Post on 11-Mar-2020
How touseTechnicalAnalysisSuccessfully
Alex Douglas
What is Technical Analysis?• VERY broad subject – Many branches • Difficult to define
- ongoing projectfor IFTA
Unrealistic expectations
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DoesTechnical AnalysisWork?
Minimum Price Objective
“Head and Shoulders Tops- The Essential
Facts”
by
David Schwartzand
Robin Griffiths
23%
11%
13%
13%
40%
Height of Left Shoulder Relative to Height of HeadThe Left Shoulder - LS
LH
• It is best if the Left Shoulder is large in comparison to the the height of the Head.
• Calculation = L / H
The Left Shoulder - LSHeight of LS Relative to Pre-Formation Rally
$6.50
$8.60
$9.00
Height of the LS relative tothe Pre-Formation Rally= ($9.00 - $8.60) / ($9.00 - $6.50)= $0.40 / $2.50= 16%
The Left Shoulder - LSHeight of LS Relative to Pre-Formation Rally
Height of LS relative to Pre-Formation Rally
Odds of Meeting orExceeding the MPO
- 65%
- 41%
- 28%
• 12% or less
• 13% to 22%
• over 22%
The HeadHeight – Peak of Head to Neckline on day of peak
$3.00
Height of Head as a percentage= ($3.45 - $3.00) / $3.00= $0.45 / $3.00= 15%
$3.05$2.95
$3.45
The HeadHeight – Peak of Head to Neckline on day of peak
Height of the Headas a percentage
Odds of Meeting orExceeding the MPO
- 79%
- 40%
- 28%
- 8%
• 16.4% or less
• 16.5% to 24.7%
• 24.8% to 44.3%
• 44.4% or more
The HeadTime Taken to form the Head
The HeadTime Taken to form the Head
Number of Weeks toform The Head
Odds of Meeting orExceeding the MPO
- 88%
- 60%
- 17%
• 5 weeks or less
• 5 to 14 weeks
• 14 weeks or moreIt is the overall relationship that is important.Patterns that form relatively quickly have abetter chance of meeting or exceeding the MPO.
The Right Shoulder - RSSymmetry between Right & Left Shoulders
• Only 14% of confirmed H&S have a Right Shoulder that is within 10% of the Left Shoulder.
• Of those 14%, only 27% end up meeting or exceeding the MPO.
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Rating a potential H&S pattern
Percentage of MPO to be achieved
38 or more 32 - 37 29 - 31 Below 29
100% or more 91% 48% 18% 3%50 - 99% 3% 44% 44% 41%49% or less 6% 8% 38% 56%
Score from rating system
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Psychology of Trading& Technical Analysis
• DISCIPLINE•“Cut Losses & Let Profits Run”• Control of - Fear, Greed, Ego• Need to tame the urge to be “right”
• We need to go further than this and be aware of our built in BIASES that influence how we see and interpret charts.
H O R I Z O N T A L / P A R A L L E L
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Divergence
Divergence
Divergence
Divergence
Indicators
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Indicator OverloadPrice Rate-of-ChangePublic Short RatioPuts/Calls RatioQuadrant LinesRelative Strength, ComparativeRelative Strength IndexRenkoSpeed Resistance LinesSpreadsStandard DeviationSTIXStochastic OscillatorSwing IndexThree Link BreakTime Series ForcastTirone LevelsTotal Short RatioTrade Volume IndexTrendlinesTRIXTypical PriceUltimate OscillatorUpside/Downside RatioUpside/Downside VolumeVertical Horizonal FilterVolatility, Chaikin'sVolumeVolume OscillatorVolume Rate-of-ChangeWeighted CloseWilliams' Accumulation/DistributionWilliams' %RZig Zag
Gann AnglesHerrick Payoff IndexKagiLarge Block RatioLinear Regression LinesMACDMass IndexMcClellan OscillatorMcClellan Summation IndexMember Short RatioMomentumMoney Flow IndexMoving AveragesNegative Volume IndexNew Highs-Lows CumulativeNew Highs-New LowsNew Highs/Lows RatioOdd Lot Balance IndexOdd Lot Purchases/SalesOdd Lot Short RatioOn Balance VolumeOpen InterestOpen-10 TRINOption AnalysisOverbought/OversoldParabolic SARPatternsPercent RetracementPoint & FigurePositive Volume IndexPrice and Volume TrendPrice Oscillator
Absolute Breadth IndexAccumulation/DistributionAccumulation Swing IndexAdvance/Decline LineAdvance/Decline RatioAdvancing-Declining IssuesAdvancing, Declining, Unchanged VolumeAndrews' PitchforkArms IndexAverage True RangeBollinger Bands Breadth ThrustBull/Bear RatioCandlesticks - JapaneseChaikin OscillatorCommodity Channel IndexCommodity Selection IndexCorrelation AnalysisCumulative Volume IndexCyclesDemand IndexDetrended Price OscillatorDirectional MovementEase of MovementEfficient Market TheoryElliott Wave TheoryEnvelopes (Trading Bands)Equivolume/CandlevolumeFibonacci StudiesFour Percent ModelFourier Transform
