ones. In combination with the overbought indication, this makes it a very wise time to sell.

When %D dips below 20%, watch for %D crossing over %K from above/behind. The converse of what to expect from crossovers above 80% holds for crossovers below 20%. They show that the average has dipped down to the level of the daily indicator, indicating that rcent prices are falling faster than earlier prices, which is a rate which would be hard to sustain for any long period of time, and so provides an unmistakable buy indicator upon the crossover to the upside when accompanied by a strong oversold signal.

Percentage D Slow Above 80% and Below 20% with crossovers of its moving average

Percentage D Slow and its moving average can be treated in much the same manner as %K and %D: Watch for %D slow to top 80 or undercut 20 for overbought/oversold indications, respectively, and watch for crossovers by the moving average to get specific buy and sell indications.

Crossovers in the Middle Range

The one difference between these last two indicators and the first two would be that since they are more smoothed out, taking more effort to show bought and sold conditions, the trader might also pay attention to crossovers within the 20% to 80% range.

A %D Slow indicator and its moving average tend to give legitimate buy sell signals with almost every crossover, and not just those above 80 or below 20. If this untidiness bothers some traders, they might want to shorten n, the period for the %K range and for the moving average represented by %D Slow. This should make %D Slow a little more jumpy and bring it into the overbought/oversold regions more often.

But Not Necessarily in a Trading Market

In a trading market, that is one in which there is neither a strong bull or bear trend, weak buy and sell signals do not work out so well, if and when they appear. (More often than not there are valid overbought and oversold signals, demarcated by crossover above 80% and below 20% boundaries) This is due to simple market logic: since a bull market is dominated by upward price movement, even a weak oversold (ie one not in the 80% oversold area) will give legitimate countertrend direction. Conversely, since a bear market is domonated by the downtrend, even weak overbought signals should be heeded (that is, signals which are not neccessarily below 20% oversold area) It follows from this that, in a market dominated by neither strong uptrend nor strong downtrend, weaker signals will have little meaning. Traders should therefore ignore them and concentrate just on crossovers above 80% for sell signals and crossovers below 20% for buy signals.

How to discern a trading market

On balance volume, Elliott Wave, and Gann Trading systems all give the trader indications of what kind of mode the market is in at the moment. Either trading or trending. Using these methods together with stochastics will then allow traders to know whether or not to pay attention to the weak crossover signals (those between the 20% and 80% levels)

• If the index rises above 70, an intermediate top is usually imminent, according to the concept behind the RSI
• If it dips below 30, they may expect an intermediate bottom
• Reversal of a rally is very profitable when the index peaks above 70, falls, recovers, and then fails to rise to its former level before heading downwards
• Reversal of a selloff is signalled by the inverse pattern taking place around the 30% level. The index bottoms below this point, rises, and the returns down again, but not as far as before

Critical buy and sell points can be determined during one of the RSI reversal patterns just mentioned:

In this article we explore some ways to make the rules less sensitive in an attempt to reduce whipsaws.

1) Traders can wait for the breaking of moving average lines by several closes for confirmation. This would make momentary crossings a little less likely to register.

2) Traders can delay taking action on a signal for a number of periods and wait to see if the price re cross the moving average line. If that happens, a false breakout just occured.

3) Traders can widen the moving average line by imposing a upper and lower band around the moving average line. Only when the band is crossed do traders enter a buy or sell signal. This allows for minor fluctuations within the band and possible several crossovers of the moving averages of closes without traders having to spring into action everytime.

4) Traders can determine a band by using averages of the period highs and lows.

5) With wide bands, there is potential to use the upper and lower bands as counter trend points and not momentum signals.

Good trends like this develop by taking a run forward followed by a few paces back (retracement) followed by another run forward and a few paces back and so on. Simple swing trading seeks to take advantage of trend continuations by identifying those significant retracements in order to provide points of entry and a level of exit for ongoing trades. The low point of each retracement constitutes a swing low – the blue horizontal lines – and you can see that entry after each of these (except the last, maybe) would have brought good rewards.

So, is it as simple as it looks? Of course not.  For a start, there are important questions of definition in relation to trend and retracement, as well as entry and exit criteria, that need to be answered and established.   I will go on to discuss these, but it is important to realise that each trader must arrive at their own conclusions for themselves in a way that is consistent with their trading instrument(s), time frame, style, attitude to risk etc.

Defining trend

There is no problem in seeing the up-trend in the first chart. It is really easy in hindsight, but what if all you have is this:

An up-trend starting or what? No answers here.  Each will have their own determination of what constitutes a trend change, whether it be judged on the price action alone or moving averages or a favoured indicator or some combination of those. If XTA had been in a down-trend some swing traders would be looking for a break through the last swing high of that down-trend to signal a potential trend change.

At this stage what happens at the first significant reaction will be informative and if it turns out to be the first retracement of a new up-trend with the price then moving to new highs, then simple swing trading assumes an up-trend to remain in force until such time as the most recent swing low is breached – which happened in this case at around the £14 level as you can see in the first chart. You will spot that there are difficulties in this simple approach when  the swing low is nearby – is it a potential trend change or a false swing low? – or when it is far away, so some element of judgement, or alternative methodology, must be introduced.  .

But what constitutes a significant retracement leading to a swing low?

Simple swing trading relies on the method used by W.D. Gann.who identified potential swing lows by requiring a minimum of three consecutive bars of lower highs and lower lows, with the final bar in the series making the potential swing low bar. The potential swing low bar gains initial confirmation when the price moves and remains above the high of that swing low bar and final confirmation when the price rises to a new high for the trend.

I have zoomed in on the third retracement from the first chart since it is a classic Gann 3-bar retracement . Others, such as Marc Rivalland, modify Gann’s requirement by stipulating that these bars do not need to occur consecutively. In either case the retracement can run to more than three bars of lower high and lower lows, although many traders will place some limit. A popular rule is  that the number of bars in the retracement should not exceed the number of bars in the previous up leg, although many will have abandoned any thought of a trade well before then.

Still others combine the use of Fibonnacci retracement levels with these methods to identify where substantive swing lows are likely to occur.

Once again, it is up to each trader to determine the precise definition to be used.

When to enter?

Aggressive traders will enter as soon as the price exceeds the potential swing low bar high. The more cautious may wait to see a close above that high and enter at the best price available in the next session. And the even more cautious may await the final confirmation of the swing low as the price makes a new high for the trend.

It is logical to place a stoploss just below that same bar’s low in case it turns out not to be a true swing low bar. The effect of this is that more aggressive traders have the least money at risk, although they are likely to suffer a greater incidence of false signals and consequent triggering of their stop loss.

When to exit?

It is often the case with a mechanical method that exits prove more problematic than entries. Simple swing trading is no exception. The basic principle is to stay with the trade and exit on a breach of the most recent swing low. Such an approach would have worked well in this XTA example where most of the trend would have been captured and if all trends were so well-behaved there would be little problem. It won’t surprise you that most are not.

The main problem is the same as I mentioned in the section about trend definition and comes when the price has moved far away from the most recent swing low. It is clearly absurd to watch healthy gains waste away – possibly into loss if the most recent swing low had triggered your opening trade – waiting for this breach. Alternative exit methods must be developed to guard against this danger when such circumstances arise.

Conclusion

I have sought to discuss the basics of a simple swing trading method and this article is not intended as anything other than a sketchy outline. I have touched on a number of questions and others will have occurred to you if you are interested in such a method. It is for each to answer those questions for themselves as they develop (and test) their set-up and trading plan. I hope, at least, that I have given you food for thought.

Collection Source: http://www.trade2win.com

Chart patterns are an invaluable aid to trading, but only when they point the way to high probability outcomes. The key feature of a chart pattern is reliability. Why should we be interested in a chart pattern that works on average only 30% of the time? We’d get a better balance of probability by flipping a coin. As a “performance filter,” we must trade patterns which provide a 70% or greater probability that the pattern will develop as expected. There are simply too many ways to lose money in the market without going out of our way to trade low probability patterns.

We use this high-probability performance filter to reduce the number of useful patterns to only a handful – which also makes them easier to identify. The danger with all pattern trading is that we build castles in the sky. Instead of seeing what is really on the chart, we

tend to see what we want to see. Although there are few effective ways to overcome this rose-coloured view – other than years of practice and strict adherence to our disciplines – we can improve our pattern recognition if we are more precise about the specific features

we look for.

As an analogy, an automobile has four wheels, an engine, and space for passengers. This broad definition excludes some vehicles and does not help us decide which SUV is best for our family. To make a better buying decision, we need a better definition of the automobile we prefer. The same applies to pattern recognition in charts. I use very exact definitions which reduce the subjectivity and filter out look-alike patterns which have a low probability of success.

Classic Bullish Flag

One of the most powerful and consistently reliable patterns is the bullish flag applied to a daily chart (see figure 1). I use this as one of my main short-term trading techniques. The flag forms when the initial Working with enthusiasm for the stock slows down. There are few sellers as most new stockholders hold onto their recently acquired positions. Buyers

collect stock from long-time stockholders who are selling into the unexpected strength and who are frightened that the rally has failed completely. Gradually, prices move downwards but as you can see in figure 1, they maintain a steady trading band.

When to entry?

The pattern may take longer to develop. When it does, we have more points with which to confirm the placement of the upper and lower trendlines. Aggressive traders buy the stock as it approaches the value of the lower trend line. More conservative traders wait for the pattern to “prove itself” by breaking out through the upper trendline before buying. I tend to be aggressive, so I buy near the middle of the pattern spread when I am confident that the pattern is for real.

The initial stop loss is placed one tick below the value of the lower trendline. This gives room for price to move within the bounds of the pattern development. If the pattern continues its downward trend, the stop is moved lower. We do not want to be stopped out of this trade prior to full pattern development. In moving the stop lower, it is important to ensure the amount at risk in this trade does not exceed 2% of total trading capital (or whatever your trading plan defines as your maximum allowable loss per trade).

How far can we let the flag drop before the trade is abandoned? There are no hard and fast rules here. Exit signals include a drop below the value of the lower trend line. In most cases I find this pattern develops fully over five to ten days. As we move beyond ten days, the pattern loses its vitality. It develops a lower probability of success as the top of the trend line continues to fall; the potential returns are also diminished as the projected exit target also drops.

It’s also important to note that the flag patterns come in faster markets. This is not a slow pattern that takes weeks to develop. For example, flag patterns on weekly charts have a much lower level of reliability.

When to exit?

The bullish flag is a pause pattern which is formed while the market is redeveloping strength. To set the potential target we first measure the height of the flagpole. This is why the flagpole is such an integral part of a flag pattern. The flagpole starts with the day signaling the beginning of the fast rise. Usually this is very clear. The distance from the base of the flagpole to the top of the flagpole is calculated in cents.

This same value is then projected upwards from the point of the breakout above the flag pattern. This sets the minimum target which, in many cases, is exceeded. When the breakout occurs it is often very rapid and it is not uncommon for prices to gap above the top of the flag trendline. This is a disadvantage for conservative traders as they may end up chasing prices.

Bullish flag patterns develop quickly and in most cases, price moves rapidly towards the target projections in three to five days. This is not a slow trend. It is a continuation of the initial rally. But in some cases breakouts drift sideways, which indicates that the pattern has lost momentum. I abandon these trades, taking a smaller profit because the probability of success is reduced. The trades are still profitable but they have less chance of reaching the profit target.

Practice

The closer the chart display is to the ideal chart pattern, the higher the probability the trade will develop as anticipated. This is not always the case, as a recent personal trade with Singapore listed China Aviation Oil will demonstrate (see figure 2).

The flag was identified three days after the flagpole was completed. The flagpole starts with the first large range day, and the price projection gives a target of $1.59. The buy was activated at $1.35 providing an anticipated return of 17.8%. This is acceptable for a threeto-five day trading opportunity. Note that the lower edge of the flag swings off a single point. No further confirmation occurs.

The breakout from the pattern was powerful and the stop was immediately moved to the value of the upper edge of the flag at $1.38. This is an end-of-day stop based on a close below $1.38. Usually these breakouts continue uninterrupted, but day two saw a pullback with an intraday low at $1.38. Day three saw a resumption of the uptrend and an increase in volume. Had day three continued the decline of day two, the trade would have been closed at a small profit on the grounds that the breakout momentum had vanished.

Five days after the breakout, prices opened above the target level. I exited the trade at $1.66 which delivered a 23% return. It was not the best exit possible, as it was made from a hotel room in Hong Kong. (Although patterns provide us with good ways to manage the trade, this is not always possible in practice. Managing short term trades while travelling is not always a good idea.) Given time to access time and trade information, an exit around $1.85 would have been possible with a profit of around 37%.

I have used this example for several reasons. Firstly, and most importantly, real trading is not the same as perfect textbook examples. This trade highlights an important disadvantage of patternbased trading. Second, this pattern is best suited to short-term position trading – when the impact of emotions is running high – as these trades often overshoot their targets. Lastly, in a bullish market this calls for better intraday management of the exit, using your best judgement about the balance of buying pressure during the day. This management can add many extra points to the trade and, where possible, it is worth taking the time to do this.

Patterns capture emotions but they do not capture trends. China Aviation Oil continued to trend upwards, hitting highs of $2.05. Trading this strong trend calls for different trading techniques. Pattern-based trades are designed to take advantage of shorter-term opportunities and there is no point is mulling over regret because we missed the run of the main trend.

I prefer to use patterns for short-term position trades based on end-of-day charts. This method offers a reliable, high-probability trade with good returns and easy trade management – with an added benefit of being able to effectively define and manage risk.

What I want to show here is the relationship of O.I. and the buying patterns of the Commercials for the Commitment of Traders (COT) report.

I’ll begin by showing a chart of gold with an indicator I’m sure you have never seen before, a 13 week stochastics of just Open Interest. Yes, this index is simply an oscillator of O.I. What we see is that, generally speaking, low levels in this index are found at market bottoms.

Thinking about it makes sense as what it is telling us is there is little interest, open or not, in the market we are stydying. I have marked off every time the index fell below 10% on the chart, admittedly this was “chosen” on a best fit basis.

Here we see the results; note how on the middle of 2002 O.I., the blue line, was at a very low reading while at the same time the red line, Commercial buying, was high telling us that the only “player” in the game were the big guys and their action was on the long side.

Again in the middle of 2003 O.I. dropped to next to nothing, while the Commercials became heavy buyers and Gold began to glitter.

At the end of 2004 the opposite condition set up, low O.I. and a large short position by the commercials, shortly thereafter Gold broke down. And on it goes, study the chart and you will see we have a nice ‘set up” for rally when “no one wants to buy” except the commercials.

SOYBEANS—The first chart here shows just the O.I. indicator where again we see low readings as most likely found at the start of important upside moves. This is perhaps the ultimate contrary opinion indicator, an and indicator we have not put to full use

Now lets look at times we have the double whammy effect of Commercials buying and Open Interest low.

Now we can see the set ups I have spoken of and as you see the presented a trader with numerous major moves. Do not think this is a timing tool or technique, at least that’s not the way I use it. To me this is all about getting a market set up—or ready—to move to the upside.

THE DOLLAR INDEX

Again we see the familiar pattern of low O.I. being bullish, but not always. We saw high O.I. readings just before prices declined in early 2005 and then again later in the year. This tells us to be careful, we cannot bank, or trade on this pattern alone, that we cam do better by seeing who the buyers are at these time of little attention.

The next chart shows the addition of the Commercial index as a guide to confirm the possible bullish set ups suggested by O.I.

SELLING SHORT—-

Finally we can look at the exact opposite…high readings in Open Interest and low or bearish readings from the Commercials. We saw how effective that was in soybeans and the same pattern is seen here.

It makes sense…after all we have an insight into what real people are doing with real money, not some mystic number or invisible line reaching through space. What we have here is a time of great attention to the market…hence the high Open Interest reading. But the attention or buying is not being done by the smart, commercial money. Instead the rally or buying has been from trend followers and the public, hence a market top usually unfolds and usually more quickly than expected.

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Step 1: Selecting a market and timeframe

One of the most popular markets these days is the e-mini S&P, and that’s not without a reason: It’s a 500 company index. One of the largest in the world and that means you have excellent and consistent liquidity, superb volatility, tremendous leverage and no uptick rule. It’s a truly bi-directional market that shorts just as easily and safely as going long. It’s a fully electronic market, offering all the advantages of electronic contracts.

We decide to trade the market intraday, i.e. we will enter and exit a trade on the same day, because we do not want to expose our position to the risk of holding it overnight.

Step 2: Define entry rules

In my opinion swing trading is actually one of the best trading styles for the beginning trader to get his or her feet wet. That’s why we decided to use a swing trading approach in this example.

Many traders are familiar with the concept of “Bollinger Bands”: Bollinger Bands consist of a centerline and two price channels, one above the centerline and one below. The important thing to know about Bollinger Bands is that they contain up to 95% of the closing prices, depending on the settings.

In the chart above you see the red centerline and the blue price channels. There are only 2 days in the beginning of November when prices close outside the Bollinger Bands.

We are using this knowledge to create a very simple entry rule:

Sell when prices move above the Bollinger Bands and

Buy when prices move below the Bollinger Bands.

The idea is that prices will move back into the Bollinger Bands by the end of the day.

Step 3: Define exit rules

Let’s start with a very simple exit rule:

Exit the trade at the close of the same day.

Below is the equity curve of the last 2 years. The first results are encouraging.

Step 4: Evaluate your system

The Net Profit of this simple trading system is $13,525.

The Average Profit per trade is $149. Even if we deduct $20 for commissions and slippage we still have a net profit of $129 per trade.

The Profit Factor is 2.20.

The Winning Percentage is 66% and the Maximum Drawdown at the end of the day is only $2,775, though we have to suffer an Intraday Drawdown of $5,250.

The next step is to test the robustness of the system. Therefore we will vary the parameters we are using for the Bollinger Bands to make sure that we haven’t curve-fitted the system. If the system produces similar results when we vary the original parameters by 15%, we have a quite robust trading system.

Originally we tested the system with a setting of 34 for the Moving Average and 2.5 for the Standard Deviation. The table below shows the results of the system when using a Moving Average between 29 and 39:

As you can see, none of these figures change dramatically when varying the parameters.

In the next step we run the system on different markets to make sure that we haven’t optimized the system for a single market.

We test the system on 5 different markets:

The net profit, average trade and max drawdown are substantially different, but the Profit Factor seems to be quite stable. The reason for this distorted picture is the different value of these five markets. In the next table we look at the Average Profit and the Max Drawdown as a percentage of the net profit:

Now we see a different picture: Only the Max Drawdown differs quite a bit depending on the market, but the remaining figures are rather stable.

