Transcript Slide 1

Introduction To
Technical Analysis & Trading
TraderMade International Ltd
Market Leading Trading & Sales Tools
Our Expertise: Your Future
Introduction
TraderMade International
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DBFS Group LLP
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Global leader in advanced Trading Charting
and Technical Analysis software
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The banks who use TraderMade represent
88% of the FX market liquidity
Brian McNulty
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Co-Founder and Head of Business
Development, DBFS Group
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Senior Technical Trader, Rand Merchant
Bank
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Technical Analyst, Automated Trading
Our Expertise: Your Future
Agenda
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Introducing Technical Analysis
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Foundations Of Technical Analysis
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Chart Construction & Terminology
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Traders Tools – Moving Averages
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Common Patterns
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Traders Tools – Oscillators
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3 Elements Of Successful Trading
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Bringing it all together
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Questions and Answers
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Introducing Technical Analysis
“Technical Analysis is the study of market
action, primarily through the use of charts,
for the purpose of forecasting future price
movement”
John Murphy: TAOTFM
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Determine future price directions
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Primarily done through studying charts
Where did it come from?
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Japanese rice traders – to see how
much people were paying / S&D
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Charles H . Dow in 1884 stock market
averages publication
– Robert Rhea 1932 ‘Dow Theory’
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Who uses technical analysis
A Trader is someone who takes a position in the market
Technical Analysis is used by anyone who requires a
view on a market
Categories:
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Traders
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Hedge Fund Managers
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Corporate Treasuries
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E-commerce / Sales teams
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Retail (HNI , Private Investors)
What is the purpose of a Trader:
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Speculative (Buy low, sell high! – simple?)
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Hedging (manage risk)
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Go long, go short or stay out
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Percentages and probability analysis
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Money management
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Different schools of thought
Fundamental Forecasting:
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Studies the ‘cause’ of the market / ‘why’
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Focuses on supply and demand
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Predicting future moves based on monetary
policy, economic conditions weather, political
etc
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Calculate the ‘intrinsic value’
Technical Forecasting:
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Believes the fundamentals are factored in
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Pattern recognition and analysis
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Study of past behaviour
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‘in times of confusion, charts come out!’
These techniques are complimentary!
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Majy market practitioners use both
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Technical is indirectly studying fundamentals
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Listen and understand both
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Use to confirm signals / build into your model
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Foundations of Technical Analysis
The 3 premises on which technical approach is
based are:
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Market action discounts everything
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History repeats itself
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Prices move in trends
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Market Action Discounts Everything
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Unless this if fully understood and accepted, nothing
else that follows will make much sense.
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Anything that can affect prices is reflected in the price
so that the study of price action is all that is needed.
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The charts do not in themselves cause markets to
move, they simply reflect the bullish or bearish
psychology of the market place.
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Instead peoples actions cause the market to move and
TA is just a picture of peoples actions
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When news comes out in the market, people react and
the price will move until everyone is happy that the
price has now factored this in.
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Foundations – History Repeats Itself
Human Psychology:
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Chart patterns have been identified and
categorized for over 100 years. Human
psychology does not tend to change, hence
patterns that have worked well in the past, are
assumed to work well in the future.
Crowd Theory:
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Group behaviour is more predictable than
individual. In the markets, vast majority behave
as groups
Self-fulfilment
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Enough people believe in it and it will become
true
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Foundations – Introducing Trend
The trend is absolutely essential to the technical approach
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A trend can be defined as the direction of the market.
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An uptrend is a succession of higher highs and higher lows and a
downtrend is a succession of lower highs and lower lows.
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The whole purpose of charting the price action of a market is to identify
trends in early stages of their development for the purpose of trading in the
direction of those trends.
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Why? A trend in a motion is more likely to continue than to reverse.
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The majority of the rest of the tools are simply to help measure the trend in
order to participate.
Resistance
Resistance
Resistance
Support
Support
Support
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The Concept Of A Trend (continued)
Why not just buy (go long) when the market is going up then?
It is all about timing
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In too early – on the wrong side
In too late – market will move against you
Corrections
Enters a sideways market – get whipped!
More bad news….major trends have 3 phases
1.
2.
3.
Accumulation – informed buying by most astute investors - ‘bad
news assimilated’
Public Participation – Most technical trend follows begin to
participate, prices begin to advance rapidly and business news
improves
Distribution – Newspapers begin to print increasingly bullish stores;
speculative volume and public participation increases. (note this is
when those long at 1 sell!!)
Hope to show some ways Traders can identify trend early enough along
with some other indicators that can mean we are not always in 3!
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Chart Construction & Terminology
Types of Charts:
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Price Bar (daily – yearly) – most common
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Line Chart (close only)
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Candlestick
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Volume – total of trading activity
Terminology:
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Placing an order (bid /offer)
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Long / Short
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Stops
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Minimal Price Objective
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Corrections
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Support and Resistance
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Trend lines
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Fundamentals of charting – Support & Resistance
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The basic idea behind this support-resistance theory is that the
understanding of the future lies in the past.