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Indicator Overload• So many indicators available at the click of a button
• Danger – Selecting the indicator that supports yourpre-conceived view of the market
• Complex is not necessarily Better
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Thoroughly learn a handful of Indicators• Trend Following Indicators
• Moving Averages• Directional Movement Index• On-Balance Volume
• Momentum Indicators / Oscillators• RSI• Stochastic
• Hybrid Indicators• MACD• Bollinger Bands
• Need to Avoid the Collinearity Trap
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Time FrameWeekly = Tide Daily = Waves Intraday = Ripples
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Time Frame
|------ BOLLINGER BANDS ------|2 sd either side of the mean
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|------ BOLLINGER BANDS ------|
89%
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BFX – Belgium
BBands narrowestsince 1995
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BFX – Belgium+10%
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Soybean Futures
Turn suggests end ofthe impulsive move
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February March April May June July August September October1998
18.5
19.0
19.5
20.0
20.5
21.0
21.5
22.0
22.5
23.0
23.5
24.0
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%b
(Last – Lower BBand) .
(Upper BBand – Lower BBand)
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February March April May June July August September October1998
0.5
1.0
18.5
19.0
19.5
20.0
20.5
21.0
21.5
22.0
22.5
23.0
23.5
24.0
1996 1997 1998 1999 2000 2001 2002 2003
2025303540455055606570758085
0.470.480.490.500.510.520.530.540.550.560.570.580.590.600.610.620.630.640.650.660.670.680.690.700.710.720.730.740.750.760.770.780.790.800.810.82AUD-USD (0.6626, 0.6668, 0.6610, 0.6656)AUD-USD
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1996 1997 1998 1999 2000 2001 2002 2003
2025303540455055606570758085
0.470.480.490.500.510.520.530.540.550.560.570.580.590.600.610.620.630.640.650.660.670.680.690.700.710.720.730.740.750.760.770.780.790.800.810.82AUD-USD (0.6626, 0.6668, 0.6610, 0.6656)AUD-USD
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1996 1997 1998 1999 2000 2001 2002 2003
2025303540455055606570758085
0.470.480.490.500.510.520.530.540.550.560.570.580.590.600.610.620.630.640.650.660.670.680.690.700.710.720.730.740.750.760.770.780.790.800.810.82AUD-USD (0.6626, 0.6668, 0.6610, 0.6656)AUD-USD
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August September October November December 2003 February March April May June July August September O
25
30
35
40
45
50
55
60
65
70
114.5115.0115.5116.0116.5117.0117.5118.0118.5119.0119.5120.0120.5121.0121.5122.0122.5123.0123.5124.0124.5125.0125.5126.0126.5USD-JPY (117.40, 117.48, 116.02, 116.20)
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August September October November December 2003 February March April May June July August September O
5101520253035404550556065707580
114.5115.0115.5116.0116.5117.0117.5118.0118.5119.0119.5120.0120.5121.0121.5122.0122.5123.0123.5124.0124.5125.0125.5126.0126.5USD-JPY (117.40, 117.48, 116.02, 116.20)
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%b(RSI)
(RSI – Lower RSI BBand) .
(Upper RSI BBand – Lower RSI BBand)
er October November December 2003 February March April May June July August September O
0.0
0.5
1.0
10
20
30
40
50
60
70
80
114.5115.0115.5116.0116.5117.0117.5118.0118.5119.0119.5120.0120.5121.0121.5122.0122.5123.0123.5124.0124.5125.0125.5126.0126.5USD-JPY (117.40, 117.48, 116.02, 116.20) www.alexdouglas.com
How to use Technical Analysis Successfullywww.alexdouglas.com
• Ensure that you have realistic expectations
• Don’t take statements on how well various tools oftechnical analysis ‘work’ at face value – Dig deeper
• Be aware of Psychological Biases• Suppress the urge to be “right”
• Learn how to detect valid Divergence signals
• Select a handful of indicators and thoroughly learnhow they are created and how they behave
• Seek confirmation across timeframes
Thank youThank youalex@alexdouglas.com
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