It seems that we developed a robust trading system that will perform well in real market conditions and on several markets.

Step 5: Improving your system

We try to improve our system by adding a stop loss:

Notice that the system performs best without any stops.

Another interesting test is to increase the duration of the trade: The original rules said that we exit the trade at the end of the day. The following table shows the results when we add x days:

If we exit on at the end of the 2nd day after entering the market, we increase the net profit and decrease the Max Drawdown. That’s the kind of improvement we are looking for.

As a last step we test these settings on the five markets again to ensure that we haven’t curve-fit the parameters to only one market:

Original settings (exit on the same day):

Modified settings (exit on the close of the 2nd day after entering):

We can see a dramatic improvement in the other markets, too.

Conclusion

We started with a very simple idea and defined two easy entry rules. Applying the simplest of all stops (exiting at the end of the day) we received a system with a nice performance. We tested the system with several parameters and on several markets to make sure that we haven’t curve-fitted the system to a certain parameter set or market. Then we tried to improve the system: While applying a stop loss did not increase the system’s performance, the increase of the time in the trade was very successful: We increase the net profit by 30% while decreasing the max drawdown by 17%. Applying these new rules to the other markets we noticed a dramatic increase of all figures in all markets.

Collection Source: http://www.trade2win.com

Therefore, the main characteristics of the January Effect are an increase in buying securities before the end of the year for a lower price, and selling them in January to generate profit from the price differences.

While the January effect has been less pronounced in recent years, we combined Ichimoku and Fibonacci Lines in analysing the price action of the S&P 500 into 2012:

As you can see, price has been well supported by the thick Ichimoku cloud since November 2011. Price has also been supported by the 38.2% retracement line in late November, and also this past week by the 61.8% retracement line.

Tenkan Sen (pink line) is still above Kijun Sen (turquoise line), with price looking to break out of the kumo cloud to the upside.

We conclude significant downside protection unless the S&P breaks below 1183. If not, we could see a short rally in January 2012.

Most Important: Choose Right on Start

Of course, ‘compare and decide’ strategy at start is proven to be most effective when it comes to credit cards particularly. If you’re like me, a proactive person yourself, you’ll try to predict and anticipate expenses and control debt you’re getting yourself into right from start. There are tools which are at your disposal to help you make a good descision and take advantage on situation.

Some credit cards comparison tools are:

• Australia – http://www.creditcardoffers.com.au
• US – http://www.creditcards.com
• UK – http://www.moneyexpert.com

Several methods of debt relief are available. Some of the most common are listed below.

Credit Counseling And Debt Management Plans

Non-profit credit counselors work with their clients to design a budget that allows for regular household expenses and repayment of debts. They also educate you in how to remain debt free after program completion. Programs normally take between four and seven years to complete and you repay 100 percent of your debts. This option has the least impact on your credit score once you complete the program.

Debt management plans (DMP) are similar to credit counseling and are administered by a certified credit counselor. While participating in a DMP you make regular payments toward your debts. You may also have the possibility of lowered interest rates and reduced or waived fees. With either of these forms of debt relief you are advised not to use or apply for new credit while participating in the program.

Debt Consolidation

In some cases, simply consolidating credit card debt can ease the monthly budget considerably. Credit card balance transfers are an easy way to reduce interest rates and combine balances so you only have one payment to make rather than several.

Home owners have the option of refinancing their mortgage or taking out a home equity loan to pay off high interest debt. Mortgage interest rates are typically much lower than those of consumer debt saving you money on the total amount repaid.

Debt Settlement

Debt settlement is usually handled through a debt relief company and involves negotiating with creditors to reduce the balances by up to 50% in some cases. Regular monthly contributions are made to an account set up and monitored by the debt relief company and when the agreed upon amount is accumulated, a lump sum is paid to your creditors.

Bankruptcy

If you have tried other alternatives but see no other option, then bankruptcy may be a suitable solution to resolve your debts. There are two kinds of bankruptcy usually used by consumers:
Chapter 7 and Chapter 13.
Both are filed in Federal Bankruptcy Court and are recorded as a matter of public record.

Chapter 7 bankruptcy is commonly called a ‘liquidation bankruptcy.’ Most assets are sold off to pay off debts. Certain assets such as your home or car are usually exempt but nonexempt property may be sold. The sale of these items will be handled by a trustee of the court and the proceeds will be paid to your creditors. Any eligible debts not paid by asset liquidation will be discharged.

Chapter 13 bankruptcy is a reorganization process that allows the filer to keep their property but they will be required to repay their creditors. A court trustee will work with the filer to set up a repayment plan that usually takes three to five years to complete.

Either type of bankruptcy, while offering relief from debts, has serious consequences to the filer’s credit score with an average decrease of 200 or more points.

Review Fees

Some debt relief companies make grandiose claims that they can settle your debt for pennies on the dollar or they may actually be able to negotiate a greatly reduced settlement on your debt but may charge excessive fees. This effectively defeats the savings you should have gained by settling your debts.

Another red flag to watch for is debt relief companies that charge upfront fees. A legitimate debt relief company never charges a fee until they resolve a debt for you.

Company Credentials And Customer Complaints

Before making a decision to work with a debt relief company, you should check with organizations such as the Better Business Bureau to confirm that they are legitimate. Review any complaints that may have been filed against them, what resolution was offered to remedy the complaint and the outcome.

This is the pattern I call the High Close Doji or the HCD method. It has dimensions of specific criteria that need to fall in place, therefore helping to eliminate and filter out false signals. It is a simple and basic approach that is a high probability winning strategy.

This setup may help you improve your trading performance and allow you to develop a consistent winning trading strategy. Consider this your own personal trading system that is based off of proven and powerful techniques. For a moment I want you to envision the concept of epoxy glue, it requires two compounds. Separately they are not very reliable or in fact a very strong bonding substance. However, when combined, a chemical reaction occurs and forms an amazingly strong and powerful bond.

Using the methods of Candlesticks with Pivot Points can give you that same result if you know what to look for. The implementation of longer term analysis using Pivot Points will give a trader a fantastic means in which to anticipate a point from where a trend change could occur, thus helping one to not only prepare but to act on a trade opportunity.

The setup:

One can implement this set-up using different time frames besides daily analysis. You can include weekly and even monthly Pivot Point calculations. Take for instance the Weekly numbers. They are compiled from the previous weeks High, Low and Close. This method of analysis after calculating the numbers will alert you well in advance of a potential Support and or Resistance level. If you have your calculations figured out on the close of business on a Friday then you are prepared before the weekend starts and now have a general guide of what may be the next weeks potential High, Low or both.

In the setup process you heighten your awareness to enter in a long or short position against predefined levels and wait for the trigger or market signal at those levels.

It can not only help you define or identify the target area to enter but also what you wish to establish as your risk objective.  Another event that occurs with this setup process is you now can “set up” your orders to buy on your trading platform with the selected contract amounts. In other words, prearrange the commands on the electronic order ticket. Now all we need is confirmation so you can pull the trigger or click the mouse to establish an entry in the market and establish a position.

The chart below magnifies what you are looking for, notice once the market closes above the Doji’s high we see an immediate reaction of positive momentum and a continuation of higher prices.

That is what we are focusing on especially after a decline in price and when the market approaches a predetermined support level based off of the Pivot Point Calculations.

Trading Rules for the HCD setup:

1. When the market approaches a key Pivot Point, buy on the close or on the next open once a new closing high is made above the previous bullish reversal candle pattern especially a Doji formation.
2. Place your initial risk management stop below the low of the lowest low point of the bullish candle pattern. This can be on a Manual Stop Close Only basis.
3. Exit the trade on the close or the first open of a candle that makes a lower closing low after a prolonged uptrend. 
4. One can use a “Filter” or back-up process to confirm the buy signal against a major Pivot Point number such as a bullish convergence stochastic pattern. 

A bullish Candle pattern can be a Harami, Harami Doji Cross, Bullish Piercing Pattern, A Bullish Engulfing Pattern or my favorite, but in most cases we want to act on a High Close Doji pattern. This pattern works for most markets including Stocks, Forex and Futures. This is a high probability intraday trading pattern however it works very well for position trading. There is a higher frequency of patterns that develop for intraday trading.

 

This pattern develops on various time periods, however I do not use less than a 5 minute time period. My favorite day trading time frame is using both the 5 and the 15 minute period. This helps me to catch trend runs as they occur in the market.

 

The example below is the CBOT electronic Gold contract taken from September 28th 2005. The first dimension we need is the Pivot Point calculations. So we take the prior days High, Low and Close and applying the formula we derive at 466.50 as the first Support level known as S-1. Notice the price action at the support level. The Doji Forms at the S-1 and two times periods later, an engulfing green candle forms, which signifies the market closed above the open. Notice that it also closes above the Doji’s high.

 

I want to illustrate the flow of the market price action, notice we never see, until the end of the trading session, prices make a lower closing low. The sequence of events that transpire is higher highs, higher lows, and higher closing highs as defined by green candles, all the way up just past the daily projected pivot Point R-1 of 472.50. This is a great example of a HCD trigger that results in a 6.00 dollar gain in Gold.

 

In case you were wondering if this set-up can be applied to Forex markets the answer is yes. This next chart is a spot FX British Pound from September 30th. If you apply the Pivot calculations derived from the prior days data you will have a predetermined support of 1.7568. Notice how the market bounces around and then the Doji forms. The trigger to buy initiates once the Green candle closes above the Doji high and the same sequence of events takes place, higher highs, higher lows and a continuation of higher closing highs all the way up until we hit resistance at the R-1 of 1.7680. That equates to nearly an 80 PIP or point gain.

This next example is the CBOT Mini-Dow contract, in this example notice how the Doji forms right on the Pivot Point Support Line. Remember that Dojis form more often than not at Pivot Point Support or Resistance levels. Here the candle right after the Doji not only closes above the doji’s high but see how it entirely engulfs the real bodies of the prior two candles of the Doji as well. That helps signal the power behind the reversal formation. As you can see we have a great run in the market testing beyond the R-2 number thus giving nearly a 100 point gain for the trading session.

This is a pattern that should show an imediate positive change as the reversal takes hold. Also notice that we see more green candles develop, which reflects the market closing above the open, thus confirming buyers dominating the market with better bullish momentum.

The rules also state that we can use confirming indicators.  In the chart below we have three indicators, my favorite being Fast Stochastics, then MACD and CCI. As you can see Stochastics indicates a bullish convergence signal, validating that prices were near an exhaustion phase and ready to reverse, as the Doji formed.

The HCD trigger would have you long at the close or the open of the next candle near 10485. However, notice the MACD triggers late and would initiate a position near 10520.

The trigger in the MACD would be verified from the moving average crossover as well as the zero line crossover method. Notice how MACD does not form a Bullish Convergence either.

No matter which indicator you are comfortable in using, when investors first discover Pivot Points, most often their first impression is one of pure amazement.  Mainly due to its ability to predict what a specific time frames overhead resistance or support might be. Moreover, more times than not the High, Low or even both are right on target as the exact number for that given session. Make no mistake Pivot Point analysis is impressive. However, its real power and value does not end there. Pivot Point Analysis deals with pin pointing not only price but in a specific time period.

It is what I consider the “Right Side” of the chart indicator. It also gives you a method for identifying the trend and how to determine the typical price or fair value of a given time frame. After all, that is what the actual Pivot Point number is. If prices deviate too far from that point the outer calculation numbers can help you determine at what point a market is most likely to turn. One can also use this feature of the actual Pivot Point to develop a moving average system. But when traders combine these calculations with the visual aid of certain candle patterns, it can give you superior guidance as to when and where to enter and exit positions. Traders who want every edge in their approach for the highest probability of success will benefit from this simple but yet time tested method.

The amazing fact is this pattern works equally well in market declines, therefore I call it a Low Close Doji set-up. When I use pivot point analysis what I want to do is see how the market behaves at or near a pivot point target number. I also include a special moving average approach which is taught in my trading course that illustrates a conditional change in the market. Once we identify that the current market price is turning direction we can establish a trading position as prices close below a Doji low, a moving average cross over occurs and prices close below both moving average values. I use a combination of a specific moving average of the pivot point combined with a simple moving average. I stay with the initial position until those particular conditions change. In bearish conditions I look for a series of events such as lower lows, lower highs and lower closing lows to indicate a bearish trend. Once the market conditions change and we have a series of opposite events occur I stay on the short side of the market.

In the chart above we have a Low Close Doji sell signal triggered at the pivot Point, prices close below both moving average values and the moving averages cross signaling confirmation that a trend change has occurred.  The profit target is the first Pivot Point support target level. If you notice that this method signals a short well before the MACD signal and even the Stochastics %K and %D 80% line cross method. As you will notice the low is formed by a doji candle. In the beginning of this article I stated the “Doji’s form more often than not at Pivot Point Support and resistance levels”. Here is another case in point. With that said, now you see why I focus on these high frequently re-occurring patterns and teach these specific patterns in my trading course.

I went and took this observation one more step in my soon to be release  book which is slated for sale in October 2006.  I cover more on statistical occurrences when Doji’s, Stars and Hammers form in certain markets. Here is an example of the frequency of these patterns, which was independently back tested by Genesis Software. In the example below using the e-mini S&P 500 futures contract, the test results were based on the US open out cry session using a fifteen minute time period. We ran these statistics on many markets; the best part is some markets had even better results than what I am sharing with you now.  Looking at this bar chart below we see that 30% of the lows are established by a doji while 40% of the lows are made by Hammer formations. Combined that accounts for a 70% chance that the low is made by a Doji or Hammer based on a 15 minute time interval.  At tops 36% of the time they are made by Doji’s and 40% are made by shooting stars, combined it accounts for a whopping 77% statistic.

The methods introduced here are used to help keep the traders focused on the now, which means to watch and study the current price action. The Candle patterns give a visual confirmation on price momentum, and the Pivot Points forewarn you what the potential turning points are. When you combine the two methods you have a solid trading program.

Collection Source: http://www.trade2win.com

Above is a chart of the QQQQ. On the chart is a 50 period moving average and a slow stochastic oscillator. To begin with, we must assess the trend of prices in this market. For this task, I use a 50 period moving average. Notice that the slope of the moving average is up suggesting we are in an uptrend. Once we know this, we only want to buy pullbacks in price. The mechanical signal to buy comes when the stochastic produces a buy signal in over sold territory (moving average cross, circled above). While this turned into a nice low risk buying opportunity, notice the price action just prior to this buying opportunity in the QQQQ. During the uptrend, the stochastic was very overbought, producing sell signals during much of the uptrend which would have led to many losses had you sold short at those times. This is a trap new traders can fall into when using these tools without reality based logical rules.

Buy Rule: When the moving average is sloping upwards, take the stochastic moving average cross in oversold territory as a buy signal. When the moving average is sloping upwards, IGNORE EVERY sell signal the stochastic moving average cross in overbought territory produces.

The Reality Based Logic: When prices are moving higher, we want to find a buying opportunity when things are on sale. Most importantly, our buy signal told us objectively that someone was selling after a decline in price and selling in the context of an uptrend. This can only be the action of a novice seller. A consistently profitable trader would never sell after a decline in price and in the context of an uptrend.

On this chart, we also have a 50 period moving average and a slow stochastic oscillator. Here, the slope of the 50 period moving average tells us the trend is down. Once we know this, we only want to sell to a novice trader who is buying after a move higher in price in the context of a down trend. The mechanical signal to sell comes when the stochastic produces a sell signal in over bought territory (moving average crosses, circled above).

Sell Short Rule: When the moving average is sloping downwards, take the stochastic moving average cross in overbought territory as a sell signal. When the moving average is sloping downwards, IGNORE EVERY buy signal the stochastic moving average cross in oversold territory produces.

The Reality Based Logic: When prices are trending down, we want to find a shorting opportunity when prices are high. Furthermore, we want to sell short to the buyer who is buying after a rally in price and in the context of a downtrend (a novice buyer).

Is this or any trading system perfect? Certainly not, there is no perfect trading system and there doesn’t need to be. If there was, that person would have all the worlds’ money. However, wrapping some simple rules and logic around your trading is the key to stacking the odds in your favor. Even Las Vegas does not win all the time. They do well over time because they realize they don’t have to always win. They just need to stick to their rules that allow them to keep the edge which means betting against people who don’t have the edge.

This is an intra-day chart of the NASDAQ Futures with the same 50 period moving average. In this example, I simply switched the Stochastic for the Commodity Channel index, better known as CCI, we will get almost the same signals.

Technical Reason for Shorting:

1) The down sloping 50 – period moving average suggests this market is in a downtrend.

2) A CCI Overbought reading (circled are on the chart).

Logical Reason for Shorting: Sell short to a buyer who buys AFTER a rally in price and in the context of a downtrend. The only type of mindset that would take this action is someone who makes decisions to buy and sell anything based on EMOTION, not simple and proper logic. This is the pedigree of the trader we want on the other side of our trades.

Trading strategies that work don’t change with time, markets, or changing market conditions. Quite frankly, to think market conditions ever change at all is a strong illusion that can only be removed when one focuses on the foundation of price movement, pure supply and demand. The systems I see working are very simple. The example below is an intra-day chart of the Dollar/Yen. Let’s apply our same basic principles.

Technical Reason for Buying:

1) The up sloping 50 – period moving average suggests this market is in an uptrend.

2) A CCI Oversold reading (circled are on the chart).

Logical Reason for Buying: Buy from a novice seller who sells AFTER a decline in price and in the context of an uptrend.

Summary

Uptrend/Oscillator Overbought: Ignore

Downtrend/Oscillator Oversold: Ignore

Uptrend/Oscillator Oversold: Buy Signal

Downtrend/Oscillator Overbought: Sell short Signal

Collection Source: http://www.trade2win.com

He credits a book called “Street Smarts”, written by Linda Bradford Raschke.

Here’s how it is described:

The basic idea for this set-up is that when the Average Directional Index (ADX) is high and price drops back to the 20 period exponential moving average (EMA), you should look to buy and target the previous swing high as your exit.

Obviously this technique can be applied to the short side as well: High ADX, price pulls back to the 20 EMA from below, get short and target the prior swing low.

A bit of tinkering is required to complete this system (in terms of what I think of as a “complete” system). For example, that paragraph uses the words “…you should look to buy…” But when creating purely objective trading systems, a specific value of where to enter needs to be written out.