Price levels that were significant in the past will be of importance for the
price action in the future.
Usually a support or resistance level is identified by previous lows or
previous highs and is a level beyond which prices may have difficulty in
moving. They are therefore considered important levels
Trend reversal could be identified by watching the support and resistance
levels.
Role Reversal
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Fundamentals of charting – Trendlines
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They are diagonal lines that either define and area of support in the
market or an area of resistance. It identifies the current trend of a
market
In an uptrend a line is drawn connecting the lows to form a trendline.
This is because the buyers in the market are pushing the market in an
uptrend
The trendline then helps not only to determine the extremities of the
corrective phases but maybe even more importantly tells us when the
trend is changing – a reversal
Filters - Validity of the trendline breaking
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Fundamentals of charting – Channels
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The important line in a channel pattern is still the trendline. The
channel line is purely a measuring line and should not be used as a
trading signal. It can be used as a take profit indicator but it should not
be used to establish a position against the prevailing trend.
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The channel line can be used for short term profit taking
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Once the channel line has been drawn on the chart, the width can be
measured and projected from the break of the trendline. This is the
Minimum Price Objective (MPO).
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Traders Tools - Moving Averages
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Remember, the trend is your friend!
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Purpose of most tools is to work out which way the trend is going asap
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MA’s are therefore used to smooth out some of the "noise“
that occurs in the market so that the underlying trend is more easily
viewed
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Moving Averages are the most popular method of doing so but be
aware using MA’s in a trendless market is one of the quickest ways to
lose money!
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Cannot simply trade one (too long, too short, non-trending_
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Common Patterns
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We know already that markets move in trends with peaks and troughs in
their price movements
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We have also seen how we can use tools such as Moving Averages to
identify the start and end of trends
The problem is that markets don’t always trend up or down - they also
move sideways.
Another challenge of a trader is to work out whether this period of
transition is just a pause before a continuation or the sign that a reversal
of trend will happen.
There are specific patterns that can help the trader to decide which it is:
– Reversal Patterns: These patterns normally indicate an important
reversal in trend is happening
– Continuation Patterns: These patterns usually indicate that the
sideways price action is nothing more than a pause in the
prevailing trend.
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This is done by identifying recognisable patterns within the price
movements, which can then be used to generate price objectives for
potential future moves
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i.e. Is a reversal or continuation likely and if so, predict where the
market will move too
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Reversal Patterns – Head & Shoulders
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Breaking of the neckline – very high probability pattern
C
A
E
G
x
Neckline
D
B
x
F
Minimum Price Objective
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Reversal Patterns – Double Top
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Two Peaks
A
C
x
E
B
x
D
Minimum Price Objective
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Filters
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Continuation Patterns – Flags & Pennants
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Continuation patterns are usually shorter
Continuation patterns tell us that a sideways movement on a chart may
be just a pause in the prevailing (longer-term) trend, after which prices
will continue to move in the same direction as before.
They must have been preceded by a sharp and almost straight line
move.
‘flying at half mast’
Minimum Price Objectives
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x
Flag
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x
Pennant
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Continuation Patterns – Triangles
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Triangle Patterns are not traded until the break out occurs.
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Expected direction is up
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Trend signal confirmation s given by closing penetration
Minimum Price Objective
x
A
C
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G
H
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F
B
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Ascending Triangles – bullish
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Descending Triangles - bearish
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Traders Tools - Oscillators
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Another useful tool in a non-trending market. Provides the technical
trader with a tool that can enable to profit from these periodic sideways
and trendless markets.
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Runs continuously
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Also used to warn us that a trend reversal is possibly approaching
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Used to warn of a trend reversal before the prices reach the actual top
or bottom (deceleration of the price increase / losing momentum)
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Overbought or oversold
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It is studying the rate of ascent or decent
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M = P – Px (where Px is price x days ago)
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Types: Stochastics, RSI, Larry Williams, MACD
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Traders Tools - Oscillators
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The 3 Elements Of Successful Trading
Price Forecasting - ‘what to do’
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Which way a market is expected to trend. (buy or
sell)
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It is the crucial first step in trading decision.
Timing – ‘when’
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Trading tactics, or timing, determines specific
entry and exit points.
Money Management – ‘how much’
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Covers the allocation of funds.(portfolio make-up,
diversification, how much money to invest or risk
in one market, the use of stops, reward to risk
ratios)
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Bringing a Trading strategy together
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Do your homework – not really a part time job!
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Pick one or two oscillators you are comfortable
with
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Combine with trend indicators and confirmation
signals and volume indicators
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Back test and paper trade
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Have a plan, NEVER trade impulsively
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Understand money management / diversify
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Trade light until proof of concept
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Automated entry and exit (profit and stop) even if not generated by algorithmic trading
system
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Always place your protective stop when you
place your order
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Exit a losing trade as early as possible
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Learn to be happy in the minority!
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Questions and Answers
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Further Reading
Technical Analysis of the Financial Markets
– John J. Murphy
Deciphering The Market
-J.M.W Tadion
Forecasting Financial Markets
- Plummer
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