Trends · PDF fileretracement levels for signs of a reversal. Fibonacci Levels (38.2%, 50%,...
Transcript of Trends · PDF fileretracement levels for signs of a reversal. Fibonacci Levels (38.2%, 50%,...
Trends● Define the term “Trend”● Explain why Trend is important● Identify Primary, Secondary, and
Short-Term trends
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● Prices rise and fall in Trends
● Trend is defined as:○ Up (Rising)
Higher Peaks and Higher Troughs○ Down (Falling)
Lower Peaks and Lower Troughs○ Sideways (Trading Range)
Peaks and Troughs are at roughly similar prices
What is a Trend?
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Sideways Trend
Uptrend Downtrend
Higher Troughs
Higher Peaks
Lower Troughs
Lower Peaks
Horizontal Peaks
Horizontal Troughs
What is a Trend?
● Linear Regression (line of best fit) is a good
way to identify trends.
● Trend is dependent on time:
○ Green is Yearly UpTrend
○ Blue is Monthly Sideways Trend
○ Red is Monthly DownTrend
● Trend must be defined in the context of the
time horizon.
● Each Analyst must make their own
determination on which time horizon to use.3
What is a Trend?
Trend is a direction, not a straight line.
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Trend Classification
● Technical Analysts have divided trends into
three categories:○ Primary
Measured in Months or Years○ Secondary (or intermediate)
Measured in Weeks or Months○ Short-Term
Measured in Days○ Intraday
Measured in Minutes or Hours
● Charles Dow first defined this model.
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Trend Classification
● If we stop our chart at July 2016, we can see
this better:○ The green Primary trend is up○ The blue Secondary trend is slightly down
(almost sideways)○ The red Short-Term trend is sharply down
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Fuzzy Logic
● Q:Does the slope of the trend matter?
● A:It depends! If we saw slopes that are
wildly different from the norm, then yes.
● This is the “art” part of Technical Analysis.
● All Analysts occasionally make statements
that seem like facts, but they are often
subjective observations.
● There will be many concepts that are built
on years of observation.
● Many of these were developed before there
were any quantitative techniques.
● In time, as evidence is presented, these will
be proven or dismissed.
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Trends - The Key to Profits
● Every TA Signal and theory is centred on
capturing the trend.
Keys to Profit
1. Determine, with minimum risk of error,
when a trend has begun at it’s earliest time
and price.
2. Select and enter a position in the trend that
is appropriate to the existing trend,
regardless of direction.
3. Close those positions when the trend is
ending.
4. The more objective and rules-based we can
be, the better.
● This sounds simplistic, but it’s the basis of
all Technical Analysis.
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Determining Trend
● Linear Regression is a nice way, but it’s not
the standard way.
● We look at the peaks and troughs of the
chart.
● Price does small oscillations around the
larger trend.
● This chart is showing the peaks and troughs
as H & L.
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The Trend Line
● We draw trend lines as a visual cue of a
break in the line.
● This is a possible signal of a change in trend.
● Where we draw a trend line depends on the
direction of the trend:○ Uptrend - we connect troughs○ Downtrend - we connect peaks○ Sideways - connect peaks and connect
troughs
● There is a “fudge” factor.
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The Trend Line
● Often candles are used and shadow breaks
are ignored.
● Even though the trend line was broken,
there was no lower peak to draw a down
trend-line to.
● A break in a trend does not mean that a
reversal is happening.
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The Trend Line
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Downtrend Trading Range
Internal Trend Lines
● A Trend Line added in the middle of the
price action.
● An attempt to repeat what Linear
Regression would be giving us.
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Trend Line Rules
● The more times a line is touched, the more
significant it is.
● The steeper the line, the sooner it will be
broken. Steep is a relative concept.
● Should never be considered “exact”.
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Accelerating or Logarithmic Trend Lines
● As a market accelerated, new steeper lines
would have to be drawn.
● Applying a logarithmic function to the line
gives us the same result.