Here’s what I came up with:

Actual entry method and stop loss placement methods are not given on the Maoxian webpage. So I chose arbitrary values, as this is just a demonstration anyway. For longs, I put the stop loss 50 pips below the low, and the entry price is 10 pips above the high.

Why that entry point? Because this trading technique is to (I guess) find a good buying opportunity in an established uptrend. So to confirm the uptrend, I make sure that the EMA(20) is rising. And to make sure it’s just a minor pullback and not a complete reversal, I put the entry price above the high. So the price has to push higher after initially falling back and triggering our entry rules.

The last thing to note about this system is the placement of the take profit. For longs, the take profit wants to be at the current bar swing high. So I just make sure that this take profit is actually going to be placed above the entry point of high + 10 pips. If not then there’s no reason to trade.

http://www.thinkingstuff.com

One simple way to trail a stop is to place it below the last “up” bar… an “up” bar is simply a bar with a higher high and a higher low than the previous bar.

http://www.thinkingstuff.com

On that archive page, he lists quite a number of trades under the “Trading for Dummies, Q&A Series” banner. While he does not specify his trading rules explicitly, I’m pretty sure that the intention of providing all those examples was for you to look at the charts and work out his system.

Here’s what I came up with:

• On 30-Minute chart.
• Unusually active (more volume than normal).
• Very volatile. Perhaps a gap.
• Wait for “pullback”, which means lower high in uptrend, higher low in downtrend.
• “Uptrend” means prices above EMA. “Downtrend” means prices below EMA.
• Trade must be before lunch-time. The noon bar is the last bar to make calculations off. Otherwise finish for the day.
• Set entry at high of pullback bar (for long trades).
• Set initial stop-loss at low of pullback bar (for long trades).
• If next bar pulls back further, reset entry and initial stop-loss.
• Exit at the end of the day (or could keep half if you want).
• One trade per stock per day only (i.e. don’t get back in if stopped out).

Please keep in mind that this system is meant for trading shares. Some adaptation is required to make it usable for trading currency. For example, currency does not have volume. Further, currency trading is 24/7, 5.5 days per week. The rule to stop trading at noon or at the end-of-day needs to be dropped or adapted.

There are also a couple of things which need to be changed into “purely objective trading systems” language. For example “unusually active”, and “very volatile”.

Unusually active

This applies to the volume. If the system is to trade in forex then just remove this rule. Here are a couple of possibilities for turning “unusually active” into something that a computer can use:

• Current bar’s volume is more than a multiple of the average volume.
• Current bar’s volume is the highest of the last 20 bars.
• Rising volume for 2 or 3 bars in a row.
• All of the above combined.

I think I’ll go with the second option.

Very volatile

There’s a special post about this. I’m going to use the “Two Bollinger Bands” method.

Here’s what I came up with:

I kept the rules in order of the English description at the start of this post. In this case there is a one-to-one mapping. Except for the last specification – only 1 trade per day. There’s no rule in ATM that handles this. But there are the “No Trading” settings. And amongst those there is the “Allow up to and including X long trade(s) in a row” option (also for short). Set these to 1. So one long trade will be allowed, one short trade will be allowed, and then this system will stop trading.

http://www.thinkingstuff.com

When the close is exactly at the lower line, %b equals 0. Below the lower line, %b is negative. When the close is exactly at the upper line, %b equals 1. When it’s exactly in the middle, %b equals 0.5. And so on.

It’s very rare for %b to be lower than -0.3, or higher than 1.3.

The way Bollinger Bands are constructed, the price moves from the lower band, to the upper band, and back to the lower band. The problem is that the Bands aren’t static. Just because the price moved from the lower band to the upper band, it doesn’t necessarily mean that the price is rising – the upper band might have come down to meet the falling (or stagnating) price.

Anyway, here’s a system which attempts to use this knowledge. In very rough testing, we used 5-Minute bars, 720 for the Bollinger period, which is kind of big, and the normal 2 standard deviations above and below.

We know that the price oscillates between one of the outer Bollinger lines and the other. So when the price falls down near the bottom one, we set a trap waiting for it to start heading back to the top one. When the price does start rising again, the limit order is taken up, and a trailing stop loss is kept at 0.3% below the close.

That’s setting the stop loss pretty close to the price, but we were using 5-Minute bars which don’t need as much wiggle room as Daily bars would.

Similarly, when the price rises up near the upper Bollinger line, we set our trap this time waiting for it to come down.

http://www.thinkingstuff.com

Here’s what a user called EZCurrency said (HHV = highest high value, LLV = lowest low value, ATR = average true range):

For a trailing stop for a long, I use HHV(H,24)-3.5*ATR(24) on an hourly chart. This is the highest high value of the past 24 hrs, then subtract 3.5 times the average range of the past 24 hrs. This accounts for the volatility. Plot it and you will see it is an excellent trailing stop for most pairs!

Another user, Gouranga, then came up with a possible improvement:

One can combine this with a LLV(n) (eg. Long Trade) and take the higher trailer of the two. LLV(n) trailer locks in profit when market consolidates. While (HHV – ATR) locks in profit when market trends. So, you get the best of both mkt conditions.

We provide both of these indicators in ATM – what is described in the first quote is referred to as the “Chandelier Stop”, and that described in the second quote is referred to as the “Better Chandelier Stop” (whether it is actually better or not is subject to some backtesting).

But this is a good time to demonstrate exactly what happens when you enter more than one value, so forget that we made the “Better Chandelier” for a second. What ATM will do with the trading system below, for the longs anyway, is calculate both the Chandelier Stop and the lowest low. Then it will take the higher of those two values. For shorts it will take the lower of the Chandelier Stop and the highest high.

The basic theory of using the ATR in order to calculate the stop loss, is that it’s adaptive to the current market conditions. During volatile periods the stop will be placed further away, and during less volatile periods the stop will be brought closer to the current price. Basically it adjusts the amount of wiggle room based on the volatility.

In very rough testing, we used 5-Minute bars, 720 for the Bollinger period, which is kind of big, and the normal 2 standard deviations above and below. The period for the ATR is 24.

http://www.thinkingstuff.com

October 3, 2006

With a lesson costing 6 billion dollars, Amaranth has taught us an, albeit disastrous,  arbitrage trading technique in energy futures: buying the March-over-April spread in  natural gas futures, and betting that it will increase in value. Unfortunately for Amaranth  and its head trader Brian Hunter, the spread decreased rather than increased in September, resulting in a $6 billion drop in value. Many commentators breathed a sign of  relief that this has caused no widespread disruptions in the financial market, reasoning  that this is too obscure a corner in arbitrage trading to matter. However, as we learned in  the Long Term Capital Management debacle, spreads in the financial markets often move  in tandem, especially during times of market stress. Since mid-August, I have been  following another obscure spread heading towards a 3-year low, and it may present a  profitable trading opportunity.

As oil prices go to historic highs during this past year, energy stocks have followed a  similar course. For example, front-month light sweet crude oil E-mini contract QM reached a historic intraday high of $78.30 on July 14, while the energy sector exchange traded fund XLE reaches its historic intraday high of $60.15 on May 11. Since energy  companies typically own rights to oil either above or under ground, it is reasonable that  their stock prices follow the price of oil. In technical terms, we say that energy stock  price “cointegrates” with the crude oil price, a concept pioneered by the Nobel laureates  Robert Engle and Clive Granger. To prove that they do in fact cointegrate, I ran a Matlab  cointegration package developed at University of Toledo in Ohio on the closing prices of  QM (using a perpetual futures series) and XLE for the last 3 years. The program determined that they cointegrate with a 95% probabilty. Now, what this does not mean is  that QM and XLE prices will always move up or down in a similar percentage everyday.  This also doesn’t mean that there won’t be periods of time when the spreads between QM  and XLE will go way out of sync, just as the gas futures spread did for Amaranth. What  this tells us is that with high probability, the spread will eventually goes back to their  historic average, and then probably goes in the opposite direction for a while.

To illustrate this point, let’s take a look at a plot of the spreads between QM and XLE over the last 3 years. Suppose we are long a front-month QM contract (rolling over the contract every month), and are simultaneously short 640 shares of XLE. The number of shares is determined by the Matlab package mentioned above. The y-axis shows the  dollar value of this pair of positions. We can see that in the past 3 years, the value went as high as $5,550 on October 14th, 2004, and as low as -$4,152 on February 16th, 2006. The average is $57, which is almost zero. As of this writing (at the close of September 28, 2006), the value is -$2,584. While this is not near the 3-year low yet, it is getting there. Those who have a strong stomach will buy this spread now, and hope that the value will move back up to its long-run average of near zero.

Some people may feel uneasy about trading oil futures because they have to keep rolling  over to the next nearby contract every month, or maybe their brokerage doesn’t allow  futures trading at all. There is now a convenient alternative: an exchange-traded fund  called USO. This fund trades like a stock on the American Stock Exchange, just like  XLE. USO closely reflects the value of the nearby contracts in crude oil (with a small  percentage that reflects the value of other energy futures such as natural gas or heating  oil). And yes, I have checked that it cointegrates equally well, if not better, with XLE.

Some thoughtful readers may wonder whether there are any fundamental reason energy  stocks have dropped much less in value since the summer than energy futures prices.  Now energy companies are valued much like any other companies: roughly speaking,  their stock is worth the present value of their anticipated future cash-flow plus their current net asset value. The current net asset value certainly should follow the frontmonth crude oil contracts very closely, in fact, more closely than their stock price.  However, their anticipated future cash-flow reflects the expected price of oil in the years  to come, not the current cash price of oil. (For those readers who enjoy a bit of exercise,  they can look up the oil contracts that expire in 2007, 2008 and beyond to see if they in  fact has higher prices than the front contract.) At this time, the stock (and futures) market  is telling us this: oil price will go back up in the future.

Dr. Ernest P. Chan is a quantitative consultant who helps his clients implement  automated, statistical trading strategies using Matlab. His office is located in Toronto and can be reached through www.epchan.com.

Disclosure: The author has existing positions in one or more securities mentioned in this article, and may enter into new positions as market condition changes.

From a valuation perspective, although large-cap stocks have outperformed small caps so far in 2011, the relative performance has not been that strong, compared with what we saw after the Lehman collapse. Accompanied by declining earnings expectations, small-cap stocks are not particularly cheap relative to large and mid-caps in an historical context, as seen in the below figure.

This chart shows the relative median P/E and P/B between the Asia Pacific ex-Japan small cap universe and MSCI AC Asia Pacific ex-Japan index universe.

Recent calculations show that small-cap stocks are only trading at around 10% P/E discount to their large- and mid-cap peers – a rather neutral valuation stance from a historical perspective. Thus, at this stage of the cycle, Nomura believes it is a bit too early to recommend a pro-small-cap bias until we see the valuations for small caps become relatively more attractive.

Source: Nomura

The chart shows that this strategy has theoretically been profitable on the Euro/US Dollar even on a 1-minute time frame. Of course, if something seems too good to be true, it usually is. For the above results we assume that the trader pays zero spread and zero comissions on every single trade. This may not seem like a terribly unrealistic assumption on many lower-frequency systems, but the 1-minute chart generated a whopping 7800 trades in a mere 3-year stretch. What do our results look like if we assume a much more realistic 2 pip roundtrip cost per trade?

Such high-frequency range trade strategies are extremely sensitive to transaction costs, but we likewise note that there are other very important factors to keep in mind. Our equity curves shown above show that the strategy lost substantially from March 2008 and onwards. Why exactly? Extreme volatility.

Given such evidence, we want to avoid situations in which price is at clear risk of prolonged intraday moves. Such effects would singlehandedly destroy virtually any range trading strategy, while the increased transaction costs linked to choppy market conditions would likewise decimate a high-frequency strategy.

So when and how do we trade range trading scalping strategies?

Given that high transaction costs and strong market volatility will both quickly eat into any intraday scalping range

trading strategy, it is important to trade when transaction costs are lowest and markets are the quietest. The charts below show important facts about the Euro/US Dollar. First, spreads are tightest through European and US trading sessions. Second, volatility tends to hit its peak at the time that New York and London trading sessions overlap—between 8-10 AM New York time. What does this mean for us as far as range trading scalping strategies go? We want to trade during times when transaction costs (i.e. spreads and potential slippage) are the lowest, but we likewise want to avoid overly volatile trading times. When does this occur?

According to our charts, we see a confluence of low spreads and low volatility at several key times in the forex trading day. After the London trading session opens, volatility slowly begins to drop while spreads hit their lowest levels of the day. This would arguably be the best time of day to employ highly transaction cost-sensitive strategies. Spreads remain relatively low through the beginning of the US trading session, but we likewise note that volatility rises significantly between the hours of 8:00-10:00 New York time—often linked to key North American economic reports. The next attractive window occurs between the hours of 10:05 to approximately 16:00. Volatility hits near its lowest levels of the trading day, but transaction costs do tend to creep higher. Finally, we see that the late Asia trading session provides solid conditions for scalping range trading strategies—a mix of good spreads and low volatility.

Collection Source: DailyFX

As an example, we will look to EURUSD, where a key support was setting in around 1.2765, which in turn led to a significant basing pattern. On the daily chart, the formation is evident. A rising trendline that began three months before gave pause to a steady bear trend. Initially, the first test of this line resulted in a sharp reversal; but additional trials confirmed the level’s influence and price action would settle. Zooming into the one-minute chart, we can seen that as price action drifted down towards the now obvious, horizontal floor around 1.2765, price action would remain choppy and largely directionless. What would be considered untradeable congestion for most traders, presents the ideal conditions for the scalper with stable and tight ranges with little hint of volatility.

On the other hand, there is always a downside to any strategy. When approaching a notable technical level, there is always the danger of a significant reversal or breakthrough. The volatility that this generates can often lead to wide spreads, gaps and directional momentum that could generate significant losses when our aim is to be in an out of the market quickly for only a few points of profit potential. Therefore, it is essential to confirm the market’s intention to yield to these technical areas rather than looking for positions on the first test.

Collection Source: DailyFX

Singapore – 14 September 2011 - We all read about Warren Buffet owning his first stock at 11 years old. It seems as though many of these legendary investors picked up not only financial acumen, but more importantly the traits of a successful investor from a young age.

And it all begins with the understanding of how money works. AsiaPacFinance.com serves retail investors globally with research and trading courses. Community outreach and citizenship efforts are also key to the company, as they seek to develop financial literacy worldwide. The Founders believe planting the seeds of financial literacy early in the child’s growing up years, increases their chances of becoming successful traders and investors in future.

Through their community outreach arm, Red Focus Private Limited, AsisPacFinance.com works with schools and community centres in Singapore in imparting financial literacy to children. Activities are a combination of classroom, games and sports, creating an environment where kids are interested in finance. Over 10,000 children have benefited from AsiaPacFinance.com’s outreach program.

About AsiaPacFinance.com

AsiaPacFinance.com’s goal is to be the primary independent source of reliable and actionable trading ideas. They provide trading courses and trading tools for a growing audience of self-directed traders. AsiaPacFinance.com covers the Asia Pacific markets from its regional headquarters in Singapore.

For more information, visit www.asiapacfinance.com.

Singapore – 22 July 2011 -AsiaPacFinance.com has maintained a high student satisfaction rate of 98% after educating students in stocks and forex trading. This satisfaction rate is measured based on the number of customers asking for  refunds, or replacement products and services.

AsiaPacFinance.com Founders attribute their success to personalized teachings, both online and offline. Their online trading courses are designed for individual self learning, while their physical seminars are one to one, because the company believes every individual’s investment goals and background are unique.

The results illustrate that AsiaPacFinance.com has consistently delivered high quality educational content to its global community of students and graduates. Not only that, our survey of customers indicated a high level of satisfaction in their customer service. With Live Chat, lifetime email and forum support, traders have always received a quick response whenever they require assistance.

AsiaPacFinance.com prides themselves on their personalized educational methods. They also have a team of research analysts who cover forex, commodities, indices and Asia Pacific stocks. Following up with clients has been a key focus with the company, and they also get in touch with clients and supporters through social media platforms such as Facebook and Twitter.

The multi pronged approach to customer service has reaped rewards for the company. For more information, visit www.asiapacfinance.com.

About AsiaPacFinance.com

AsiaPacFinance.com’s goal is to be the primary independent source of reliable and actionable trading ideas. They provide trading courses and trading tools for a growing audience of self-directed traders. AsiaPacFinance.com covers the Asia Pacific markets from its regional headquarters in Singapore.

For more information, visit www.asiapacfinance.com.

Singapore – 6 February 2011 - Fundamental Analysis has had a stronghold on Wall Street on these years, with universities teaching fundamentals, and research analysts churning out fundamental reports. In the past decade, there has been a growing movement in the investment community: Technical Analysis.

Some call it witchcraft, others call it pattern recognition. This mysterious form of trading has created numerous legendary traders such as the Turtle Traders. Not surprisingly, retail investors have jumped on the bandwagon and are thirsty for knowledge in this realm of investing. Question is, where can they learn this art?

Much like how we have the Chartered Financial Analyst (CFA) program which teaches largely fundamentals and portfolio management, the trading community realised a need for an associate for Technical Analysts. The two official associations are the International Federation of Technical Analysts (IFTA), and the Market Technician Association (MTA), and they have qualifications called Certified Financial Technician Program and Chartered Market Technician respectively. Similar to the CFA, these are exams you can take which qualify you as a professional technical analyst.

While the exams and qualifications are structured, the exam preparation is not. Candidates and traders are given a long list of books and resources to read, which usually takes them three years to complete the program.

A Singapore-based company, AsiaPacFinance.com, realises a need for an efficient way for traders to efficiently absorb the contents of technical analysis. They have created and are offering globally, a suite of online trading courses based on the IFTA and MTA syllabus.

AsiaPacFinance.com Founders have stated that this is the most structured, comprehensive and credible program, in the education of technical analysis. The interactive online trading causes are full of charts and quizzes, which go deep into the contents, ensuring an understanding and appreciation of this art of investing.

About AsiaPacFinance.com

AsiaPacFinance.com’s goal is to be the primary independent source of reliable and actionable trading ideas. They provide trading courses and trading tools for a growing audience of self-directed traders. AsiaPacFinance.com covers the Asia Pacific markets from its regional headquarters in Singapore.

For more information, visit www.asiapacfinance.com.

Singapore - 8 August 2010 - Search for equities research or strategies online and you will come across names such as SeekingAlpha, Fool.com or TheStreet.com. What do these big name sites have in common? They only cover US-Listed stocks.

