technical analysis by mpfx- stideas
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B y M P F X B y M P F X
Our aim at S.T.I. is to make Technical Analysis as simple and uncomplicated as possible.
We will try to explain the concepts of each indicator in Plain English and include examples wherepossible.
No indicator is 100% accurate but by the use of several at the same time we may be able toeliminate many False signals.
We will start with the basics and work our way up to the more complex indicators.
1. by M PFX
The basis for drawing trend lines onto charts is probably one of the most basic to do andmaster, yet it is one of the more powerful and reliable indicators used to determine a change intrend.
Trend lines can be applied to many different indicators but for the reference of this article we will
use closing price data. This is the most common data used.
We will discuss the other uses at a latter stage.
Use the list below to navigate or simply scroll down.
1. What are trend lines and how to draw them !2. Support lines.3. Resistance lines4. What to look for / Breakout's
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Trend linesWhen viewing mostcharts a pattern ofthe price formationis usually visible tothe naked eye. Thispattern is called atrend and thesetrends havethree
distinct patterns.
UP TREND :Prices increasing
DOWNTREND:Prices decreasing
HOLDING OR
FLAT LINE :Prices stagnant orsmall trading range.
A trend line isbasically a linedrawn joiningconsecutive lowsor highs in a trendpattern.
Draw a lineconnecting thelowest points on achart in an uptrend.
Draw a lineconnecting thehighest points on achart in a downtrend.
Draw BOTH highsand lows for aholding pattern
Note Rising
volumes on lead
up to Breakout
An Up trend with trend line drawn in
A down trend with trend line drawn in
Holding pattern with BOTH lines drawn in
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Support Line
When we draw a linejoining all the lows of aprice pattern togetherthe line is called aSupport Line.
These lines are a lowpoint on the chart on
which the pricebouncesoff consistently whenreached.
Many traders elect toBUY when the pricereaches this point.
It is our belief that themarket likes to testSupport lines morethan once and we look
for BUY signals after asecond or thirdtesting of this line.
If a support line isbroken then the currenttrend is said to bebroken or in a DownTrend and the marketwill look for a lowerprice to set up a newsupport level.
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Support line
You will hear comments about support levels consistently on the chatrooms and in editorials.
These levels ARE very powerful and SHOULD bemonitored diligently when reached.
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Resistance
lines
When we draw a linejoining all the tops of aprice pattern togetherthe line is called aResistance Line.
It is basically the exactopposite of the support,it is a series of highs onachart where themarket continuallyrejects the price thusnot allowing it togo anyhigher.
Many traders elect toSELL when the pricereaches this point.
It is our belief that themarket likes to testResistance linesmore than once andwe look for SELLsignals after a secondor third testing of thisline.
The same applies forresistance in that it is apowerful level andone SHOULDthinkseriously about takingprofit at this level.
Some traders like tosell small parcels toaverage out their pricepaid and leave the restin hope of greatergains.
Resistance line is drawn in RED.
Support in Green
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What to look
for! Breakouts
We have nowestablished what aretrend lines and how todraw them.When oneof theses lines isbreached is called aBreakout.
If a breakout occurson a Resistance linemany Trader's willclass this as BUYsignal and actaccordingly.
If a breakout occurson a Support line
many Traders willclass it as a SELLsignal an actaccordingly.
Please note how theOLD Support lineNOW becomes theNEW Resistance line
Resistance Broken
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Note Rising
Volumes on
Breakout
TOPResistance Broken
Support Broken
From time to time there will be FALSE signals given.
This is why it is important to WAIT FOR CONFIRMATION of a trend reversal or breakout.
It is at this point we need to add other indicators to help with our Analysis.
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2. by M PFXYou should now have a basic understanding of Trend Lines and their workings from our first
chapter. In this chapter we will discuss some of the patterns that form on the charts that help givea further indication of an impending Trend Reversal. Once again some of the patterns about to be
discussed are very powerful and SHOULD be respected!
Use the list below to navigate or simply scroll down.
