Download - Draft Stage 3 chapter 3 slides
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Lecture ThreeTechnical Analysis II
Andy Bowerwww.alchemetrics.org
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Advanced Chart Patterns
Fibonacci Levels•Retracements•Clusters
Elliott Wave Analysis•Impulse 5-waves•Corrective 3-Waves
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Indicators
Moving Averages•Simple/Exponential/Weighted
Oscillators•Momentum/CCI/RSI/MACD/Stochastics
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Fibonacci Levels
Series•1, 1, 2, 3, 5, 8, 13 etc•Ratios 61.8%, 38.2%, 23.6%•Inverse 161.8%
Retracements•Additional retracements 50%, 100%•23.6%, 38.2%, 50%, 61.8%, 100%
Extensions•100%, 161.8%
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Fibonacci RetracementsExamples
NasdaqNasdaq 100 ETF Weekly 2005100 ETF Weekly 2005
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Fibonacci RetracementsExamples
SPY S&P100 ETF DailySPY S&P100 ETF Daily20032003--20042004
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Fibonacci ClustersExamples
BroadcomBroadcom 15min15min20052005
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Elliott Wave Analysis
Patterns•Impulse waves in direction of trend•Impulse waves have 5 steps•Correction waves against trend•Corrections have 3 steps
Ratios•Retracement and extension follow fibonacci
ratios
Time•Multiple time frames
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Elliott Wave AnalysisPatterns
2211
33
44 55 aabb
cc
ImpulseImpulse••W3 or 5 mayW3 or 5 may ““extendextend””••W4 canW4 can’’t overlap w1t overlap w1••Often, when w3 extends w1=w5Often, when w3 extends w1=w5
CorrectionsCorrections••ZigZig--zagzag••FlatsFlats••TrianglesTriangles
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162% Wave 3 ExtensionExample
Nasdaq100 ETF DailyNasdaq100 ETF Daily20022002--20052005
11
33
22
44
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IndicatorsMoving Averages
Simple•Sum over period, divide by period•Smoothing• but.. Substantial lag
Exponential•Weight each prior price point using:
EMA% = 2/(n + 1) where n is the number of days•Faster response than Simple Moving Average (SMA)
Uses•Crossover systems (poor in consolidating markets)•Support and Resistance trend lines
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Moving AverageTrend Lines
Long term trend usingLong term trend using178 period EMA178 period EMA
Short term trend usingShort term trend using89 period SMA89 period SMA
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IndicatorsOscillators
Attempt to capture “momentum”informationfrom price action
Oscillators vary between bounds• Upper bound=“overbought”• Lower bound=“oversold”
Basic momentum:M=V0-VnNo upper/lower boundary
Common Oscillators• Commodity Channel Index (CCI)• Relative Strength Index (RSI)• Stochastics (K%D)
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Relative Strength Index(RSI)
RSI = 100-100/(1+RS)
RS= Avg of n days’up closesAvg of n days’down closes
•Varies between 0-100.•Overbought generally > 70•Oversold generally < 30•Often used to detect “fading trend momentum”
based on a divergence between RSI peaks/troughscompared with price action peaks/troughs
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RSI-Price DivergenceNasdaqNasdaq 100 ETF Daily 2005100 ETF Daily 2005
RSIRSI
RSI SmoothedRSI Smoothed
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Computer Pattern Matching
Strategy•Isolate tradable patterns.. Then test
Backtesting•Evaluation of a trading strategy using historical price
data to measure performance.
Metrics•Equity Curve•Profit Factor, Sharpe Ratio•Drawdown•Avg Trade %
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BacktestingEquity Curve
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BacktestingPeriod Returns
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BacktestingPerformance Report
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BacktestingOptimization
Strategies may have parameters•Optimize to maximize profitability•Need to be wary of “curve fitting”
Split data into segments•Backtest & Optimize on some segments•Then forward test on remaining segments
Minimize number of variables
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Genetic Algorithms
Parameter Optimization•Searching a large multi-dimensional space•Typically better at avoid local optima
Use for Optimizing•Indicator based systems•Neural Network topology
Backtesting•Curve fitting issues are very important
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Neural Networks
Used to isolate “unknown”patterns
BackpropagationBackpropagationNeural NetNeural Net
Real NeuronsReal Neurons
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Neural Networks
Used to isolate “unknown”patternsInputs•Indicators/Other Networks
Outputs•Profit/Sharpe Ratio/etc
Network configuration•Optimize using Genetic Algorithms
Backtesting•Curve Fitting issues are very important