While the US stock market is highly visible and tightly followed by the media and banking analysts, Asia listed stocks can no longer be ignored. With the troubles faced by american and european economies, fund managers today typically hold a good portion of Asia Pacific stocks for diversification. While institutional investors can conduct their own analysis, what about retail investors? They do not have access to research reports and Bloomberg terminals, and turning to mainstream media will not give them any unbiased insight into the Asia Pacific stock market.

The Founders of AsiaPacFinance.com, both former bankers, realised this need and set up the company to fill this information gap. With analysis from both the fundamental and technical perspectives, Asia Pacific stocks are well covered by their analysts. The company aims to serve retail investors globally by supplying unique insight about this growing region. As each country has its own stock exchange, currencies, cultures and language, the Asia Pacific share market is more challenging to understand compared to other regions. For example, a Korean annual report can be written in a different language compared to a Hong Kong annual report.

AsiaPacFinance.com’s research reports are freely available globally. They also equip retail investors with the tools, skills and knowledge to navigate the increasingly complicated global markets.

About AsiaPacFinance.com

AsiaPacFinance.com’s goal is to be the primary independent source of reliable and actionable trading ideas. They provide trading courses and trading tools for a growing audience of self-directed traders. AsiaPacFinance.com covers the Asia Pacific markets from its regional headquarters in Singapore.

For more information, visit www.asiapacfinance.com.

Anhui Conch Cement Company Limited is principally engaged in manufacture and sale of clinkers and cement products.

The chart above is the daily chart of Anhui Conch Cement.

Price has been testing the Kumo (shaded region) but has not successfully broken above.

In fact, price has broken below the Kumo yet again. At the same time the Chikou Span (green line) is below prices and Kumo also.

Tenkan Sen (blue line) is below Kijun Sen (pink line) and sloping down.

We expect prices to test Kumo resistance going forward with more odds stacked to the downside as shown by the blue arrows drawn on the chart.

Tencent Holdings Limited is an investment holding company. The Company and its subsidiaries are principally engaged in the provision of Internet value-added services, mobile and telecommunications value-added services and online advertising services to users in the People’s Republic of China.

The chart above is the weekly chart of Tencent Holdings listed on Hong Kong Stock Exchange.

Tencent Holdings has been trading above the Kumo support since May 2009. During mid 2010, it tested the support and failed to break below. Prices subsequently put in another rally to its current top.

Tencent is trading below the Kumo now. This could be the start of a bear trend.

Click on the chart above to expand to view size.

Macquarie Group Limited (Macquarie) acts as a non-operating holding company. The Company is a financial services provider of banking, financial, advisory, investment and funds management services.

The chart above is the daily chart of Macquarie Group.

The bear trend from Feb 2011 to Oct 2011 is evident, with prices trading well under the Kumo resistance zone.

Since then til now, Macquarie has entered into a consolidation phase. The channel is stuck between the last low price point and the 23.6% retracement level.

Going forward, the thinning of Kumo suggests to us that the market is indeed uncertain about market trend.

In such markets, it might be more profitable to trade mean reversion strategies.

Housing Development Finance Corporation Limited (HDFC) is engaged in providing loans for the purchase or construction of residential houses, commercial real estate and loans for certain other purposes in India.

The chart above is the daily chart of HDFC listed on National Stock Exchange of India.

The downward trend is intact.

With a downward sloping Kumo (shaded region), there is strong resistance for any bulls attempting to break higher. The immediate resistance level is the Kijun Sen (pink line)

The same price pattern is evident on the weekly chart shown above.

A confluence of dual time frames’ direction enhances the probability of the bear trend extending.

Axis Bank Limited is an India-based bank. The chart above is the daily chart of Axis Bank listed on National Stock Exchange of India.

Prices has reached a year low as shown on the chart. Bearish momentum is strong. The 61.8% retracement level (1107) serves as significant resistance level. Significant support is at the 38.2% retracement level (790.4)

PT United Tractors Tbk is an Indonesia-based heavy equipment manufacturer and distributor.

The chart above is the daily chart of United Tractors.

The price stopped right at the top side of Kumo and rebounded strongly upwards.

The Kumo is thick and serves as a very strong support.

The chart above is the daily chart of IJM listed on Bursa.

The future kumo is represented by those shaded region in front of current prices.

The kumo shadows are represented by the blue horizontal lines drawn from flat portions of the Kumo in the past.

IJM closed the week bouncing off the top of the Kumo. In coming days, it will be testing the thick kumo support zone. The kumo shadow lines we draw are key resistance levels.

Should prices bounce off the kumo support zone and clear the first kumo shadow resistance level, the next significant resistance level is around 5.988, which is the next kumo shadow line drawn. This is also a key Fibonacci retracement level.

Plus Expressway listed on Bursa Malaysia looks to be starting a potential bull rally following a break above the Kumo (shaded region) and at the same time, Chikou Span (green line) also broke above the Kumo. These are signs to a strong bull momentum.

The Kijun Sen would serve as immediate significant support level.

We need to confirm this daily chart bullish signals with the larger trend. We examine the weekly chart.

The Tenkan Sen (blue line) is about to cross above the Kijun Sen (pink line). As this happens inside the Kumo, it is commonly known as a medium strength bullish crossover, a good reinforcement to the daily trend.

If prices subsequently breaks above the Kumo on the weekly chart, and the Chikou Span also breaks above the Kumo, the bullish trend would be even more certain.

The shaded region is known as the Kumo in Ichimoku Analysis. The zone serves as support or resistance to prices. YTL Power has been trading under the Kumo since the start of the year. It tested the Kumo during the start of Jul 2011 and failed to penetrate resistance. Subsequently prices fell from 2.20 to 1.65 levels.

For the first time in the year, YTL Power traded above the Kumo but quickly lost momentum and broke below the Kumo once again.

This time round, we place less emphasis on the downside Kumo break compared to the start of the year. The Kumo is sloping sideways and we expect prices to start entering a consolidation phase (sideways)

The near term resistance level is $2.065, the 61.8% retracement level due to the last significant high and low points.

We take a closer look at the chart above. As you can see, the Kumo slopes sideways and prices broke down below the Kumo.

We might start to see the Tenkan Sen (blue line) and Kijun Sen (pink line) weaving up and down. This is typical in a whipsaw condition like what we expected prices to enter into in the near future.

The trend is unclear on the daily charts we examined earlier, with a hint of downside risk following the Kumo downside breakout.

The larger trend is a lot more evident.

The chart shown above is the weekly chart of YTL Power.

A clear downside momentum is in play. The thick Kumo provides strong resistance for any attempts to begin a long term bull trend.

What is a Gap?

A gap is a change in price levels between the close and open of two consecutive days. Although most technical analysis manuals define the four types of gap patterns as Common, Breakaway, Continuation and Exhaustion, those labels are applied after the chart pattern is established. That is, the difference between any one type of gap from another is only distinguishable after the stock continues up or down in some fashion. Although those classifications are useful for a longer-term understanding of how a particular stock or sector reacts, they offer little guidance for trading.

For trading purposes, we define four basic types of gaps as follows:

A Full Gap Up occurs when the opening price is greater than yesterday’s high price.

In the chart below for Cisco, the open price for June 2, indicated by the small tick mark to the left of the second bar in June (green arrow), is higher than the previous day’s close, shown by the right-side tick mark on the June 1 bar.

A Full Gap Down occurs when the opening price is less than yesterday’s low. The chart for Amazon below shows both a full gap up on August 18 (green arrow) and a full gap down the next day (red arrow).

A Partial Gap Up occurs when today’s opening price is higher than yesterday’s close, but not higher than yesterday’s high.

The next chart for Earthlink depicts the partial gap up on June 1 (red arrow), and the full gap up on June 2 (green arrow).

A Partial Gap Down occurs when the opening price is below yesterday’s close, but not below yesterday’s low.

The red arrow on the chart for Offshore Logistics, below, shows where the stock opened below the previous close, but not below the previous low.

Why Use Trading Rules?

In order to successfully trade gapping stocks, one should use a disciplined set of entry and exit rules to signal trades and minimize risk. Additionally, gap trading strategies can be applied to weekly, end-of-day, or intraday gaps. It is important for longer-term investors to understand the mechanics of gaps, as the ‘short’ signals can be used as the exit signal to sell holdings.

The Gap Trading Strategies

Each of the four gap types has a long and short trading signal, defining the eight gap trading strategies. The basic tenet of gap trading is to allow one hour after the market opens for the stock price to establish its range. A Modified Trading Method, to be discussed later, can be used with any of the eight primary strategies to trigger trades before the first hour, although it involves more risk. Once a position is entered, you calculate and set an 8% trailing stop to exit a long position, and a 4% trailing stop to exit a short position. A trailing stop is simply an exit threshold that follows the rising price or falling price in the case of short positions.

Long Example: You buy a stock at $100. You set the exit at no more than 8% below that, or $92. If the price rises to $120, you raise the stop to $110.375, which is approximately 8% below $120. The stop keeps rising as long as the stock price rises. In this manner, you follow the rise in stock price with either a real or mental stop that is executed when the price trend finally reverses.

Short Example: You short a stock at $100. You set the Buy-to-Cover at $104 so that a trend reversal of 4% would force you to exit the position. If the price drops to $90, you recalculate the stop at 4% above that number, or $93 to Buy-to-Cover.

The eight primary strategies are as follows:

Full Gaps

Full Gap Up: Long

If a stock’s opening price is greater than yesterday’s high, revisit the 1-minute chart after 10:30 am and set a long (buy) stop two ticks above the high achieved in the first hour of trading. (Note: A ‘tick’ is defined as the bid/ask spread, usually 1/8 to 1/4 point, depending on the stock.)

Full Gap Up: Short

If the stock gaps up, but there is insufficient buying pressure to sustain the rise, the stock price will level or drop below the opening gap price. Traders can set similar entry signals for short positions as follows:

If a stock’s opening price is greater than yesterday’s high, revisit the 1-minute chart after 10:30 am and set a short stop equal to two ticks below the low achieved in the first hour of trading.

Full Gap Down: Long

Poor earnings, bad news, organizational changes and market influences can cause a stock’s price to drop uncharacteristically. A full gap down occurs when the price is below not only the previous day’s close, but the low of the day before as well. A stock whose price opens in a full gap down, then begins to climb immediately, is known as a “Dead Cat Bounce.”

If a stock’s opening price is less than yesterday’s low, set a long stop equal to two ticks more than yesterday’s low.

Full Gap Down: Short

If a stock’s opening price is less than yesterday’s low, revisit the 1-minute chart after 10:30 am and set a short stop equal to two ticks below the low achieved in the first hour of trading.

Partial Gaps

The difference between a Full and Partial Gap is risk and potential gain. In general, a stock gapping completely above the previous day’s high has a significant change in the market’s desire to own or sell it. Demand is large enough to force the market maker or floor specialist to make a major price change to accommodate the unfilled orders. Full gapping stocks generally trend farther in one direction than stocks which only partially gap. However, a smaller demand may just require the trading floor to only move price above or below the previous close in order to trigger buying or selling to fill on-hand orders. There is a generally a greater opportunity for gain over several days in full gapping stocks.

If there is not enough interest in selling or buying a stock after the initial orders are filled, the stock will return to its trading range quickly. Entering a trade for a partially gapping stock generally calls for either greater attention or closer trailing stops of 5-6%.

Partial Gap Up: Long

If a stock’s opening price is greater than yesterday’s close, but not greater than yesterday’s high, the condition is considered a Partial Gap Up. The process for a long entry is the same for Full Gaps in that one revisits the 1-minute chart after 10:30 am and set a long (buy) stop two ticks above the high achieved in the first hour of trading.

Partial Gap Up: Short

The short trade process for a partial gap up is the same for Full Gaps in that one revisits the 1- minute chart after 10:30 am and sets a short stop two ticks below the low achieved in the first hour of trading.

Partial Gap Down: Long

If a stock’s opening price is less than yesterday’s close, revisit the 1 minute chart after 10:30 am and set a buy stop twoticks above the high achieved in the first hour of trading.

Partial Gap Down: Short

The short trade process for a partial gap down is the same for Full Gap Down in that one revisits the 1-minute chart after 10:30AM and sets a short stop two ticks below the low achieved in the first hour of trading.

If a stock’s opening price is less than yesterday’s close, set a short stop equal to two ticks less than the low achieved in the first hour of trading today.

If the volume requirement is not met, the safest way to play a partial gap is to wait until the price breaks the previous high (on a long trade) or low (on a short trade).

End-of-day Gap Trading

All eight of the Gap Trading Strategies can also be applied to end-of-day trading. Using StockCharts.com’s Gap Scans, end-of-day traders can review those stocks with the best potential. Increases in volume for stocks gapping up or down is a strong indication of continued movement in the same direction of the gap. A gapping stock that crosses above resistance levels provides reliable entry signals. Similarly, a short position would be signaled by a stock whose gap down fails support levels.

What is the Modified Trading Method?

The Modified Trading Method applies to all eight Full and Partial Gap scenarios above. The only difference is instead of waiting until the price breaks above the high (or below the low for a short); you enter the trade in the middle of the rebound. The other requirement for this method is that the stock should be trading on at least twice the average volume for the last five days. This method is only recommended for those individuals who are proficient with the eight strategies above, and have fast trade execution systems. Since heavy volume trading can experience quick reversals, mental stops are usually used instead of hard stops.

Modified Trading Method: Long

If a stock’s opening price is greater than yesterday’s high, revisit the 1 minute chart after 10:30 am and set a long stop equal to the average of the open price and the high price achieved in the first hour of trading. This method recommends that the projected daily volume be double the 5- day average.

Modified Trading Method: Short

If a stock’s opening price is less than yesterday’s low, revisit the 1 minute chart after 10:30 am and set a long stop equal to the average of the open and low price achieved in the first hour of trading. This method recommends that the projected daily volume be double the 5-day average.

It is important to look at the longer term charts of the stock to know where the support and resistance may be, and play only those with an average volume above 500,000 shares a day until the gap trading technique is mastered. The most profitable gap plays are normally made on stocks you’ve followed in the past and are familiar with.

How successful is this?

In simple terms, the Gap Trading Strategies are a rigorously defined trading system that uses specific criteria to enter and exit. Trailing stops are defined to limit loss and protect profits. The simplest method for determining your own ability to successfully trade gaps is to paper trade. Paper trading does not involve any real transaction. Instead, one writes down or logs an entry signal and then does the same for an exit signal. Then subtract commissions and slippage to determine your potential profit or loss.

Gap trading is much simpler than the length of this tutorial may suggest. You will not find either the tops or bottoms of a stock’s price range, but you will be able to profit in a structured manner and minimize losses by using stops. It is, after all, more important to be consistently profitable than to continually chase movers or enter after the crowd.

This paper employs a trading strategy, previously applied only to the stock market that creates abnormal returns in the FX market. By running a simple parametric test, I find that UIP deviations follow mean reversion and momentum. In the FX market the half-life of mean reversion is very close to that obtained for the stock market, while the momentum effect is stronger than in the stock market. The combination strategy creates significant abnormal mean returns (slightly underperforming those of the stock market) and Sharpe ratios usually much higher than in the stock market. The results are also strong in comparison to strategies developed specifically for FX markets. Transaction costs do not alter the results significantly. I consider developed countries only, and the sample post January 1999 consists of just five currencies after the birth of the Euro. The portfolio I construct should be even more profitable if the currency choices are more numerous.

This paper contributes to the literature not only by applying a new strategy in the FX market, but by applying one originally designed for the stock market. The FX literature considers mean reverting behavior toward PPP values and momentum trading strategies based on moving average rules. I bring a fresh perspective to understanding FX market dynamics by considering risky asset returns, instead of macroeconomic fundamentals. This allows for the creation of a strategy based on returns (computed in this case from deviations from UIP) and a direct comparison of the exploitability of the return patterns between the FX and the stock market. Up to now strategies employed in one market have not been successfully implemented in the other market, likely due to fundamental differences between the two markets. For instance, technical trading rules were found to be completely useless in the stock market since the publication of Fama and Blume (1966), but profitable in the FX market (Sweeney, 1986; Szakmary and Mathur, 1997; and LeBaron, 1999), suggesting major differences between the markets. The striking results here, on the other hand, raise the question of why the two markets behave so similarly.

Many papers challenge the efficiency of the two markets. Neely (2002) examines the possibility that the FX market is inefficient due to Central Bank intervention. He argues that the abnormal returns obtained in the FX market through technical rules, but not existing in the stock market, are due to these interventions that have no relevance for the stock market. This paper challenges that finding. I find evidence that the FX and stock market inefficiencies have similar patterns.

One is left to wonder whether the two markets are indeed inefficient, or whether, in fact, there exists an unobserved risk factor that explains these returns. A possible theory is the overreaction hypothesis proposed from a behavioral perspective (e.g. DeBondt and Thaler, 1985, 1987) for the stock market: individuals tend to “overreact” to recent information, creating momentum. After some time, extreme movements in prices 20 will be followed by a return to fundamentals, leading to movements in the opposite direction, creating mean reversion. In foreign exchange markets, Dornbusch (1976) shows that exchange rates tend to “overshoot” in their response to monetary policies, but then revert to a long-run equilibrium. The correspondence between overreaction in the stock market and overshooting in the foreign exchange market may be responsible for the similarity in results in these two markets when the combined momentum and mean reversion strategy is applied. Examining this correspondence presents a promising direction for future research.

Download full paper here

To present this strategy, we will make an example of the US Non-Farm Payrolls (NFPs) report. Preparation begins well in advance of the actual event risk. At the beginning of the week (or even the beginning of the session), we will look for significant indicators or events considered market movers that threaten stable price action. The NFPs has proven itself to be a consistent driver of volatility over the past; so we can reasonably expect activity to increase around its release (again, the actual outcome is not important).

There are three key stages to a market’s reaction to a significant economic indicator. In the lead up to a release that could potentially turn a market or otherwise boost activity, there is often a slump in price action. Retail capital is held in the wings as traders await the actual release to trade on while institutions and banks look to hedge themselves to avoid the shock the market may be in for. What results from the drop in open interest is usually a tight range (sometimes imbued with a modest bullish or bearish bias). For this particularly report, the chop began a few hours before the actual report was released. With a range of 10-15 points, there is little room for the traditional trader to take a position. However, these are ideal conditions for a scalper who is able to repeatedly trade in and out of the market for 4-10 points each swing with a relatively tight stop set outside of the range itself. The effectiveness of trading this phase of the strategy depends on the range and the width of the bid/ask spread.