Head & Shoulder Patterns
Inverse Head & Shoulder Pattern
Double Tops
Double Bottoms
Rounded Top / Saucers
Rounded Bottoms / Saucers and Cups
Triangles
Flags / Pennants / Wedges
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Head &Shoulder
Pattern
The Head &Shoulder Patternhas claim tobeing one of themostreliable of all
chart patterns. Itis usually formedat the end of anupward trend ormarket rally andacts as a SELLsignal.
There are fourmaincomponents thatmake up a H&Spattern and they
are :
The LeftShoulder
The Head
The RightShoulder
The Neckline.
The LeftShoulder- Themarket looks totest higher pricelevels.IncreasingVolumes.Followed byretracement toneckline.
The Head-Market againlooks to test
higher groundand succeedswith settinga higher pricethat was set bythe LeftShoulder. LargeVolumesFollowed byretracement toneckline.
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The RightShoulder- Onceagain the marketlooks to testhigherground but thistime fails toachieve the highprice set byHead. Reducing
Volumes.Againfollowed byretracement toneckline only thistime there is agood chance ofthe Necklinebeingviolated and themarket MAY lookto test Lowerground.
The Neckline -Is a line that isdrawnconnectingconsecutivelows. It is a linewhere the pricebounces off andrefuses to gobelow.It isbasically thesame as asupport line
Most traders whoare familiar withthis patternwould try toliquidate at thetop of the Heador as it started toretrace towardsthe Neckline.
If you are stillholding a stock
during the RightShoulder stage itmay be your lastchance toliquidate beforethe price testslower ground.
I advise that youlook to liquidateat the top of theRight Shoulder.
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InverseHead &
Shoulder
Pattern
This pattern isidentical to theH&S discussed
above except itoccurs atthe end of adownward trend ormarket sell off. It ismade up of thesamefour componentsonly this time theyare acting inreverse and thusgive a Buy signal.
The Left Shoulder -The market looksto test lower pricelevels. DecreasingVolumes. Followedby test of Neckline.
The Head - Marketagain looks to testlower ground andsucceeds withsetting a higherprice that was set
by the LeftShoulder.Steadyto slightlyincreasingVolumes. Followedby test of Neckline.
The RightShoulder- Onceagain the marketlooks to test lowerground but thistime fails to
achieve the lowprice set byHead. IncreasingVolumes. Againfollowed by test ofthe neckline onlythis time there is agood chance of theNeckline beingviolated andthe market MAYlook to test Higherground.
Please note volumes rising.
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The Neckline- Is aline that is drawnconnectingconsecutive Highs.It is a line wherethe price bouncesoff and refuses anyHigher. It isbasically the sameas aResistance
Line
Again most traderswho are familiarwith this patternwould try to Buy atthe bottom of thehead but it is asafer way to tradeif you wait tillconfirmation thatthe Right Shoulderhas formed and is
looking to test theNeckline onceagain.
Where you decideto take yourposition is a matterof personalpreference and riskadversity.
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Double Tops
This is another powerful patternthat MAY indicate that the marketis looking to test Lower levels.
It occurs at the end of a upwardtrend or market rally.
Double tops basically tell us that
the market has tested a price levelon two occasions and on bothtimes refused to go higher.
They can also come in the form oftriple and quadruple tops.
Volumes on the second top shouldbe lower than the first top.
If you hold a stock that exhibits adouble top be ready to liquidate asthere is a good chance the marketwill go lower.
TIP
Bar and Candle Charts will give
you a better example of double
tops than line charts.
Examples of Double and Triple Tops:
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Double
Bottoms
Double bottoms are
identical to double topsexcept they work in theopposite way and thuscreate a Buy signal.
Double bottomsbasically tell us that themarket has tested aprice level on twooccasions and on bothtimes refused to goLower.
They can also come inthe form of triple andquadruple bottoms.
Volumes on the secondbottom should beGreater than the firstbottom.
Double bottoms cangive an excellent Buysignal and mostTechnical Traders would
act on such a sign.
TOP
Examples of Double Bottoms :
Note Dramatic rise in volumes on second bottom
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Rounded Top /
Saucers
The formation of arounded top on a chart isa good indication that themarket will look to testLower ground soon andthus giving us a Sellsignal.