● Green line gives us much earlier warning of
a possible change in trend.
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Trend Line Tools
● Channels● Volume● Retracements● Speed Lines● Andrew’s Pitchfork● Point & Figure
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Channels
● Often prices appear to travel in a channel.
● Very similar to a trading range.
● Watch for peaks that are no longer reaching
the upper line.
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Volume to confirm Change in Trend
● High Volume confirms significant reversal
points.
● Blue zones - volume peaked on the trough.
Peaks have weak volume.
● Don’t know for sure until the day after.
● Red zone—did not work—Change of trend?
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Retracements
● Trends rarely follow straight lines without a
number of smaller trends.
● The smaller counter-trends are called
retracements.
● We measure the retracement as a
percentage of the impulse before it.
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Fibonacci Retracements
● Many traders will watch defined
retracement levels for signs of a reversal.
● Fibonacci Levels (38.2%, 50%, 61.8%) are
common levels.
● If retracement is below 38%, shows there is
conviction in the current move. Above 62%
and it gives a warning.
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Speed Lines
● Developed by Edson Gould
● Draw Lines from the start point through the
end of the Fibonacci Retracements Levels
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Gann Fans
● W.D. Gann found from his hand charting
that many times securities would bounce off
angled lines.
● Using the Graph Paper (Charting Paper), he
would count squares to make angles:○ 1x1 = 45 degrees○ 2x1 = 63 degrees
● Great way to identify Trend Speed.
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Gann Fans
● Note: This is not a geometric angle on a
chart.
● Often used in pairs, paying careful attention
to the intersection points.
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Gann Fans
● Note: This is not a geometric angle on a
chart.
● Often used in pairs, paying careful attention
to the intersection points.
● Falls into a subjective area of Technical
Analysis that is hard to quantify.
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Andrew’s Pitchfork
● Again, a subjective tool that is hard to
quantify.
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Andrew’s Pitchfork
● Extra lines can be added.
● With most TA, we stand on the shoulders of
those who went before, and we are able to
experiment.
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Support & Resistance
● What is Support and Resistance?
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Buyers and Sellers
● Every transaction is where buyers and
sellers agree on price.
● Economic Theory tells us that when there
are more buyers, demand increases and the
price will rise (more sellers...price falls).
● Aggression of Buyers is a factor too.
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Resistance
● A peak in the market is when the number
(or aggression) of the sellers has grown to
balance out the number (or aggression) of
the buyers.
● We say that price met Resistance at that
price.
● The sellers did not let the price-rise
continue.
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Support
● A trough in the market is when the number
(or aggression) of the buyers has grown to
balance out the number (or aggression) of
the sellers.
● We say that price met Support at that price.
● The buyers did not let the fall in price
continue.
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Support & Resistance
● Previous Peaks and Troughs have a habit of
stopping the market in the future.
● They become zones where there is a high
probability of the market turning.
● The reasons for this:○ Recency Bias○ Exiting a bad trade○ Second chance○ Large institutions (looking at P/E)
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Support & Resistance
● The reasons are psychological but have
been evident in the markets for decades.
● Best to think of them as spongy zones
rather than hard barriers.
● When we see peaks repeating and troughs
repeating, we know we are in a trading
range.
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Trading Range Breakouts
● The longer the market has been “bound” in
a range, the bigger the move out will be.
● Everyone is on the side waiting for
confirmation.
● Breakouts indicate that the balance has
shifted.
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Support and Resistance Zones
● Lots of reversals “around” the same price
tells us we have a zone.
● We draw zones by considering all the peaks
for a resistance zone and all the troughs for
a support zone.
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Donchian Breakout Method
● Channel shows the highest and lowest
prices over the past four weeks.
● When the high is broken—Buy.
When the low is broken—Sell.
● Best in strong trending markets.
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Support & Resistance Switch
● Once broken, previous Support zones
become Resistance zones.
● Previous Resistance → Support
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Trends and Support & Resistance