Typically, most speculative traders are interested in the actual release itself and plan to trade the data as quickly as they learn of the outcome. This brings with it a number of problems including: lagging data; a reaction that is inconsistent to the fundamental outcome; gaps; and a temporary widening of spreads. With such sort-falls, a scalper should clearly avoid these unfavorable conditions. While the shock of an indicator or other event announcement can be significant; the influence on the market environment does not last for long. From our example, the surge in volatility and open spreads lasted no longer than a few minutes. Afterwards, the market found a directional bias; but overall the swings were subdued as the market efficiently ran through preset orders or market participants otherwise took their positions off. This cowed period allows the market to develop new – or pick up old – technical formations while allowing for wider ranges.

Collection Source: DailyFX

Good trading strategies exploit recurring market dynamics that can be more prevalent in some time periods than in others. Indeed, the concept of regimes is fundamental to financial markets, and much research has focused on the detection of regime shifts. In this paper, we consider a regime as defined by a set of trading strategies that exhibit similar performance in a given time period.

We consider different parameterizations of the same strategy as distinct in our ground set of strategies. The trading problem is to pick a distribution over the ground set that will achieve good performance in the current time period. That we typically choose a distribution of support greater than one reflects uncertainty on many levels, and allows diversification of risk and return drivers.

We provide a simple algorithm that empirically picks distributions that often approximate the performance of an oracle that picks the best trading strategy in each period from the ground set. To this end, we explicitly define regimes as subsets of strategies. An initial phase is to rule out a large number of regimes as irrelevant to counter the combinatorial explosion of dealing with subsets.

In the training phase of our algorithm, we pick random time windows and learn two functions: the first, classifyMarket, is for (probabilistic) regime classification and takes as input the market data and produces a distribution over regimes; the second, stFuncDist, produces for each regime a distribution over strategies, where strategies believed to be good in that regime are assigned higher probability. The main tools we use are Monte Carlo permutation tests and incremental re-weighting of probabilities. In the trading phase we use a standard “walk-forward” approach. In the in-sample period we use the trading results for regime classification, and in the out-of-sample period we allocate capital according to the combination classifyMarket determined from the in-sample period and the current stFuncDist. This is a simple algorithm, but an empirically successful one – an indication of which we report. The approach bears some similarity to Sequential Monte Carlo methods in that it sequentially re-weights hypotheses (in our case, regarding suitability of strategies).

In the final section, we discuss an approach to modelling the time evolution of strategy fitnesses with a view towards characterizing regimes. This could be used to guide our choice of in-sample of out-of-sample periods in the existing setup. We present preliminary results in this direction. In current work, we are trying to extend the basic algorithm in such a way that we can more directly make use of the Sequential Monte Carlo method, such as particle filter based estimation of strategy fitness that might parsimoniously accomplish what is done above with permutation tests.

Download full paper here

Our main observation, until now disregarded by all traders in their trading strategies, is that when putting into relationship the height of a corrective wave and the height of the prior impulsive wave, the corrective wave tends to retrace the prior impulsive wave in Fibonacci ratios. Frequent relationships are 25%, 38%, 50%, 61% and 75%. Up to now we will refer to this effect as the Impulsive/Corrective Wave Retracement (ICWR) phenomenon.

To get started, it’s important to note some things about the charts used in this strategy, as well as to provide some definitions of the terms used. The strategy trades using the S&P E-Minis (the popular mini stock index futures traded on the CME), so, to use the strategy, you must subscribe to an eSignal package with the CME E-Minis datafeed.

First, some definitions: the TICK is the NYSE broader market cumulative TICK, and it simply measures the number of stocks in an uptick minus the number of stocks in a downtick. Note that the chart (shown in “Trading the Open: The Set-Up”) to which it is applied as a symbol has ($TICK,1) in the top left corner.

PREM, or the premium, is the difference between the lead S&P 500 futures contract and the underlying cash S&P 500 index. By knowing where the day’s fair value, buy premium and sell discount levels are, a trader can have a general knowledge of where program trades can come into the market. Note that the chart to which it is applied as a symbol has ($PREM,1) in the top left corner.

You will want to set up and save a Layout in your eSignal application with a chart showing the E-Minis (ES) at the top and $TICK and $PREM charts below it.

Trading the Open: The Set-Up

1. I use a 3-minute chart for the ES (the S&P 500 E-Mini contract), but you can use a 5-minute chart if you are comfortable with that time frame.

2. I have the high, low and close of the prior day as horizontal lines on my chart. I also plot the open as a horizontal line on my chart.

3. I place a 1-minute TICK and 1-minute PREM chart below the 3- minute ES chart.

Trading the Open: Rules of Thumb

1. I normally wait 10 – 15 minutes after the open to let the overnight ”market on open” orders get filled.

2. If the price is between the prior day’s close and the current day’s open, it is neutral, and it is best to stand aside until the market shows a long or short bias.

3. Exceptions to these rules are extreme gap openings, of which there are 4 types, divided into “buying” and “shorting” categories:

For buying:

· Gap Up Long

· Gap Down Long

For shorting:

· Gap Up Short

· Gap Down Short

Trading the Open: Some General Facts about Gaps

A gap between 0 and 1% will have an 85% chance of retracing at least halfway and a 78% chance of retracing 90 to 100%. Gaps between 1 and 2% are not quite as reliable when it comes to retracement. 78% of them will retrace at least halfway while just 60% will retrace 90 to 100%. So, it’s important to know the size of the gap.

Gap Up Long

Before You Start:

Remember: A larger gap has less of a chance of filling completely, and I think these can be the toughest to trade.

1. Wait 10 – 15 minutes after the open, and watch for pullbacks.

2. If there isn’t a pullback, then use the 1st bar/candle low as your stop.

3. If that is too far for your money management rules, use a money stop.

Look at This Example Again:

In this Gap Up Long, the ES never tested the low or the opening price. Because of that, the ES was net positive all day long.

Gap Down Long

1. After waiting 10 – 15 minutes to let overnight orders get filled, take the entry on a price cross back above the opening price with TICK confirmation.

Look at This Example Again:

In this example, the ES gapped down at the open. It then tested a pivot line (S1) and retraced back to the opening price. The entry was taken above the trigger bar when it was confirmed by TICK strength. The stop was 2 points, for a good reward/risk potential.

As you can see, the initial entry was stopped out. But, patience and persistence paid off and, after the price tested S1 and held again, a 2nd entry was taken and paid off nicely. Additional positions could have been taken on the 5/15 MA cross and on the price cross above the prior session’s close.

Gap Up Short

Before You Start:

This set-up takes advantage of the so-called “gap and trap” open. If the market gaps up through the upper Bollinger band, a short trade would trigger when the price drops below the opening price and is confirmed by a weakening TICK.

1. Place your stop just above the high point of the day.

2. Or, use a money stop if the high is too far away. (In this situation, you are not restricted to waiting 15 minutes. You have to be prepared before the open and know where the overnight Globex high and low are.)

Look at This Example Again:

The solid blue line is the opening price. As you can see, the market gapped up and pierced the upper Bollinger Band. The TICK and PREM also went negative early, giving additional confirmation. The short entry was below the opening price. One of the best ways to be prepared and to get your entry is to use a sell stop.

Before You Start:

The ES gapped down 1.3%, giving just a 60% chance of a gap fill. Patience is key

1. Wait 10 – 15 minutes for the overnight orders to be filled.

2. Take your entry on the cross below the opening price with a 2-point stop.

Look at This Example Again:

The solid blue line is the opening price, and the entry was taken on a cross below the opening price with a 2-point stop. Notice, once again, that a sell stop is a great tool to get your entry.

Collection Source: Tradewinds Online

The US dollar rallied to its strongest in nine months against the Swiss Franc as falling stock prices spurred the demand for perceived haven of US currency.

According to Bloomberg, SNB policy makers, led by Philipp Hildebrand, will keep the franc’s minimum exchange rate at 1.20 per euro when they meet in Zurich tomorrow

Referring to the daily chart on USDCHF above, prices are currently trading above the Kumo. This suggests to traders that the market is feeling bullish about USDCHF. However we note that the Kumo is thin. Typically the thickness of the Kumo cloud suggests the strength of the support or resistance. The thin Kumo therefore suggest to traders that the current support zone represented by the Kumo is weak. This is a factor to consider when trading the pair.

USDCHF has a neutral Tenkan Sen Kijun Sen crossover. This is subsequently followed by prices breaking above the Kumo, further skewing the odds towards a bull trend in USDCHF.

Multi time frame analysis is always important in technical analysis. We examine the weekly chart to give us more information on the bigger trend direction.

Following a weak Tenkan Sen Kijun Sen crossover, USDCHF is testing a thick Kumo resistance. As indicated earlier, a thick Kumo suggests the resistance is strong. Thus it is more difficult for bulls to penetrate the strong resistance zone. That said, if the strong resistance is broken through, traders must pay attention to this strong bullish momentum. As of writing, USDCHF is trading above the 50% retracement key level from the last high made during Apr 2010 and the last low made during July 2011, as shown on the chart above.

In conclusion, traders need to pay close attention in the coming weeks for a break above or failure to break above the Kumo resistance on the weekly chart. This needs to be combined with the observation on daily chart that prices are in a bull trend with a weak support. While it is more prudent to buy dips than to sell rallies, traders should navigate with caution until the weekly Kumo resistance is broken through.

Very clearly the red line signalled a sell on 31st October 2011 but we waited for a double confirmation from the blue line crossing below zero (in green circle) on 8th November and we entered a convicted short position. As of this typing, our strategy is up 600 pips.

Get your hands on this powerful forex system now.

The system Keltner presented was built around a moving average of the high, low, and closing prices with a band or channel on each side of the market formed by a moving average of the high low range. A buy signal occurs when the market penetrates the upper band and a sell signal when the market penetrates the lower. We have used the basic Keltner approach, but have added a few bells and whistles. We hope, as did Chester, that when the market makes an abrupt move away from its moving average, it is signaling a change in trend. In the King Keltner system, the penetration of the upper/lower bands signals this trend change. We will go with the flow and buy on strength and sell on weakness. We will get out with a win or a loss when the market retraces back to the moving average.

The major problem with channel break out systems is the failed breakout. Many times, the channels represent a point of market exhaustion instead of trend confirmation. Frequently, a market will spend itself by moving to the upper or lower bands and then immediately fall back and move in the opposite direction. This is our worst fear. However, since we realize the weakness of this type of system, we have programmed a liquidation stop at the moving average. Most trading methodologies will fail and some form of protection should be put into place when a trade is initiated. If most trading methodologies fail, then why put a trade on in the first place? The success to any form of trading is to cut losses short and let profits run. This basic tenet of trading falls under the realm of money management. Your trading system gets you into the trade and your money management scheme manages your position and eventually gets you out of the trade. In the King Keltner system, the direction of the moving average and the penetration of the bands are our entry technique, and the liquidation of our position at the moving average is our money management scheme. Our money management stop will either be a protective stop or a take profit stop. If we do capture a long trend, then the moving average should move in the same direction as our entry signal and with any luck capture a good portion of the move. Always remember it is the exit technique that determines the success of the entry technique. Since King Keltner is a longterm approach, short-term profits are not an objective. We will take them if they come our way, but with this type of system they would eventually become counterproductive. This system will have fewer than 50 percent wins and that’s all right. The few large trends that we do catch should more than cover the losses from the failed breakouts.

Most moving average-based systems are very simple to program and this one will not be an exception. We will need only two tools: (1) a moving average of the average of the high, low, and close prices, and (2) a moving average of the true ranges. You may not be familiar with the term true range. The range of a daily bar is simply calculated by subtracting the low price from the high price. An average of these ranges will give an estimate of future price ranges. The true range calculation extends the range of a bar to the previous day’s close (true range = max(close of yesterday, high of today) – min(close of yesterday, low of today) thus, expanding the bar’s range to include any gaps from the previous day’s close. We feel true ranges give a slightly more accurate measure of market volatility. Since we are trying to capture a longer term move, we will use 40 days in our average calculations.

King Keltner Pseudocode

movAvg = Average(((High + Low + Close)/3),40)

upBand = movAvg + Average(TrueRange,40)

dnBand = movAvg – Average(TrueRange,40)

liquidPoint = Average(((High + Low + Close)/3),40)

A long position will be initiated when today’s movAvg is greater than yesterday’s and market action >= upBand

A short position will be initiated when today’s movAvg is less than yesterday’s and market action <= dnBand

A long position will be liquidated when today’s market action <= liquidPoint

A short position will be liquidated when today’s market action >= liquidPoint

King Keltner Program

{King Keltner by George Pruitt—based on trading system presented by Chester Keltner}

Inputs: avgLength(40), atrLength(40);

Vars: upBand(0),dnBand(0),liquidPoint(0),movAvgVal(0);

movAvgVal = Average((High + Low + Close),avgLength);

upBand = movAvgVal + AvgTrueRange(atrLength);

dnBand = movAvgVal – AvgTrueRange(atrLength);

if(movAvgVal > movAvgVal[1]) then Buy (“KKBuy”) tomorrow at upBand stop;

if(movAvgVal < movAvgVal[1]) then Sell Short(“KKSell”) tomorrow at dnBand

stop;

liquidPoint = movAvgVal;

If(MarketPosition = 1) then Sell tomorrow at liquidPoint stop;

If(MarketPosition = –1) then Buy To Cover tomorrow at liquidPoint stop;

The King Keltner program demonstrates how to:

• Invoke the Average and Average True Range functions.

• Buy/Sell on the next bar at a stop level.

• Liquidate a position on the next bar at a stop level.

• Incorporate inputs for user interface and future optimizations.

King Keltner trading performance is summarized in Table 6.1

A visual example of how this system enters and exits trades is shown in Figure 6.1.

King Keltner Summary

Overall trading performance was extremely positive. The system did well in the majority of the test markets, which is a testament to its robustness. Remember there are only two parameters, which are the same for all markets. Could this system be improved by optimizing the parameters on an individual market basis? We like the idea of the same parameter set, but others in the industry would argue this point with us. Their argument would be based on the belief that markets from different sectors (e.g., Japanese Yen and live cattle) have different underlying fundamentals and, therefore, do not demonstrate similar market movements. Changing a parameter to reflect the differences between different markets is not just acceptable but it is an absolute necessity. We don’t totally agree with this argument, but we could be talked into different parameters for different sectors.

All of the currencies would have one set of parameters, and all of the meats would have one and so on. We would emphatically disagree with the idea of having a different parameter for the Japanese Yen and the Swiss Franc; these two markets have similar fundamentals and market movements. King Keltner could be the foundation for an entire portfolio-based trading platform. All that is needed is an algorithm for bet size (the number of contracts that is put on with each trade). In other words, you would need a money management overlay.

Timeframe: Any (but I recommend from 15 minutes chart and above)

Indicators:

Moving averages (Exponential)

i. Period 5 (Yellow)

ii. Period 10 (Magenta)

iii. Period 15 (Red)

iv. Period 65 (White)

MACD (Default settings)

You can also change the colors to Red and Dark Turquoise as shown below.

Entry Signals

The signals are classified into 5 sentiments for the indicators

i. Bullish

ii. Bearish

iii. Consolidation

iv. Bullish Consolidation

v. Bearish Consolidation

Which means that the moving averages and the MACD can give signals based on any of the 5 sentiments. Although, we have four Exponential moving average indicators but, I will classify them as two different indicators i.e, 5, 10 and 15 as one and then 65 as another indicator for our signals.

Now we have:

Indicator 1 – EMA (5, 10, 15)

Indicator 2 – EMA (65)

Indicator 3 – MACD with Red and Dark Turquoise colors.

SIGNALS FOR EACH INDICATOR

Indicator 1: Whenever there is a crossover of the three EMA (5, 10, 15), then wait until they split distinctively according to the periods or colors as shown on the chart, then a BUY or SELL is confirmed depending on the direction at that point in time (Bullish or Bearish). If they are all together, that means consolidation.

Indicator 2: Check the angle of the 65 EMA

Upward angle: Bullish (BUY)

Downward angle: Bearish (SELL)

Flat: Consolidation (NO TRADE)

Indicator 3: MACD

Red line is the MACD signal line

Dark Turquoise bars are the MACD cloud

Zero level (0.00) separates BUY/SELL regions

If the Red line is above the zero level (0.00), that means BUY (Bullish) but if it is below the zero line it means SELL (Bearish).

If the Dark Turquoise bars are above/below the zero line, that means BUY (Bullish)/SELL (Bearish).

If the MACD signal line (Red line) is inside the MACD cloud (Dark Turquoise), above/below the zero (0.00) line, that means BUY(Bullish)/SELL(Bearish).

If the MACD signal line (Red line) comes out from the MACD cloud (Dark Turquoise) above/below the zero (0.00) line, that means Bullish consolidation/Bearish consolidation.

Now, let me bring everything together. You must make sure that you consider these five

sentiments before taking a trade:

i. Check the three EMA (5, 10, 15).

ii. Is the market trading above or below the white line (65 EMA)?

iii. Check the angle of the white line (65 EMA).

iv. Check if the MACD signal line (Red line) is above/below the zero(0) level

v. Check if the MACD signal line (Red line) inside the MACD cloud.

Let’s apply all the rules on the market and see:

As you can see on the chart above, the 3 EMA (5, 10, 15) separated (SELL) and the candles are below the white line (SELL). The white line (65 EMA) was angling down (SELL) and at the same time the MACD signal line (Red line) was below the zero level (0.00) (SELL) and entering the MACD cloud (Dark Turquoise) (SELL).

For every signal, make sure the five sentiments shows BUY/SELL before you take a trade.

Exit Signals

You can pullout from a trade when the MACD signal line (Red line) comes out of the MACD cloud for short time traders or when the signal line crosses above/below the zero level (0.00) in an opposite direction of our trade for position traders. Look at the chart below:

Collection Source: Obaseki O. A.

Ichimoku chart trading is quickly gaining popularity in the forex trading community, although its early application in Japanese markets was confined primarily to commodities and futures trading. The newly stylized chart is actually a combination of specialized indicators that was devised back in the sixties in Japan, the land that gave us candlesticks many centuries ago. Forex traders picked up the mantle some years back, and began to tinker with its various attributes to match their personal needs.

Steeped in Japanese terminology, the primary components consist of a “Kumo Cloud” that represents support and resistance levels, both present and future, and various lines that act like moving averages, coupled with a market sentiment indicator. Many forex traders have discarded the latter items, but have retained the “cloud” and added a few other indicators to support their individual trading needs. The “line” components tend to work better when volume data or exchange cut-offs are present, both nonexistent in the world of currency markets. The basic application is readily available on Metatrader 4 platforms supported by most forex brokers.