It can also be called asaucer or distributioncurve and is seen at theend of an upward trend. Itshows the market isrunning out of steam andcannot achieve newhighs.
Volumes will start toreduce as the pricereaches it's peak andincrease as the pricestarts to fall.
Most experiencedTraders would note thisand exit their position.
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Some example of Rounded Tops:
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Rounded
Bottoms
This formation has thesame characteristics asa rounded top only thistime it works in theopposite way andcreates a BUY signal.Rounded bottoms aresometimes calledSaucers or theAccumulation Period.
All of these patternsindicate that thedownward trend isrunning out ofsteam and the marketis looking to test higherground once again.
Most experiencedtraders would belooking to positionthemselves in thisaccumulation period, itis called theaccumulation stage asthat is exactly what ishappening, traders areaccumulating shares.
A further extension ofthe rounded bottom is aformation called a Cup.It is basically acompleted roundedbottom with a smallerrounded bottomformed on the righthand side thus givingthe appearance of ahandle for the cup.
Volume should be onthe increase as thebottom starts to climbupward.
There should be evenlarger volumes againduring the Handlestage.
Below are examples of rounded bottoms and cups:
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The Handle is maybeour last chance to takea position before themarket tests higherground.
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Triangles
Triangles and wedgesare probably the mostfrequently occurringpattern to form onthe charts and can givea possible earlyindication of a trendreversal.
As they occur sofrequently they are notas reliable as somepatterns previouslydiscussed but are still avery useful indicator forthe Technical Trader.
Drawing Triangles ontocharts is basically justdrawing BOTH supportand resistance lines at
the same time.
They can be foundnearly anywhere on achart. Sometimes anentire up trend ordowntrend may bemade up of lots of littletriangles.
The two main types oftriangles that can befound are:
SymmetricalTriangles and RightAngled Triangles:
SymmetricalTriangles - Theseoccur when the price islocked into a reducingtrading range. Bothsupport and resistancelines meet in a point.
The lines are said to bein Convergence.Volumes slowly reduceas the price nears thepoint of the triangle andthen on breakout surgeconsiderably.
Below are examples of triangles :
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As Traders we arelooking for thisbreakout and wouldeither buy orsell according to thedirection of thebreakout.
Please remember thatfalse are common withthis type of pattern.
Right Angled Triangles- Are similar tosymmetrical trianglebut instead one of thelines drawn will eitherhave a flat top or flat
bottom and is drawnnear perfectlyhorizontal.
These triangles areprobably more accuratethan all others and mayalso indicate whichway the price couldbreak.
Again extreme cautionis needed when usingtriangles as they DOgenerate false signals.
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FlagsPennants
Wedges
Flags, pennants andwedges occur on bothup and down trendsand indicatethemarket is reassessingthe share price ormore simply taking abreather.
They are more oftenthan not formed at thehalfway stage of atrend.
They are drawn ontocharts by drawing bothsupport andresistance lines
simultaneously.
Once drawn theyshould take on theappearance as theirnames imply. I.e. AFlag looks like a Flag
A basic rule to followis ' If a Flag, Pennantor Wedge forms inan up or down trend,the trend USUALLYcontinues on thesame path'. I.e.An up trendcontinues Up
.
Below are some examples :
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If holding a stock andone of these patternsforms on the chart it isa signal for cautionand a breach of eitherthe support orresistance shouldbe acted upon
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As you can seeWedges andPennants are verysimilar in appearancebut in essence asTraders we are onlyinterested in whichway they will break as
opposed to what tocall them.
FOOTNOTE:
Be Warned.. ALL of the above mentioned in this chapter
CAN and WILL giveFalse buy and sell signals.
It is at the Traders discretion whether to act on any of these signals.
It is my recommendation that diligent monitoring should be applied if you
are holding a stock that exhibits ANY of these patterns mentioned.
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B Y M P F X B Y M P F X
When looking at a chart we have the option to view the price formations in four main styles, these are: Line, BaCandle and Point and Figure. All of these have their strengths and weaknesses and which style you choose willbe a matter of personal preference.
I personally elect to use three of the four types with point and figure the one I never use. This works for me butthere are many Technical Traders out there who trade with great success using only P&F so as already stated
this really is a personal choice that you will have to make.
