Book Notes -Bar Charts

Book Notes -Bar Charts - BAR CHARTS 1. Moving...

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Unformatted text preview: BAR CHARTS 1. Moving Averages a. Smooth the price data to make the underlying trend more easy to identify b. If Rising –trend is bullish c. If Falling – trend is bearish d. If current close > moving average – uptrend  ­ buy e. If current close < moving average – downtrend  ­ sell f. Trading does not work well with a choppy market 2. Momentum Oscillators a. Focus more on this instead of long term trend b. Relative Strength Index (RSI) – a momentum indicator i. Measures acceleration and deceleration of price changes in order to anticipate change in trend ii. Overbought market – risen too far, too fast iii. Oversold market – fallen too far, too fast 3. Developing a Trading System a. Benefits i. System is compatible with your personality and trading style ii. Reduce emotional trading iii. Have objective entry validated by quantifiable data iv. Control risk v. Know when and where to get out vi. Know your drawdown and have backup capital b. Type of Market i. Stocks ii. Mutual funds iii. Financial futures iv. Commodities c. Timeframe: Weekly, daily, intraday d. Type of Market Activity: i. Trending – large, sustained price advance or decline ii. Nontrending – moves sideways with drifting price swings iii. Volatile – sharp, quick price jumps e. Set ­up – signal the market is favorable f. Entry – criterion met after a set ­up for trade is initiated g. Exit – criterion by which trade is closed out i. Trailing stop 1. below current price (long position) – raise trailing stop for profits 2. above current price (short position) – lower trailing stop for profits ii. profit target BAR CHARTS Technical Analysis – study of price and its action in the past 1. Trendlines a. Uptrend – higher highs and higher lows – connect the lows b. Downtrend – lower high and lower lows – connect the highs c. Reliability and support (uptrend)  ­the longer and more prices it touches d. Resistance (downtrend) – line drawn across descending highs e. Channel – narrow band of price action within 2 parallel trendlines (buy bottom, sell at top) f. Sideways move trend 2. Continuation Formations a. Congestion areas, pauses, resting periods b. Symmetrical triangles (pennants), ascending triangles, descending triangles, flags – suggest a move will continue c. Triangles – prices trade in a narrower and narrower range before springing with a strong move i. Breakout not in the same direction as the trend – can be a reversal d. Pennant – uncertainty  ­ breakout in same direction as trend – reliable e. Flag – short term trend against the prevailing trend f. Measuring of Formations i. Prepare stops – don’t know the trend ii. Breakout and once long – analyze the shape to determine the trend iii. Pennants and flags occur halfway into a move iv. Length of Flag poles can also be used to predict next move g. Measuring Gaps i. No trading takes place – drastic changes in price ii. Halfway point in a move from top to bottom 3. Reversal Formations a. The more points of contact on the trendline – the stronger it is b. Retracements (corrections) i. Breakout and new trend begins – how fast and how long? ii. Markets acts and reacts – reaction depends on market’s strength iii. Common reaction – 50% retracement iv. Retracement levels  ­clue to continuation or reversal v. Measuring gap – also gives clues because it is half way – is at the 50% retracement level – could expect reversal right after gap c. Key Reversal i. Uptrend – market drives to new highs and closes below previous period’s low ii. Downtrend – hits new lows and closes above previous period’s high iii. Not very reliable d. Island Reversal i. More reliable – takes several days to develop BAR CHARTS ii. Price action here stands out iii. Exhaustion gap (left side) – price level with no trading iv. Island – bar or bars that push to new high or low v. Breakaway gap (right side) – market picks up steam e. Multiple tops, bottoms i. Sell double or triple tops, buy double or triple bottoms ii. Assumes concept of support/resistance f. Vs and Saucers i. V – spike up or down (reversal) almost immediately – volatile markets – hard to catch ii. Saucer – take long and are slow – rounding tops  ­ tries the patience g. Head ­and ­Shoulders i. Best known type of reversal ii. High, (flag) then low, then high, then low, (flag) then high iii. Neckline is key point (connects the 2 lows)– as prices move down the right shoulder, passed the neckline, time to sell iv. Comes at the end of an extended move – pattern of trading volume = pattern of prices h. Ms and Ws – resemble head and shoulders but miss a shoulder i. M top – price hit a high, drop to reaction low (1), back to a smaller high (2), fall again, when prices fall below reaction low sell (3) ii. When the high at 2 goes higher or the drop is not below (1) then different plan ...
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This note was uploaded on 02/19/2012 for the course BIP 364 taught by Professor Stephenlevin during the Fall '10 term at Northwestern.

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