Many experienced traders have used variations on this theme over the past five years, arriving at a forex strategy that focuses on taking what the market is prepared to give without attempting to pick perfect market bottoms or tops. When all conditions are met, positions are initiated. A sample chart “template” is displayed below:

The “Kumo Cloud” has been retained and augmented with two exponential moving averages (50 and 100 period settings), along with Slow Stochastics and ATR indicators affixed. This trading system works best with hourly charts, thereby eliminating much of the “noise” in shorter timeframes. Trade set-ups appear whenever the candlesticks are fully below or above the cloud and EMA combination.

Two trading opportunities have been highlighted with green circle pairs on the chart. A third entry point has formed at the right portion of the chart and is worthy of attention. Downtrends tend to migrate back up to and through the cloud. Once above, the cloud gives some indication of future directions. An experienced trader, however, is happy to get in and get out with 60-pip gains, as indicated. The ATR suggests adequate stop-loss margins, and the Slow Stochastics indicator is only used to validate bottom reversals.

For some traders, this customized version of Ichimoku trading may appear overly complex with too many moving parts, but, for the conservative trader that prefers to have several conditions met before entering the market, the plan offers a “step-by-step” decision-making process that satisfies their personal objectives. Adding more EMA’s with longer period settings is another option that has been tried with success, but each interested trader may wish to substitute his favored indicator of choice.

The chart choice above was taken from a current market setting in order to capture the unique property of the “Kumo Cloud” to project into the future, an attribute that few, if any, other indicators emulate. Once the template is in place, users can obviously review historical pricing behavior to observe favorable trading opportunities in the past that offer better returns than presented in this example. The recommendation is to experiment with this system until you reach a complement of indicators that suits your personal tastes and trading system requirements.

Ichimoku chart trading is relatively new in a currency setting. In order to be successful its helpful to have working capital. The basic approach may provide all you need to detect favorable trading opportunities in the market. Hourly and daily timeframes are more appropriate when using this system to eliminate noise, and customization is always an option if that is your inclination.

To learn more about Ichimoku, watch this online Ichimoku course.

While their application is extremely wide, we do not believe that trailing stops are appropriate in all trading circumstances.  Most of the trailing exits we will describe are specifically designed to allow profits run indefinitely. Therefore, they are best used with systems that are trend following. In counter-trend trading, more aggressive exits are suitable.  The “when you have a profit, take it” philosophy works best when you are trading counter-trend, since the anticipated amount of profits is relatively limited.  However, to take quick profits in a trend is usually an exercise in frustration.   Exiting the market with a small profit only to watch a huge trend continue to move in our trade direction for days or months after our untimely exit can be very frustrating.  Therefore, we recommend using different exit strategies based on the underlying market conditions. We will discuss the more aggressive exits later. For now, we will concentrate on exits designed to accumulate large profits over time.

A thorough understanding of trailing stops is critical for trend-following traders because trend following is typically associated with a lower percentage of profitable trades. This makes it particularly important to capture as much profit as possible when those large but infrequent trends occur. Typical trend followers make most of their profits by capitalizing on a few infrequent but very large trends, while managing to cut losses effectively during the more frequent sideways markets. The rationale behind the use of the trailing stop is based on the anticipation of the occasional extremely large trends and the possibilities of capturing substantial profits during these major trends.  If the trade entry is timely and the market continues to trend in the direction of the trade, trailing stops are an excellent exit strategy that can enable us to capture a significant portion of that trend.

The trailing stops we will describe in this and following articles have similar characteristics.  It is important to understand these characteristics as we use them to design our trading systems. Effective trailing stops can significantly increase the net profits gained in a trend-following system by allowing us to maximize and capture large profitable trades. The ratio of the average winning trade to the average losing trade is substantially improved by using trailing stops.

However, there are some negative characteristics of these stops.  The number of profitable trades is sometimes reduced since these stops may allow modestly profitable trades to turn into losers.  Also, occasional large retracements in open trade profits can make the use of these stops quite difficult psychologically.  No trader enjoys seeing large profits reduced to small profits or watching profitable trades become unprofitable.

The Channel Exit

The simplest process for following a trend is to establish a stop that continuously moves in the direction of the trend using recent highest high or lowest low prices.  For example, to follow prices in an uptrend, a stop may be placed at the lowest low of the last few bars.   Conversely, in a downtrend, the stop is placed at the highest high of the last few bars.  The number of bars used to calculate the highest high or lowest low price depends on the room we wish to give the trade.  The more bars used to set the stop, the more room we give the trade and consequently the larger the retracement of profits before the stop is triggered.  Using a very recent high or low point enables us to take a quick exit on the trade.

This type of trailing stop is commonly referred to as a “Channel Exit.”  The “channel” name comes from the appearance of a channel formed from using the highest high of x bars and the lowest low of x bars for short and long exits respectively.  The name also derives from the popular entry strategy that uses these same points to enter trades on breakouts.  Since we are focusing on exits and will be using only one boundary of the channel, the term “channel” may be a slight misnomer, but we will continue to refer to these trailing exits by their commonly used name.

For most of our examples, we will assume that we are working with daily bars but it is possible that we could be working with bars of any magnitude depending on the type of system we are designing.  A channel exit is extremely versatile and can work equally well with weekly bars or five-minute bars.  Also, keep in mind that any examples referring to long trades can be equally applicable to short trades.

The implementation of a channel exit is very simple.  Suppose we have decided to use a 20-day channel exit for a long trade.  For each day in the trade, we would determine the lowest low price of the last 20 days and place our exit stop at that point. Many traders may place their stops a few points nearer or further than the actual low price depending on their preference.  As prices move in the direction of the trade, the lowest price of the last twenty days continually moves up, thus “trailing” under the trade and serving to protect some of the profits that have accumulated.  It is important to note that the channel stop moves only in the direction of the trade.  When prices fall back through the lowest low price of the last twenty days, the trade is exited using a sell stop order.

The first and most obvious question to answer about channel exits is how many bars to use to pick the exit point.  For example, should we set our stop at the lowest low of 5 days or the lowest low of 20 days, or some other number of days?  The answer to this question depends on the objectives of our system.

A clearly stated set of objectives for the system is very helpful at these important decision points.  Do we want to design a long-term system with slow exits or do we want a short-term system with quicker exits?  A longer channel length usually allows more profits to accumulate over a long run if there are big trends.  A shorter channel will usually capture more profits if there are smaller trends.  In our research, we have found that long-term systems generally work well with a trailing exit set at the lowest low or the highest high of the last 20 days or more.  For intermediate term systems, set the trailing exit at the lowest or highest price of between 5 to 20 days.  For short-term systems, the lowest or highest price of between 1 to 5 days is usually optimal.

Trailing stops with a long-term channel accumulate the largest open profits if there is a sustained trend.  However, this method also gives back the largest amount of open profits when the trailing stop order is eventually triggered.  Using a shorter channel can create a closer stop in order to preserve more open trade profits.  As can be expected, the closer stop often does not allow profits to accumulate as nicely as the longer channel, and often causes a premature exit out of a large trend.

However, we have noticed that a very short channel length of between 1 and 3 bars is still highly effective in trailing a profitable trade in a runaway trend.  The best type of channel exit to use in a runaway trend is a very short channel, for example 3 bars in length.  We have observed that this exit in a strong trend often keeps us in a trade until we are close to the end of the trend.

It appears that there is a conflict of exit objectives here.  A longer channel length will capture more profit but give back a larger proportion of that profit; a shorter channel length will capture less profit, but protect more of what it has captured.  How can we resolve this issue and create an exit that can both accumulate large profits, as well as protect these profits closely?  A very effective exit technique calls for a long-term channel to be implemented at the beginning of a trade with the length of the channel gradually shortened as larger profits are accumulated.  Once the trade is significantly profitable or the market is in a strongly trending move, the goal is to have a very short channel that gives back very little of the large open profit.

Here is an example of how this method might be implemented.  At the beginning of a long trade, after setting our previously described money management stop to avoid any catastrophic losses, we will trail a stop at the lowest low of the last 20 days.  This 20-day channel stop is usually far enough from the trade to avoid needless whipsaws and keep us in the trade long enough to begin accumulating some worthwhile profits.  At some pre-determined level of profitability, which can be based on a multiple of the average true-range or some specific dollar amount of open profit, the channel length can be shortened to take us out of the trade at the lowest low of 10 days. If we are fortunate enough to reach another higher level of profitability, like 5 average true ranges of profit or some other larger dollar amount, we can shorten the channel further so that we will exit at the lowest low of 5 days.

At the highest level of profitability, perhaps a very rare occurrence, we might even be able to place our exit stop at the low of the previous day to protect the large profit that has accumulated.  As you can see, this strategy allows plenty of room for profits to accumulate at the beginning of a trade and then tightens up the stops as profits are accumulated.  The larger the profits in the trade, the tighter the exit stop becomes.  The more we have, the less we want to give back.

There is another way to improve the channel exit that is worth discussing.  This method is to contract (or expand) the traditional channels using the height of the channel, or some multiple of the average true range.  How this would work – suppose you are working with a 20-day channel exit.  First, calculate the height of the channel, as measured by the distance between the highest 20-day high and the lowest 20-day low.  Then, you contract the channel by increasing the lowest low value and decreasing the highest high value previously obtained to determine the exit points.  For instance, in a long trade, you could increase the lowest low price by 5% of the channel height or by 5% of the average true range, and use the adjusted price as your exit stop.  This creates a slightly tighter stop than the conventional channel.  More importantly, it allows your stop order to be executed before the multitude of stops that are already placed in the market at the 20-day low.

The last point should be considered an important disadvantage of the channel exit.   Channel breakout methods are popular enough to cause a large number of entry and exit stops to be placed at previous lowest low and highest high price levels.  This can cause a significant amount of slippage when attempting to implement these techniques in your own trading.  The method of adjusting the actual lowest low or highest high price by a percentage of the overall channel height or the average true range is one possible way to move your stops away from the stops that are placed by the general public and achieve better executions on your exits.

Collection Source: Charles ‘Chuck’ LeBeau

The chart above is the MSCI Singapore chart for today. Price is below the kumo and is heading downwards, a confirmation of the resistance posed by the Kumo shadow we earlier discussed.

If you look at this chart, the portion highlighted in the green circle is the future Kumo. What’s interesting is that it is thin and twisting – what’s better known as a Kumo Twist.

A Kumo Twist is produced when the Senkou Span A and Senkou Span B overlap repeatedly, and this is a sign of uncertain market, which signifies range bound prices.

Ichimoku analysis suggests that the market is currently unsure, range bound, with a higher probability to the down side.

To learn more about the powerful Ichimoku Kino Hyo, click here to watch an online Ichimoku course.

In essence, the study submits that prices tend to move in waves; more specifically, they move in 5 waves upwards, and 3 waves downwards. If you look here at the weekly silver chart, price of silver is expected to be bullish in the long term.

The downward move (in an uptrend) is called the corrective a-b-c pattern, which is typically followed by a 5 wave movement upwards.

To learn more about Elliott Waves in forecasting stocks, forex and commodities prices, watch this e-learning video.

Recently I’ve been doing quite a bit of research on new systems for stock trading. The research is on behalf of a new hedge fund that will be starting later this year. The fund will be managed by Tan LeBeau LLC, the company that funded this research project. After some serious internal discussion about the advantages of keeping this new exit strategy a company secret, the LLC has graciously given me permission to share this discovery with our System Traders Club members. Here is a bit of background on how the new exit strategy came about.

In the process of testing various exit strategies for our stock trading systems we found that we needed a profit-taking exit that performed somewhat along the lines of the Parabolic SAR but that could be made more flexible and easier to code and apply. We found that the Parabolic was hard to use because it was often on the opposite side of the market from our trades or it was starting from a point that was too low for what we wanted. After spending a great deal of time with the Parabolic we decided it was not helpful for the particular systems we were creating. As an alternative to the Parabolic exit we decided to test some new exit ideas based on my extensive work and experience with the Average True Range. After a great deal of tinkering and experimentation we were pleased to learn that the new exit strategy worked surprisingly well for profit taking and had many very useful features and applications. I decided to name this new exit strategy the “ATR Ratchet”.

The basic idea is quite simple. We first pick a logical starting point and then add daily units of ATR to the starting point to produce a trailing stop that moves consistently higher while also adapting to changes in volatility. The advantage of this strategy over the original Parabolic based exit is that when using the ATR Ratchet we have much more control of the starting point and the acceleration. We also found that the ATR based exit has a fast and appropriate reaction to changes in volatility that will enable us to lock in more profit than most conventional trailing exits.

Here is an example of the strategy: After the trade has reached a profit target of at least one ATR or more, we pick a recent low point (such as the lowest low of the last ten days). Then we add some small daily unit of ATR (0.05 ATR for example) to that low point for each day in the trade. If we have been in the trade for 15 days we would multiply 0.05 ATRs by 15 days and add the resulting 0.75 ATRs to the starting point. After 20 days in the trade we would now be adding 1.0 ATRs (.05 times 20) to the lowest low of the last ten days. The ATR Ratchet is very simple in its logic but you will quickly discover that there are lots of moving parts that perform a lot of interesting and useful functions; much more than we expected.

We particularly like this strategy because, unlike the Parabolic, the ATR Ratchet can easily be implemented any time we want during the trade. We can start implementing the stop the very first day of the trade or we can wait until some specific event prompts us to implement a profit-taking exit. I would suggest waiting to use the exit until some minimum level of profitability has been reached because, as you will see, this stop has a way of moving up very rapidly under favorable market conditions.

The ATR Ratchet begins very quietly and moves up steadily each day because we are adding one small unit of ATR for each bar in the trade. However the starting point from which the stop is being calculated (the 10 day low in our example) also moves up on a regular basis as long as the market is headed in the right direction. So now we have a constantly increasing number of units of ATR being added to a constantly rising ten day low. Each time the 10-day low increases our ATR Ratchet moves higher so we typically have a small but steady increase in the daily stop followed by much larger jumps as the 10 day low moves higher. It is important to emphasize that we are constantly adding our daily acceleration to an upward moving starting point that produces a unique dual acceleration feature for this exit. We have a rising stop that is being accelerated by both time and price. In addition, the ATR Ratchet will often add substantial additional acceleration in response to increases in volatility during the trade.

The acceleration due to range expansions is an important feature of the ATR Ratchet. Because markets often tend to show wider ranges as the trend accelerates the ATR will tend to expand very rapidly during our best profit runs. In a fast moving market you will typically find many gaps and large range bars. Because we are adding multiple units of ATR to our starting point, any increase in the size of the underlying ATR causes the stop to suddenly make a very large jump that brings it closer to the high point of the trade. If we have been in the trade for forty days any increase in the ATR will have a forty-fold impact on the cumulative daily acceleration. That is exactly what we want it to do. We found that when a market was making a good profit run the ATR Ratchet moved up surprisingly fast and did an excellent job of locking in open profits.

Keep in mind that this exit strategy is a new one (even to us) so our experience and observations about it are still very limited. However I am going to discuss a few observations about the variables that might help you to understand and apply this exit successfully.

Starting Price: One of the nice features about the ATR Ratchet is that we can start it any place we want. For example we can start it at some significant low point just as the Parabolic does. Or we can start it at a swing low, a support level, and a channel low or at our entry point minus some ATR unit. If we wait until the trade is fairly profitable we could start it at the entry point or even somewhere above our entry point. The possible starting points are unlimited; use your imagination and your logic to find a starting point that makes sense for your time frame and for what you want your system to accomplish. Our idea of starting the Ratchet from the x day low makes it move up faster than a fixed starting point (as in the Parabolic) because the starting point rises repeatedly in a strong market. If you prefer, you could just as easily start the Ratchet at something like 2 ATRs below the entry price and then the starting point would remain fixed. In this case the Ratchet would move up only as the result of accumulating additional time in the trade and as the result of possible expansions of the ATR itself.

When to Start: We can very easily initiate the exit strategy based on time rather than price or combine the two ideas. For example, we can start the exit only after the trade has been open for at least 10 days and is profitable by more than one ATR. My general impression at this point is that it is best to implement the ATR Ratchet only after a fairly large profit objective has been reached. The ATR Ratchet looks like a very good profit taking exit but I suspect it will kick you out of a trade much too soon if you start it before the trade is profitable.

As I mentioned, one of the things I like best about the ATR Ratchet is its flexibility and adaptability. Here is another idea on how to start it. We can start it after fifteen bars but we don’t necessarily have to add fifteen ratchets. The logic for the coding would be to start the Ratchet after 15 bars in the trade but multiply the ATR units by the number of bars in the trade minus ten or divide the number of days in the trade by some constant before multiplying the ATR units. This procedure will reduce the number of ratchets, particularly at the beginning of the trade when the exit is first implemented. Play around with the ATR Ratchet and see what creative ideas you can come up with.

Daily Ratchet Amount: After testing it the daily Ratchet amount we chose when we were first doing our research turned out to be much too large for our intended application. The large Ratchet amount (percentage of ATR) moved the stop up too fast for the time frame we wanted to trade. After some trial and error we found that a Ratchet amount in the neighborhood of 0.05 or 0.10 (5% or 10% of one 20-day average true range) multiplied by the number of bars the trade has been open will move the stop up much faster than you might expect.

As a variation on this strategy the very small initial Ratchet can always be increased later in the trade once the profits are very high. We could start with a small Ratchet and then after a large amount of profit we could use a larger daily Ratchet increment. There are all sorts of interesting possibilities.

ATR Length: As we have learned in our previous uses of ATR, the length that we use to average the ranges can be very important. If we want the ATR to be highly responsive to short term variations in the size of the range we should use a short length for the average (4 or 5 bars). If we want a smoother ATR with less reaction to one or two days of unusual volatility we should use a longer average (20 to 50 bars). For most of my work with the ATR I use 20 days for the average unless I have a good reason to make it more or less sensitive.

Summary: We have just scratched the surface on our understanding of the possibilities and variations of the ATR Ratchet as a profit taking tool. We particularly like the flexibility it offers and we suspect that each trader will wind up using a slightly different variation. As you can see, there are many important variables to tinker with. Be sure to code the Ratchet so it gets plotted on a chart when your are first learning and experimenting with it. The ATR Ratchet is full of pleasant surprises and the plot on the chart will quickly teach you a great deal about its unusual characteristics.

We propose several ideas for trading gold from a systematic perspective.