The line chartis the one mostof us wouldhave seenmany timesbefore and isusually plottedusing closingprice data.
This chart isgood forvisualizing theoverall trend ofa stock and onsome chartingprograms it willallow you tosee more dataover a longertime span.
It's use islimited as it isbasically what Icall a onedimensionalchart as it usesonly one formof data.
Good forglancing, butnot foranalyzing.
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Bar charts are probably themost widely used by tradersand not only give us theclosing price but also thehigh, low and openingprices.
As traders we need to knowas much as possible about astock and its movementsand these bars are theperfect tool for the job.
With a single glance at oneof these bars we can get afeel for how investors tradedthis stock for the day andtheir general sentimenttowards it.
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Small bars ( or bodies asthey are Technically called )are a sign the market maybeconsolidating its position orthinking about its nest move.
Long bodies could indicatethe market is again on themove and looking to testnew levels.
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Some charting packages willonly show the close on thebar, many traders elect to
use this style with greatsuccess. Some say theopening price does not givea true indication of marketsentiment and choose toignore it.
There is a marked differencewhen drawing trend lines ona line chart compared to abar chart. With a bar chartyou get the entire tradingrange and a trend line canbe drawn using theseranges as opposed to onlyusing closing price data on aline chart. To make thismore clear please refer todiagrams opposite.
These two charts areidentical except one is a linechart and one is a bar. Thetrend lines drawn in are thesame for both charts basedon the bar chart only.
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In the circled areas you cansee the clear differencebetween the two.
With a bar chart we aredrawing trend line based ontrading ranges rather thanend of day closing prices.
By doing this we areallowing ourselves a betterchance of gaining a lowerentry price and a higher exitlevel. We also increase therange in which the stockmay trade thus allowinggreater profit margins.
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Candle stickcharting wasdeveloped by theJapanese severalcenturies agoand hasundergone aresurgence inpopularity inrecent times. This
form of chart is byfar my personalfavorite and Iusually use itexclusively.Although morecomplex tounderstand, oncemastered, candlecharts can giveyou the bestoverall view ofmarket sentiment.
In this section Iwill give you abrief summary ofcandles but thepurchase of abook dedicated tocandle chartingshould be a mustfor anyoneserious aboutdeveloping theircharting skills.
Candles aresimilar to barcharts in that theyshow all four datacomponents (open , close, highand low ) but thatis where thesimilarities end.
Candle chartsuse rectangularboxes that join
the open andclosing pricestogether, and usevertical thinnerlines to define thetrading range.The boxes arecalled the ' RealBody ' and thethin trading rangeline are called the' wicks or shadow
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If the closingprice is higherthan the openingprice the body willbe white, if theclosing price islower than theopening price thebody will beblack.
Opposite is abasic list ofcommon candlestick formations.
A = Open/closethe same. largetrading range.
B = Open/closethe same. smalltrading range.
C = Open/closethe same. notrading range
D = Open closethe same. Markettested higherlevels but failedto close any
higher than open.
E = Open closethe same. Markettested lowerlevels but failedto close lowerthan open.
F = Doji withmarket testinghigher levels butrefusing to close
above open. Alsoknown as a 'Hammer ". Theappearance of ahammer at thetop of a trendcould suggestlower prices mayfollow. Bearishsign.
The correct term for a line that represents a price that opened and closed at identiclevels is ' Doji '
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G = Doji withmarket testinglower levels butrefusing to closebelow open. Alsoknown asHammer. Theappearance of ahammer at thebottom of a trend
could suggesthigher prices mayfollow. Bullishsign.
H = Hammer withclose higher thanopen. Bullish atbottom
I = Hammer withclose lower thanopen. Bullish at
bottom.
J = Hammer withclose higher thanopen. Bearish attop.
K = Hammer withclose lower thanopen. Bearish attop.
Please note thatHammers arealso referred toas ' umbrellalines ".
L & M = Both ofthese are knownas spinning tops.They representsmall tradingranges and areimportant in somecandle chartpatterns. Againwhere they occuris of the up mostimportance.