Introduction 

We seek to ascertain the main drivers within the gold market. We also try to understand how it trades with respect to assets within the foreign exchange market. As a very first step, we need to understand why investors purchase gold. The most obvious reason is gold‟s reputation as a store of value, which has remained largely undiminished through the ages. Unlike other metals, it does not degrade through oxidation and its supply has remained largely limited. However, when supply has been increased it has not been immune to the basic laws of supply and demand. In the sixteenth century when the Spanish mined a large amount of precious metals from newly conquered parts of South America, gold’s value declined in terms of the goods which could be purchased. Today, it can be argued that supply is a lot more constrained1. Indeed only around 168,300 tonnes of gold had been mined by the end of 2010. Assuming gold‟s price is $1500 an ounce, this implies that the gold above ground is worth around $8trn.

Summarizing the major drivers of gold

Bullish for gold

Real rates:

Negative real rates (i.e. high inflation and low nominal rates) mean that US Treasuries yield less than gold on an inflation adjusted basis, thus making gold more attractive to hold.

Dollar:

The gold price tends to be supported by a weak USD. It is priced in USD. The USD is generally negatively correlated with commodity prices in general, not just with gold.

Supply picture:

Heavy demand and a lack of supply (from central banks, mining, recycling etc) would positively affect the gold price.

Risk sentiment:

Strong risk sentiment tends to be positive for the gold price, as margin investors are prepared to leverage up more to purchase gold. Also during very severe market crises gold’s status as a hold on value can assume greater importance (where the lack of credit risk associated with gold can be an attractive property).

Bearish for gold

Real rates:

Positive real rates (i.e. low inflation and high nominal rates) mean that investors can earn more yield from holding US Treasuries than gold on an inflation-adjusted basis.

Dollar:

The gold price tends to fall when USD rallies.

Supply picture:

Ample supply such as from large-scale central bank dumping would adversely affect the gold price.

Risk sentiment:

Poor risk sentiment can force heavily leveraged investors to liquidate holdings in liquid assets (such as gold) to pay for losses elsewhere. Note that we make a distinction between periods of poor risk sentiment and extreme risk aversion.

One reason investors cite for purchasing gold is that it can be used as a hedge for inflation. Hence, as inflation reduces the value of paper money, gold should be worth more in terms of paper money. In Figure 2, we have plotted gold alongside the USD 10yr real rate. As real rates rise, we see that the gold price tends to decline. When real rates fall4, the gold price tends to appreciate. Intuitively this relationship is easy to understand. When real rates are very high, the attraction of holding gold diminishes, as investors can invest in Treasuries and earn high decent-sized yields, even allowing for inflation. In Figure 3, we have plotted the size of the Fed‟s balance sheet against the gold price. We see that since the introduction of QE during the financial crisis there has been a substantial expansion of the Fed‟s balance sheet. During this period, there has been a strong relationship between the increase in the gold price and the rise in the Fed‟s balance sheet. The supply of gold cannot be readily increased unlike paper money, which can be printed by central banks.

Gold and the dollar

Another important factor in gold price action has been the dollar itself. Generally, the USD tends to have an inverse relationship with commodity prices. The US is a substantial net importer of commodities (in particular crude oil) and as such, rises in the cost of commodities adversely affect the US terms of trade. Furthermore, gold is denominated in USD, hence any broad-based USD move should also affect gold prices. In Figure 4, we have provided an example of this, showing how AUD/USD and the gold price tend to move together. In Figure 5, we have plotted USD/ZAR against gold, but the relationship seems slightly weaker.

Below, we look at the relationship between the gold price and USD using daily and quarterly data, using some contemporaneous regressions across a multitude of different USD crosses. Our sample is from 1992 to present. In Figure 6, we present the T statistics for these regressions and in Figure 7 we show the betas from these regressions. Looking at daily data, in virtually every case there is a statistically significant relationship between moves in the USD crosses and the gold price. Hence, as the USD strengthens, gold tends to sell off and vice versa. In particular, daily moves in EUR/USD and AUD/USD tend to have the strongest relationship with the gold price. Generally for EM currencies the T statistics tend to be smaller6. Looking at quarterly data, the relationship is still statistically significant, but the Tstatistics are mostly smaller. Using quarterly data, USD/CHF has the highest T-statistic. USD/JPY also has a high T-statistic. Looking at the betas, generally, a 1% move higher in USD versus other currencies is accompanied by a move lower in the gold price by around 0.5%. A similar relationship is found with quarterly data.

In Figure 8, we plot gold returns in the two weeks following major risk events in the past 15 years. Our first observation is that it has tended to sell off during many of the market crises in the recent past. Hence, gold seems to behave more like a risky asset than a safe-haven asset. Indeed, if we construct a regression between gold and short run GRAM+, the relationship is statistically significant. One explanation may be that much of the recent boom in commodity prices has been fuelled by liquidity. However, there is an exception when gold appreciated significantly during the biggest market crisis in our sample, following the bankruptcy of Lehman Brothers. This suggests that during the most severe riskevents there is some value in owning gold (credit risk is not an issue when purchasing physical gold). We have also plotted the moves in gold priced in EUR for comparison and we find something similar, suggesting that our results are not purely influenced by the USD effect of gold pricing. The USD tends to appreciate during risk aversion. There are several reasons for this. First, it has the status of being the world‟s reserve currency. Second, many low risk assets are denominated in USD, such as US Treasuries.

The gold price has rallied significantly in recent years. In particular since the beginning of the credit crunch it has risen from around $600 to over $1500. In the first quarter of 2011, nearly 64% of total gold demand was driven by Asia (India, China and the Middle East). One key issue to understand is how Asian demand is reflected in the price action. This can be done by looking at the intraday price action in gold. We split up the moves in gold spot during Asia, LDN AM, LDN PM and NY PM. In Figure 9, we plot the cumulative moves during these various time zones. Our first observation is that price action is fairly bearish during LDN AM. During LDN PM and NY PM it is more bullish, but price action is still somewhat inconsistent. However, the clearest observation is the continual appreciation of gold during Asian trading hours. In May 2011, when gold depreciated significantly, it still managed to rally during Asian trading hours. Much of the liquidation during May was concentrated during London hours. This ties with other statistics on physical demand emanating largely from Asia. These factors suggest that increasingly inflation from Asia could help drive price action

In terms of the actual break-up of the physical demand for gold (see Figure 10), by usage most demand comes from jewellery (over half). Of the investment portion, most of this comes through demand for bars and coins, rather than ETFs. In Figure 11, we have plotted the average monthly moves over the past 30 years. In each of our subsamples, there has been a significant rise during September (in fact in over 70% of these years). This is consistent with demand for gold before the Indian wedding season, which begins in September.

Throughout much of the earlier part of the last decade, central bank selling of gold was around 400 tonnes per annum. Up until late 2008, there was very much an inverse relationship between central bank selling (mostly developed markets) and the gold price. In recent years, however, as central banks have become net purchasers of gold (mostly from emerging markets), there has been a positive correlation with the gold price, suggesting that in recent years it has helped to support the gold price. The US is the largest holder with around 8,000 tonnes equivalent to about USD400bn.

The relationship between equity volatility and gold volatility

Intuitively we might expect a strong relationship between equity and gold volatility (see Figure 14). However, is this relationship contemporaneous, or is it lagged? Using 2006 to present day, we tested for a lagged daily relationship and found it to be statistically significant (T-statistic of the beta coefficient is 6.99). Furthermore, if we do a lagged correlation between VIX and gold price volatility, we find that it is positive historically. This suggests that should VIX rise, we would expect gold implied volatility to follow. There is the caveat that VIX is more liquid hence this might be more of a contemporaneous relationship, when traded.

We have established that the gold price has a strong relationship with other asset prices, notably real rates and also USD. Below we have constructed a multiple contemporaneous regression-based model that uses AUD/USD and USD10yr real rates as independent variables and gold as the dependent variable. We use quarterly data to provide a longer-term forecast. We can then use the coefficients of the regression alongside moves in the independent variables to estimate the value of gold. We can compare this to the actual value of gold and gauge whether it is overvalued or undervalued compared to our estimate. In Figure 16, our model currently suggests that gold is slightly overvalued on a short-term basis. In Figure 17 we plot the gold price, which has been adjusted for moves in inflation. Based on this measure we have not yet eclipsed the all-time high of 30 years ago.

Creating some trading rules for gold

We have discussed the various drivers for gold. Based upon this analysis we have constructed various trading rules for gold. We use the Dow Jones excess returns index for gold, which is based upon gold futures positions. Our sample goes back to 1997. Our active trading rules flip between long and flat positions, but do not go short. We investigate several rules:

• Long only – as a benchmark we compare the returns of our various trading strategies with a static long position of the index
• Momentum – we trade gold based on underlying momentum. When there is strong upward momentum, we buy gold. Otherwise, we stay flat.
• Real rates – we trade gold based upon real rates. Generally speaking, rising real rates trigger a flat signal, while falling real rates trigger buy signals
• FX – we trade gold based upon FX markets. When USD depreciates we buy gold. Conversely,we stay flat, when USD appreciates.
• Risk – we trade gold based upon risk conditions as measured by our proprietary risk indicator GRAM+. When GRAM+ is in risk averse territory we stay flat and we buy gold when it is in risk neutral or risk seeking.
• Portfolio – we create a portfolio of our four trading strategies, namely momentum, real rates, FX and risk.

In Figure 18 we plot the historical returns for our active trading strategies. In Figure 19, we plot the returns for long only versus our portfolio. The first observation is that a long-only strategy has better returns than our portfolio. However, this comes at a cost of highest volatility and much higher drawdowns. It also has a slightly lower IR than our portfolio (0.47 vs. 0.57).

We also investigate the performance of these various strategies on a year-on-year basis. By analysing the returns this way, we can understand how the drivers of gold have differed over the years. For example, our real rates trading rule had a very strong year in 2009. This is consistent with our early observations concerning the rapid expansion of the Fed‟s balance sheet in 2009.

Correlation of the various gold trading strategies

In Figure 21, we have plotted the long-term weekly correlations (since 1997) between our various trading strategies and correlations with other indicators (S&P500, GRAM+, real rates and gold spot). We see that the correlations between our active strategies and long only are evidently high, which should not be surprising. However, interestingly, the correlations among the various strategies are somewhat lower than we might expect. For example the correlation with Nomura‟s Global Carry Currency basket, although positive is relatively small. This suggests that investors that are long gold can diversify themselves to a certain extent by investing in FX carry.

Much of the work we have done here confirms common market intuition on the behaviour of gold. We find that on a day-to-day basis it is most highly correlated with EUR/USD and AUD/USD. On a quarterly basis, it is highly correlated with most G10 USD crosses. Gold is also negatively correlated with real rates. Perhaps unexpectedly, we find that in the immediate aftermath of many recent market crises, gold has behaved more like a risky asset than a safe-haven asset (with the exception of the Lehman crisis). Indeed, it has a statistically significant positive relationship with GRAM+, Nomura‟s proprietary risk indicator. We find that in recent years, gold has appreciated most during Asian trading hours. This is consistent, with gold demand data, which show that the majority of demand comes from Asia. This suggests that Asian sentiment towards gold is likely to be increasing important going forward (and hence as will Asian inflation). We have used the above observations to construct several active trading rules for gold. We have also created a portfolio of active gold trading strategies, which has an information ratio of 0.57 and annualized returns of 6.5% since 1997. Drawdowns from our active strategy are nearly half that of a static long-only gold position. With our economists not expecting the Fed to move higher until 2013, it seems reasonable to expect gold to continue to rise in the near future. The lack of QE3 however, implies that a move higher is likely to be measured.

Collection Source: Nomura

Introduction

Tom DeMark’s technical indicators have a strong following within the market, but are generally less popular than simpler indicators such as simple moving averages and RSIs. A significant amount of literature is available that explains them. Much of the work explains how to construct the signals. We investigate one of the most well known of DeMark’s indicators, TD Sequential. However, our objective is to see whether historically this indicator can be used to trade FX profitably, rather than purely to describe the indicator’s construction. We shall examine a subset of the output from TD Sequential to generate a trading signal.

Essentially, a buy (downward moving) setup is created, when 9 consecutive closes are LESS than the close four bars earlier. A sell (upward moving) setup is created is created, when 9 consecutive closes are HIGHER than the close four bars earlier. If there are less than 9 consecutive closes in a particular direction, we cancel the setup and have to start again. In Figure 1, we show the TD Sequential for EUR/USD plotted on Bloomberg. Whenever there is a green 9 in Figure 1 it is a place where a trading signal would be triggered.

There are other elements to the TD Sequential, such as the creation of countdowns, which are written red in Figure 1. However, to keep our trading rule relatively easy to understand, we shall avoid looking at these. Furthermore, there are many different variations of these rules in literature, which can further complicate matters.

Our first trading signal that we have defined is essentially a mean-reverting signal, so we would get a sell on an upward moving setup, when the price is driven repeatedly higher and a buy on a downward moving setup when the price action is driven repeatedly lower. Clearly, such an approach is likely to fail, if markets are continually trending in a specific direction. This is simply because such an indicator will repeatedly indicate that an investor should fade the current market move. Our objective will be to assess whether this factor really does have an impact in practice. To that end we calculate the historical returns for two different trading rules. First, we shall try the traditional mean-reverting TD Setup rule ie:

Mean-reverting TD Setup

•  Buy when a downward moving setup is created (so we fade moves lower in spot)
•  Sell when a upward moving setup is created (so we fade moves higher in spot)

Second, we use the setup in a less commonly used trend way, ie:

Trend-following TD Setup

•  Sell when a downward moving setup is created (so we follow moves lower in spot)
•  Buy when a upward moving setup is created (so we follow moves higher in spot)

Historical analysis of mean-reverting and trend-following TD Setup rules

We present the historical returns for these trading rules in Figure 2. We find that for the majority of the crosses we have analysed, employing our very specific mean-reverting trading rule is not always profitable. Admittedly, we do emphasis that we are only testing a small subset of the full TD Sequential trading framework. There are exceptions for certain crosses, notably USD/JPY and EUR/CHF, but these seem relatively rare. This contrasts with the trend following rule based upon TD Setup, which are largely profitable in particular for G10 USD crosses and for EM. Our findings seem to suggest that the common usage of TD Setup, to identify areas where we can fade price action is in fact loss-making in the FX markets and instead investors should use TD Setups to identify trends in the market. One explanation is that markets on the whole tend to trend. Hence, for a mean-reverting style rule to be profitable it must avoid triggering signals during periods of strong trends. Of course, we note that we not following the full TD Sequential trading framework.

Figure 2: Information ratios for mean-reverting and trending TD Setup

Introduction

Our research on technicals has largely focused on trend-following strategies. By and large FX markets tend to trend. Intuitively, we can view these trends as self fulfilling. As price action begins to move in a certain direction, it can attract market participants eager not to miss out on the move. However, markets do not trend indefinitely. This gives rise to periods of more range-bound price action, where the most profitable strategy is fading moves. In ranging markets, attempting to use trend-following strategies can be unprofitable. For example, as price action breaks out to the topside, a trend-following strategy would likely suggest buying spot. Yet, in a ranging market, this is likely to be the high, and spot will likely rebound lower. Part of the problem with strategies designed for ranging markets, is attempting to identify points where we can fade price action (see Figure 1). As markets tend to trend, we also need to be selective when we apply these strategies. If we keep attempting to fade price action during strong trends, we are likely to be repeatedly stopped out.

Our objective is to create trading rules to fade price action, with the above thoughts in mind. The trading rule we employ has two parts to it:

Fade consecutive closes – The rationale is that as we get a series of consecutive closes in any particular direction, there is likely to be a pullback as investors seek to take profits.

Fade large intraday jumps – We look at the difference between the high and low prices and whether spot has fallen over the day. We then standardise this metric on a rolling basis. If price action has jumped up considerably on the day and the daily range is large, a large numbers of stops are likely to have been cleared. Hence, a lot of the impetus for the move upwards1 has likely been removed. As a result, we might consider fading price action. In addition, we can think of large ranges in price action as being like a volatility filter.

Rather than purely looking at these rules in isolation, we combine them together, so we trade less often (and hopefully avoid periods of strong market trends) and have some confirmation on it. It will also reduce the likelihood of attempting to fade large breakouts at the beginning of large trends, or attempting to fade slow directional grinds in price action. Hence our fade trading rule becomes:

Sell spot – if there are several consecutive closes higher and there has been a large intraday range.

Buy spot – if there are several consecutive close lower and there has been a large intraday range.

If these conditions are not satisfied go flat.

Historical trading rule returns

In order to assess how robust this trading rule is, we look at the historical returns. Our sample is from 2002 to 2009. Both carry and transaction costs are included in our analysis for major G10 FX and EM FX deliverable currencies. We also compare our results with a fade-based rule that includes a stop loss and take profit.

We present the risk adjusted returns in Figure 2 for these trading rules. The results are mixed in G10, most notably in EUR/USD and USD/SEK. In general, including the stop loss/take profit improves risk adjusted results. Generally, our fade-based trading rule tends to be most profitable for EM.

We have discussed rules to fade price action. Our focus has been to fade those instances where spot has gone up or down in succession over the past few days and where there is a large daily range. We find that this trading rule is generally profitable when trading EM FX spot, although less so with G10 FX. However, importantly it can complement trend-based strategies

Collection Source: Nomura

To read the strategy and backtest method, please download here

*Backtest results adopted from “An Empirical Study of Rotational Trading Using the %b Oscillator”, H. Parker Evans, CFA, CFP, CMT

SPDR Gold Shares (GLD)

Description: SPDR Gold Trust is an investment fund incorporated in the USA.  The investment objective of the Trust is for the Shares to reflect the performance of the price of gold bullion, less the Trust’s expenses. The Trust holds gold and is expected from time to time to issue Baskets in exchange for deposits of gold and to distribute gold in connection with redemptions of Baskets.

Market Vectors Gold Miners

The Idea

For those of you familiar with the common statistical arbitrage (pair trading) strategy, this pair should be familiar to you. If not, you might want to consider doing some testing on it.

Trading the spread of these two instruments have been popular with traders. Historically this pair has shown strong cointegration and mean reversion characteristics. A good trading signal is to bet on mean reversion of the spread when it exceeds 2 standard deviations from the mean.

However as the trade get crowded with more money chasing after the same pair, the profitability seems to be dropping recently.

Please note that it is not always easy to short these instruments.

Tenkan Sen (pink line) crossed above the Kijun Sen (blue line). This happened above the Kumo (shaded region) and is commonly known as a strong bullish crossover.

The Kumo is thickening and sloping higher. At the same time the Chikou Span (green line) is also breaking above the Kumo.

These are signs of a potential bull trend starting in PTT. The next key resistance level to watch for is the 50% retracement level at $311.7

We seek confirmation of the emerging bull trend on the weekly chart. Indeed there’s a Tenkan Sen Kijun Sen crossover as well.

However do note that this is a weak crossover as it happened below the Kumo.

The thick Kumo serves as a resistance to rallies. Prices are currently testing the Kumo and it is important to bear this in mind when trading the shorter time frames i.e. daily chart.

Taiwan’s Media Tek, a designer of chips used in mobile phones, is undergoing what may be the start of a bear trend in it’s stock price.

Towards the end of Nov 2011, bears had enough momentum to push prices below the Kumo (shaded region). The future Kumo started sloping downwards and subsequently the Chikou Span ( green line) also broke below the Kumo Support zone.

This price setup points to further bear pressure on Media Tek’s stock price.

We might see a corrective rally, sometimes known as dead cat’s bounce in prices. However the bear trend is strong and it is better to be selling rallies then to buy dips at this point.

The Kumo (shaded region) represents changing support and resistance zones. A thicker Kumo in general represents a stronger support or resistance zone.

In the daily chart of Foxconn Intl above, the recent rally went into consolidation mode with a sideways movement. Prices are testing the Kumo support currently. As the Kumo is thick and upward sloping, the probabilities are skewed towards more upside support for Foxconn.

Looking at the weekly chart to observe the bigger picture, notice Tenkan Sen (pink line) crossed above the Kijun Sen (turquoise line)? This happened below the Kumo and is known to be a weak crossover. The logical reasoning is, The Kumo above prices when the crossover happened serves a resistance for rallies.

Currently prices are looking to break above the Kumo on the weekly chart. It is a bullish sign should it happen in coming weeks. The 100week moving average (green line) is the next key resistance level to watch for. Followed by the 61.8% retracement level at $6.449 between the last high and low points.

With Citigroup eliminating 4,500 jobs and HSBC following suit with 10,000 axed employees, hear say is that a recession is looming.

And the charts paint the same picture. Look at the bearish picture for the Straits Times Index:

• Tenkan Sen (pink) is below Kijun Sen (turquoise)
• Chikou Span (Green) is below price and cloud
• Thinning future kumo, indication of weak support into 2012

A lesser understood component of Ichimoku analysis is the Kumo Shadow. This is the portion highlighted in the yellow circle.

A Kumo Shadow is a thick cloud behind current price, an indication of strong resistance before a stock is clear for a bull run. To be out of this Kumo Shadow, price has to break above the dotted line at around 2945 before the captain announces “clear skies ahead”.

Till then, much turbulence is anticipated as price fights its way out of the Kumo Shadow.

Asia’s high yield bond market represents a compelling story from a risk / reward perspective.

The attractiveness of Asia high yield is supported by several key factors:

• Asia’s strong economic growth is driving issuance of high yield debt
• The search for income is attracting international investors to high yield Asian debt
• Default rates on high yield debt are lower in Asia than in the US

The Government announced that on top of the regular 3% stamp duty, Additional Buyer’s Stamp Duty (ABSD) will now be imposed as follows:

— Foreigners and non-individuals (corporate entities) buying any residential property will now pay about : +10%

— PRs who own one and are buying the second and subsequent residential property: +3%

—Singaporecitizens who own two and are buying the third and subsequent residential property: +3%

While the last 3 rounds of property tightening (Feb 2010, Aug 2010 and Jan 2011) were clearly anti-speculation, this latest move is targeted at investment demand. Paradoxically, a potential flight of capital out of Europe into Asia may have galvanised the government’s resolve to ring fence the domestic property market, especially now that foreign purchases account for 19% of private residential property purchases in 2H2011, up from 7% in 1H2009.

With new supply ramping up into 2015, Morgan Stanley expects property prices to fall.

However, stocks typically bottom ahead of physical market prices. In 2009, the FSSTI bottomed in Mar 2009, even though the URA property price index continued falling, by -14.1% QoQ in Q109 and -4.7% in Q209. Similar experiences took place during the bounce in 1998 (Asian crisis), 2001 (TMT/Sept-11) and 2003 (SARS).

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We analyse the daily chart of NOL listed on Singapore Stock Exchange.

The Tenkan Sen (blue line) crossed above the Kijun Sen (pink line). At the same time prices successfully broke above the Kumo resistance. Do note that this resistance is weak in nature due to the thin Kumo. It did not take much for bull to break through. As such, the strength of this bull movement needs to discounted.

Notice that volume is greater than average and this is a positive accompanying sign to the current bullish price setup.

Do be careful as the weekly chart is still showing a steady bear trend, as shown below.

The volume on the weekly bear trend has been decreasing and this downside trend is losing momentum for now.

We might see prices retrace back to the Kijun equilibrium. The near term resistance level is 1.30

However the resistance is very strong on the weekly chart as represented by the thick downward sloping Kumo. The bear trend is intact generally on the weekly chart.

Short term traders looking to benefit from the rally on daily chart must be aware of the higher time frame technical analysis as discussed earlier.

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Public Bank listed on Bursa Malaysia had a strong bullish crossover today.

We are referring to the Tenkan Sen (blue line) crossing above the Kijun Sen (pink line). As this crossover happened above the Kumo, it is a strong crossover. Think of price rallies having no resistance to stop its way and having a strong support to protect rallies.

The bull trend would be further reinforced when the Chikou Span (green line) subsequently moves above prices.

The weekly chart also shows a timely Tenkan Sen Kijun crossover recently.

This could potentially be the start of a bull rally.

Phillip Securities maintained a Buy Rating on Golden Agri with a target price of $0.795 – over 10% upside at the time of this writing. Taking a look at the charts, this stock is bullish and well supported, poised to test the high of $0.74 in August.

This Golden Agri chart is overlayed with Ichimoku analysis. These are the reasons to be bullish from the technical standpoint:

1. Very nice rising and thickening Kumo cloud, offering strong support into 2012.
2. The pink conversion line is above the turquoise base line.
3. The green lagging span is above price and kumo.

The last hurdle for this stock will be the previous high of $0.74, where we can expect some resistance. A break above this significant point will see the stock soaring into clear skies.

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Both traders and investors should periodically study the Volatility Index to assess how the global market participants’ risk appetite.

The CBOE Volatility Index is a simple and good proxy to gauge risk appetite of assets in general. In general, Volatility Index is negatively correlated with risky assets, such as equities.

The chart above is the daily chart of CBOE Volatility Index. Recently it tested the 200D Simple moving average and bounced off it. The 200D Simple moving average line shown above continues to be a key support level for the index.

The picture is clear. Green is buy, red is sell. AUD/USD has a green support line at the moment on the daily charts, indicating a bullish trend formation.

This is double confirmed with a positive EMA ROC (Exponential Moving Average Rate of Change), adding on to the bullish momentum.

The final confirmation we are seeking is a break above the kumo cloud, a bullish sign based in Ichimoku analysis.

This simple trading strategy is available here.

We analyse the daily chart of the Shanghai Stock Exchange Index.

Prices failed to break above the Kumo resistance zone and subsequently broke below the Kumo once again. This is indicative of potential further downside price movement going forward.

We are very close to testing the trend line support (blue line drawn on chart). Prices made new lows during Jul 2010 and then Oct 2011. Breaking below this key trend line further increases the probability of further downside movement.

The credit score companies form the credit scoring system in a way that they turn out to be really predictive and robust so that the industry selects their formula to calculate the risk of their customers. The credit scoring system has gained importance and becoming a vital tool for the industries because in today’s market conditions, lenders have become overly cautious about loaning new credit.

The approach which many companies are taking to combat this problem is innovation and development. They are constantly striving to update and remodel their credit scoring systems to meet the changing needs of the industry. This is now done every three to five years and then the new credit scoring model is launched into the market. Credit bureaus that provide FICO and Vantage Score have launched many new credit scoring models in the recent years. The new updated version is obviously better to use for the lenders and they are encouraged to do so, but it is not a compulsion. Many lenders still use old credit scoring models which they are used to.

The software’s updated by the companies are done at a time interval. The basic features and functions of the credit score calculator stay the same, more or less. The changes are made to make it more compatible with time. For examples, if any new version of Windows is launched, then the software might be updated to improve its performance. Most of the lenders do upgrade their software’s, sooner or later.

This is also true for the free credit scores, only the consumers don’t get to know about it. This happens between the lenders and other entities whether to upgrade the score version. Since this is more of a discreet decision, the consumers don’t get to know when and how does it takes place.

But there are some hiccups as well. A consumer can go and find out his credit score and report himself which makes things a little complex. This is because the version from which the consumer found out his score can actually differ from the version used by the lender. Since the consumer will get two different figures, this can be confusing for him.

Why the credit scores be re-developed?

Credit score models like the FICO and Vantage Score are launched every few years. The models launched by them are developed and tested in such a way that they are able to efficiently calculate the future credit score of the customer. The score calculated by these models are both robust and stable so they can deal with the micro and macro changes. It also is able to correctly predict the high risk behaviour which will remain the same in the future. High risk here mainly constitute people who do not pay their bills on time, use too much of the available credit, and keep applying for more credit very frequently.

However, there are many reasons why the scores have to be updated. The new and updated scores can depict the new credit practices and new offerings.  The updated system also uses advanced techniques of calculating the best possible credit score for the consumer.

The benefit of updating your credit scoring model can be best explained by the following example. FICO, which is one of the leading companies who develops such model failed to include “rate shopping logic” while calculating the credit scores. This means that they failed to acknowledge a consumer’s shopping trends regarding mortgage, student loans, etc. Since this was causing hindrances in calculating the score correctly, they updated the model and included the missing factor into it.

Which is the best forex trading platform? Most currency traders will tell you it is Meta Trader 4, more commonly known as MT4.

While MT4 is great when you have a computer, what happens when you need to monitor your trade when you are away from your desk?

Sure, you can enter and exit trades on your mobile trading platforms, but you will not be able to see your personal trading indicators on charts when you are on the go.

No worries, we have a free method to see your MT4 charts on the go.

Step 1: On your desktop, display your charts and indicators as you would like to see them on your mobile.

Step 2: Sign up for a free account on http://www.livestream.com/ This website provides you a url which broadcasts your desktop.

Step 3: Access the unique broadcast url from your mobile. You will be able to see your desktop (MT4) on your mobile and monitor your forex trades.

We have tested this on the iPhone and it works like a charm. You will need to leave your computer on as long as you want to view your desktop from your mobile.

Do check out the powerful APF Drift Strategy which you can monitor from your mobile.

The FTSE 100 broke above the Kumo and approaches the 200 day simple moving average. This happened during mid Oct as shaded on the chart above. The FTSE 100 tested the 200D simple moving average after breaking above the Kumo but failed to surpass the key resistance level represented by the 200D simple moving average.

Do note that the 200D SMA is sloping downwards. A break above the 200D SMA in coming days would suggest bulls are more in control and we might see FTSE100 rally more. However the overall bearish sentiment is not totally behind us as yet.

1. Global economic growth will equal 3.2% in 2012 and 4.1% in 2013. Europe will be in a recession for most of 2012 and the status of the Euro is questionable. Our outlook remains strongest in Asia ex-Japan with GDP growth above 7% in both 2012 and 2013.

2. The US economy will post its fifth consecutive year of stagnation with GDP growth of 1.5% in 2012 and 2.2% in 2013. Consensus estimates are higher at 2.1% and 2.7%, respectively. We expect unemployment will remain above 9% through 2013.

3. Inflation will remain subdued with core CPI at 1.7% in 2012 and 1.3% in 2013. Fed Funds will remain unchanged at 0%-0.25% through 2013. We forecast 10-year Treasury yields will end 2012 at 2.5% and rise to 3.25% by year-end 2013.

4. Earnings per share (EPS) will grow by 3% to $100 in 2012 and by 7% to $106 in 2013. Bottom-up consensus estimates equal $108 and $119. Different margin assumptions explain the gap between top-down and bottom-up EPS forecasts.

5. Profit margins will slip from a peak of 8.9% in 2011 to 8.7% in 2012. However, bottom up consensus expects margins to reach a record high of 9.4% next year. Every 50 bp swing in EPS Goldman Sachs Global ECS Research 4 net margins translates into roughly $4 per share in 2012 EPS.

6. Valuation in the stagnating economic environment should remain flat with a forward P/E multiple of 11.8X at year-end 2012. Our dividend discount model (DDM) anchors our 12 month target of 1250. Our uncertainty-based P/E multiple model suggests fair value of roughly 1210.

7. Defensive sectors should outperform given the weak economic backdrop. We recommend investors overweight Consumer Staples, Telecom Services, and Information Technology; and Underweight Consumer Discretionary, Industrials, and Materials.

Capitaland started its bear trend during Feb 2011 with a break below the Kumo followed by the Chikou Span (green line) breaking below the Kumo, further reinforcing the bear momentum. It then dropped nearly 25%.

Today we re-visit the weekly charts of Capitaland and assess what the market sentiment currently is.

Prices retraced 4 weeks earlier towards the Kijun Sen (Turquoise line). This is a typical retracment back to price equilibrium (Kijun Sen). Once that was done it gave up gains and dropped further. Prices would try yet again to retrace closer to the Kijun Sen this week. The Tenkan Sen (pink line) is sloping upwards, a first sign of Capitaland losing its bear momentum. The bears are taking a rest.

The Kijun Sen and the 78.6% retracement of the last major high and low points coincides at $2.697. This is a near term key level to watch out for. Price reaction at this key level would give us additional clue to the future movement of prices.

Do note that the Kumo is thick, providing strong resistance to any attempts by bulls to break above the Kumo resistance.

Prices are likely to move sideways in the coming weeks with a tendency to continue its decline in this bearish price trend.

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There are many employers who offer corporate cards to their employees. You are told to charge your expenses to the card and the company pays the bill. However, in some cases, the expenses are charged to the employees account, resulting in the credit of the employee being affected.

When you get a corporate credit card from your employer, there are a few things you must know that are elaborated in this article.

There are two types of Corporate Credit Cards. Both of them have been described below.

 1. Credit card where the company is responsible

This type of corporate credit card is issued to the majority of employees. The employee can make business expenses using this card and the company is responsible for payment of bills. The employee is only an authorized user. The expenses made or non-payment of bills does not affect credit report of the employee.

 2. Individual liability

In this type of credit card, the employee is liable for all expenses made. The corporate credit card is issued to the individual but the company does not pay the bills. The employee pays the bills and later submits it to the company for reimbursement. The expenses and payment of bills affect the credit report and score of the employee.

Five major credit card issuers inAmerica, Bank of America, American Express, Chase, Capital One and Citibank offer corporate cards that may or may not have individual liability. It depends upon the policy of the card issuer and the arrangement between the company and its employees.

American Express leaves it to the client or the company to decide the kind of cards that they need. In some cases, the company is billed and in others, the employee pays the bills and later on claims reimbursement from the company. In either case, if the employee has used the card for business purposes only, he will not be held responsible for any lapse in payment of bills. The employees have to fill out an application that also details the terms and conditions.

Bank of America offers both types of cards depending upon the requirement of the company and the payment policy and liability depends completely upon the company and the type of program that it chooses. Capital One has a completely different policy. It does not hold the employees responsible for outstanding bills. However, the employer is asked to keep and account of the employee’s expenses and also set a limit on the monthly expense of the employee. The individual is not liable for payment of bill until he signs an application to the effect and only in case the expense is personal.

Whatever the type of corporate card that you have, you must keep a copy of the application that you sign. Get a copy of the expense policy of your employer and keep it handy in case there are any disputes. Ask the employer if you are liable for it or not and always use it only for business purposes. When you follow these basic rules, you are sure to have trouble-free use of corporate credit card.

Donna Lyttle is a regular article contributor for various finance-related websites and magazines. She loves writing on topics, like free credit score, forex trading, personal finance, and others.

The yen may weaken to levels against the dollar last seen during Bank of Japan intervention, according to a Royal Bank of Canada, citing technical analysis.

The break above 76.90 yen per dollar, the top of so-called cloud of the ichimoku chart, means the chances the Japanese currency will weaken against the greenback have increased, said George Davis, chief technical analyst for fixed income and currency strategy in Toronto at RBC. The yen tumbled to 79.53 as the central bank sold the currency Oct. 31 and has failed to retrace its losses, signaling a deviation from previous interventions, he said.

A close above 78.30, a level last reached three days after the October sale, would underpin recent dollar strength against the Japanese currency, Davis said. A close below 77.24 would shift the upward momentum of the pair to neutral and an ending below 76.72, the bottom of the ichimoku cloud, would signal downside risks outweigh topside risks.

“The market isn’t as eager to push dollar-yen down to the lows we were trading at in late October and challenge the BOJ,” Davis said in a telephone interview. “It does look like, technically, based on that breakout last month, that there are top-side risks that we can’t ignore in dollar-yen.”

The previous time the Bank of Japan intervened, on Aug. 4, it sold a record 4.51 trillion yen ($60 billion). The currency retraced all of its losses in four trading sessions.

Ichimoku charts are used to predict a currency’s direction by analyzing the midpoints of historical highs and lows. The baseline plots the sum of the highest high and lowest low in the preceding 26 trading days. The cloud refers to the area between the first and second leading-span lines on the chart and is used to show an area where buy orders may be clustered.

In technical analysis, investors and analysts study charts of trading patterns to forecast changes in a security, commodity, currency or index.

Analysing weekly charts on Bank Rakyat Indonesia, we see the upward sloping Kumo support. In Feb 2011 prices tested and failed to break below the Kumo support. This resulted in a rally.

In Oct 2011 prices tested the support once again and failed to break below. A rally is underway right now and seems to be well supported by the Kumo.

We analyse the weekly charts on Maybank listed on Bursa.

If you have been following our analysis, you would have realised that the Kumo (blue shaded region) is a core part of Ichimoku analysis.

Most other counters around the region have been on a down trend and thus, the Kumo is acting as resistance for most other counters.

Interestingly Maybank held up very well while the stock markets came plummeting down.

This is seen very clearly visually. Notice how the thick, upward sloping Kumo is acting as a very strong support for Maybank.

Like all good trends, prices need to take a breather. This finally happened when Maybank reached 9.07 levels. Since then prices were consolidating and entered a sideway range. This is healthy and a very common price behaviour.

As prices are hovering inside the Kumo, traders can take a break from Maybank. It will tell us where it is going (up or down). Have some patience and wait for the fog to clear!