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Opposite are 3examples ofHammers. Thebottom two arebullish while thetop one isBearish.
The appearanceof Dark clouds is
not a good sign.It is formed with awhite real bodyfollowed by aLarger black realbody that closedlower than theprevious daysclose.
As mentioned atthe start of thischapter Candlestick charting isso involved thatthe purchase of abook solelydedicated to thissubject should bemust for anyserious trader.
I have onlyscratched the
surface of thisinvaluablemethod ofcharting in thischapter.
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Moving Averageshave beenaround for manycenturies andhelps the traderto try andeliminate some ofthe volatility thatis associated withstock prices.There are three
main types ofmovingaverages:Simple,Exponential andWeighted.
I personally useonly Simple M/Asfor my trading.This suits mytrading style andall examples
shown here arebased on this.
I suggest that youexperiment withall 3 on the samestock to see howall three behavejust that little bitdifferently.
Moving averagesare basically the
share pricesmoothed outover a set timeframe. They arecalculated byadding all theclosing pricestogether for a setnumber of daysand then dividingthis total by thatset number ofdays. So for a 20
day m/a we usethe last 20 daysof data. As newdata becomesavailable theearliest entry isreplaced with thelatest entry thuskeeping our 20day total intact.
B y M P F X B y M P F X
The four charts below are all of the same stock with only the time frames changed onthe m/a.
The longer the time frame the less false signals.
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As most chartingpackagesautomaticallyconstruct all threetypes of movingaverages Ibelieve that timeis better spenthere explaininghow to trade
using them asopposed to theirhow they aremathematicalmade up.
The first andmost basicmethod for theuse of m/a's is towait till the priceof the stockcrosses over the
m/a.
This works asboth a buy andsell signal and isone of the mostwidely usedmethods.
The key to thismethod is thetime frame. Thebasic rule is the
longer the timeframe the lessfalse signals.This is fine butwith this you alsoget the longer thetime frame thelater the buy orsell signal.
Day traders andshort termspeculative
traders may electfor shorter timespans than a longterm, morecautious trader.Ranges from 9days to 24months can beused. The mostcommon used bytraders would be9, 20, 25, 30, 50,75, and 100
days.
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I advise that yourun tests on astock you arefamiliar with,changing the m/atime frame to seethe differences inentry and exitlevels.
As we havealreadydiscussed trendlines we can nowapply themtogether with am/a on the samechart.
We now howhave twoindicators givingus signals.
Sell Signal = 50m/a crossed tothe downside andsupport line hasbeen broken.
Buy Signal = 50m/a crossed toupside andresistance linehas been broken.
Interesting tonote that the50ma gave a sellsignal before thesupport wasbroken but gavea buy signal afterthe resistancewas broken.
Above and below are the same stock with only five days added to both m/a's in theone below. It is interesting to note that such a small change can effect the timing of
the signals.
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The secondmethod for theuse of m/a's is to
apply MultipleMovingAverages.
This is thepreferred methodby many tradersand the method Ipersonally electto use.
It involves theuse two or more
moving averagesat the same timewhich are set atdifferent timesspans.
When the movingaverages crosseach other, eithera buy or sellsignal isgenerated.
When the fastermoving average (25ma ) crossesabove a slowermoving average (50ma ) it isclassed as a Buysignal.
When the fastermoving averagecrosses belowthe slower
moving average itis classed as aSell signal.
Once again thetime frames usedhave a greatimpact on wherethe signals aregenerated on thecharts.
Below are all the same stock with a moving average added each time. It is of PBL
daily.
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I advise runningnumerous testsadjusting the timeframes on bothm/a's. Make sureyou use the samestock for thetests. Thismethod is by farthe best way totruly understandmoving averagesand will allow youdevelop your ownset of tradingcriteria.
Some traders liketo use up to 6moving averagesat a timebelieving thatwhen all theaveragesconverge to thesame spot on thechart a change oftrend is verynear.
As you can seefrom charts
opposite, by thetime we use fourm/a's the chartbegins to lookvery busy. Thismethod definitelyits merits as thelines convergingis sometimes thefirst indictor to getthe attention ofthe TechnicalTrader and is a
sign that thisstock should beplaced in the 'watch closelybasket '.
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In summary Iwould like toadvise that thebest way to gaina realunderstanding ofmoving averagesis to run tests.Please keep inmind that onceyou have testedthe ma's on theone stock andyou arecomfortable withthe settings youhave chosen, trytesting thosesettings on at
least 50 othersstocks to see ifthey still show thesame results.The more timespent testing, themore comfortableyou will be whenmaking yourtrading decisions.
In closing I haveincluded a chart
opposite with thesettings I usewhen trading. It isof PBL and is acurrent chart. Ihave included allsignals that arerelevant thathave beendiscussed so far.PLEASE do notjust copy mysettings and take
them as gospel.This works for meand may not besuitable for you,PLUS it will notaid in your owndevelopment as atrader, pleasetake the time torun the tests, youwill be more thanrewarded in theend.
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MACD indicators are yet afurther extension of themoving average theory.They are part of theMomentum indicatorfamily.
MACD simply stands forMoving AverageConvergence Divergence.
The most common formused by traders is theMACD Histogram. It isconstructed by measuringthe convergence and thedivergence of two movingaverages.
The most widely used timeframe is a 12,26,9 macd.
The 12 and 26 ma's aredivided and plotted as theRed line, the 9 ma isplotted as the blue line.
A horizontal line is drawnand is used as the pointwhen these two movingaverages are at the exactsame level. ( The 12,26macd crosses the 9 ma)This is called the
Equilibrium Line .
A dotted line is usuallyadded which representsthe zero line.
Bars are used as a visualaid in determining theposition of the fastermoving average inrelevance to the slowermoving average.
Bars pointing above theEquilibrium Line indicatethat the Macd average isabove the 9 day movingaverage.
Bars pointing below theEquilibrium Line indicatethat the Macd average isbelow the 9 day movingaverage.
by M PFX
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There are 3 mains waysto trade when usingMacd's.
The first is use thecrossing of the m/a's asa signal.
A buy signal is givenwhen the bars first point
above the equilibriumline.
A sell signal is givenwhen the bars first pointdown below theequilibrium line.
The chart opposite showstwo buy and two sellsignals. It is interesting tonote where the signalsgiven correspond to the
price action on the mainchart. The first two signalsare pretty much spot on,but after the second sellsignal was given, the pricemoved higher beforemoving down again. Onthe second buy signal theprice drifted lower beforemoving up again. Thesecond sell signal was toolow and the second buysignal was too high. This
is important becausetraders who set tight stoplosses on their trades runthe risk of getting out oftheir trade only to watchthe stock rebound.
This is why it is soimportant not to rely ononly one technicalindicator, it is theculmination of manyindicators that are
positive or negative atthe same time.
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On this next chart we havefive signals beinggenerated by the Macd.
The Red circle indicates 4sell signals occurring
within 2 weeks of eachother. This is a what Imean by more than oneindicator turning negativeat same time, it does nothave to happen on thesame day.
The Pink circle indicatesthat although the price diddrop on both sell signals,the support line remainedintact. The price only
crossed the 20ma on thefirst sell signal butremained above on thesecond.
The 20 ma remainedabove the 50ma on bothsell signals.
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The second methodused with Macd's is theConvergence /Divergence method.
Convergence means twoseparate objects headingtowards the same meetingpoint.
Divergence means twoseparate objects movingaway from a meetingpoint.
For the use in trading weare interested in theconvergence ordivergence of the pricechart and the indicator thatwe have selected, in thiscase Macd.
What we are looking for islower lows on the pricechart and higher lows onthe Macd. This creates abuy signal or at leastshould alert the trader to apossible trend reversal.
Using this method is agood visual aid for seeing
that a trend is slowlyrunning out of steam.Nearly all momentumindicators exhibit theseconverge / divergeproperties. Most technicaltraders use what is calleda lead indicator. This is theindicator that is the first toshow signs of animpending trend change.Momentum indicators areusually high on this list.
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The same applies whenwe are searching for sellsignals. Instead of thelines converging, this timewe are looking fordivergence of the priceand the Macd.
We are looking for theprice to be making higherhighs but the Macd to besetting lower highs.
We are looking for theprice to be making higherhighs but the Macd to besetting lower highs.
Again these signals areonly part of the equationwhen look to buy and sell.If a trader only looks touse one indicator he willget caught out more timesthan not, but on the otherhand, I believe the use oftoo many indicators is justas a fatal mistake as usingonly one. It is a finebalance of the indicatorsthat you feel mostcomfortable with.
The third method used
is to use the macd linecrossing the zero line asa buy signal and themacd line making a clearbreak of the histogrambars as a sell signal.
This method creates theleast amount of buy andsell signals but also theleast amount of falsesignals.
This method is also theslowest to generate asignal and is good for thelonger term trendchanges.
Of course it still generatesfalse signals like ALLindicators so advicementioned already aboveabout multiply signalsshould be heeded.
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Time Fames.
Choosing which timeframes to use variesgreatly andexperimentation is by farthe best way to educateyourself. Again use thesame stock and adjust thesettings of the macd tosee the difference inwhere buy and sell signals
are being generated.
Some standard timeframes are :
12, 26, 9
8, 17, 9
12 ,25, 9
Please take the time
to do your OWNexperimentation.
As you can see above a faster Macd gives an earlier buy signal but
many more false signals.
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STOCHASTIC
Stochasticindicators are
part of themomentum
indicator family
and are extremelyuseful for
determiningwhether a stockhas moved into an
overbought or
oversold area.
There are usually2 lines plotted on
the standard
stochastic, theseare the %K and
the %D lines.
%K is a moving
average of a
stocks past
trading rangerelative to its
current price.
%D is a moving
average of the
%K line.
These lines areplotted on a chart
with a range of 0 -
100.
As most charting
packages do allthese calculations
for us I believe
that time is betterspent learning toread them as
opposed to their
mathematical
make up.
by M PFX
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a several ways to
trade using the
stochastic
indicator.
The first is by theuse of bands at
the 20 and 80
mark.
A stock isconsidered
overbought ( Sell
Signal ) when thestochastic is at or
above the 80
level.
A stock is
considered
oversold ( BuySignal ) when the
stochastic is at or
below the 20
level.
Of course thisdoes not mean
sell when it hits
80 and buy whenit reaches 20, as
false signals arecommon place as
the chart opposite
illustrates.
It does however
indicate that thetrend, in either
direction, is
running out of
steam.
This is a current chart of BDL
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method is to buy
and sell at the
crossing of the%K and %D
lines. This is the
same methodapplied to 2
multiple m/a's on
a price chart.
Once again there
are many false
signals givenusing this method.
On the chart
opposite you cansee 5 signals
being given. Only
2 of these arevalid and would
have resulted inprofit or saved
losses.
The third method
that can be used isby the addition of
trend lines to thestochastic chart in
the exact samemanner as you
would on a price
chart.
As the chart
opposite
illustrates the
down trend ( Blue
Line ) has clearlybeen broken by
both lines.
This works for
both up trends
and down trends.
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will have to be a
personal
preference to suitthe type of trader
you are.
The default on
most charting
programs is set to
20 & 9. Onceagain I strongly
recommend
experimentingwith the levels to
find a
combinationwhich best suits
your trading style.
On the chart
opposite I haveincluded
examples of three
different settings.You can clearly
see that the
slower stochastic,the less false
signals.
My personal
preference forstochastic on a
daily chart are 17
and 9.
If using intra-daycharts these
numbers could
possibly go as
low as 5 and 3.
Please take thetime to
experiment.
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After much back
testing I havefound that the
best way to use
stochasticindicators is to
combine the
entire above
mentioned rules.
On the chart
opposite you can
see theseconfirmations
occurring.
The top sell signal
shows 2 out of
our 3 rules
confirmed, whilethe bottom buy
signals shows all
3.
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time to put all that
has been
mentioned so faronto the one
chart.
The chart
opposite shows a
combined total of
10 positivesignals from 4
different
indicators.
Throughout this
editorial I have
stressed the pointthat T/A is a
combination of
many signals
given at the onetime and this is an
excellent example
of this.
The chart
opposite is ofBDL dated 30-10-
2001.