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Eric L. NAYMAN
Small
Trader's
Encyclopedia
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BBK 65.26 H20
Nyman E. -L.
H20 Small Trader's Encyclopedia —K 221
. VIRA-R Alfa Capital, 1999. —236 p..ill. 134 -
Bibliographer - p.
ISBN 966-95440-0-9
This book discusses the basics of technical and fundamental analysis of financial markets, the
psychology of stock trading, as well as risk management systems. The book
is designed to help readers master a set of financial decisions consisting of two main blocks - the
theory of financial market analysis and the practice of financial asset management. This publication is replete
with practical material , on the basis of a careful study of which you can master many tricks of the financial
markets
The book is intended both for professional participants in the securities market, the foreign exchange
market and exchange commodity markets, and for a wide range of readers. It can be used as a textbook for
students of economic universities, banking schools and business schools.
The author thanks Alfa Capital represented by Mr. Nilov VV for their help in publishing this book.
LBC 65.26
ISBN 966-95440-0-9
© Alfa Capital, 1999
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SMALL TRADER ENCYCLOPEDIA
TABLE OF CONTENTS
page
Introduction ................................................ ................................................. ................................................. .. 5 1. Fundamental market
analysis .............................................. ................................................. ...........7 1.1 Basic Definition of Speculative Markets 1.1.1 Foreign
Exchange Market 1.1.2 Stock Market 1.2 Causes and Effects 1.3
7
Life Cycle of Fundamental
Factors 1.4 Mainstream
7
Economic Intelligence of
17
Governments of Developed Countries 1.5 Relationship between
20
22 24
Fundamental Factors and exchange rate dynamics 1.6 Rumor trading 2. Technical market
analysis .............................................................. ................................................. .................................35 2.1 General
27
32
principles of technical analysis
2.2 Purpose of analysis 2.3 Types of charts and rules for their construction 2.4 Trend models. Rules for construction and analysis Confirmations
2 1 Trend lines at high prices (resistance lines) 2 .4 .2 Trend
35
lines at low prices
36
(support lines) 2 2 2
36
39
.4 .
40
41
. 4 . 3 Transition of a support line into a resistance line and vice versa 4
. 4 . Channel lines
. 4 . 5 Classic figures of technical analysis 6 Common
2 . 4 . features and contradictions of trend patterns
2 . 4 . 7 Lifespan of a trend and its life cycle 4
2 . . 8 Acceleration and deceleration of trends 2.5
42
43
44
60
61
64
Simple averages 2.5.1
65
Construction rules and their types 2
65
. 5 . 2 Analysis rules 2.6
Compound averages
2.6.1 Construction and analysis of two averages on the same chart and combination of pairs of
averages
2
. 6 . 2 Price
change channels 3
67
2 . 6 . Construction and analysis of MACD
2.7 Other trend indicators 2.7.1
Construction and analysis of the PTP line
2 . 7. 2 Construction and analysis of the "directional change" indicator (+/-DM) 2 . 7. 3
Construction and analysis of the average indicator of probable direction 2.8 General
conclusions on the trend analysis of the market 2.9
Oscillators 2.9.1
General principles of construction and calculation, types of oscillators 2 .
9 . 2 Analysis rules 2.10
Analysis of volume indicators 2
. 10 . 1 Rules for constructing and calculating volume indicators
3
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SMALL TRADER ENCYCLOPEDIA
No one should trust anyone as the Lord God or His prophet. Simple enough
listen to a person who makes you think.
Peter Oppenheimer, English economist INTRODUCTION
This work is intended for people who are familiar with the general principles of work and the concepts of the exchange
and over-the-counter markets for currencies, securities and commodities. Free cash has
two main goals - to maximize profitability while maintaining appropriate reliability. In general, it is difficult to attribute
speculation in the currency and stock markets to reliable assets, but they provide the highest profitability of all legal
types of operations. If you don’t invest money, then they tend to disappear over time, so you either work with money or
say goodbye to
them forever.
The main goal that I pursue when I write this work is to help you save, not lose, your money. If you minimize losses,
then you are guaranteed a consistently high profitability. But let's first check for "traderism" (traderism is not a fatal, but
an incurable
disease of a professional speculator-trader, expressed in getting special pleasure from trading "air"). In this case,
you will check yourself and you will evaluate yourself.
First of all, check yourself for gambling. Go to the casino and play until you have the strength and desire. If you go
out of there still dressed, without pawning your wife and mistress, then we can assume that you passed the first test with
honor. If you didn’t go to the casino at all, then think about whether you need such a job. Next, check your attention.
Take any simple object (glass,
plate, ballpoint pen, etc.) and try to notice any differences from the standard form of these objects. There must be at
least five such differences. A trader needs logical thinking. Try to draw a logical chain between the Gulf War and the rise
in gas prices in Europe, between the fall in crime and the
holidays, etc. And finally, test your ability to wait and stand . Date a girl you will have to (you must be sure of this)
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wait at least three hours. If you still wait for it, then you can start professional speculation. If there are no
such girls in your environment, then wait for public transport at a bus stop, draw bridges in St. Petersburg,
etc., until you calmly react to any fact of waiting. I apologize in advance for the inherent dryness of the
presentation
of this work, but try to revive it with your own imagination. From the outside, everything that financial
markets are can look like an
extremely complex and confusing labyrinth. Therefore, briefly, what we will study here can be called the
paths of the labyrinth. After you make your way through the first blockages of your own possibilities on the
outskirts of the labyrinth, it's time to enter it. Let's briefly consider the paths of this labyrinth. After the first turn
after the introduction , we find
ourselves within the limits of the foundations
of fundamental analysis. Despite the apparent simplicity of its turns and exits, we will never be able to
say in advance what conclusions this or that path will lead to. Just as it is impossible to step into the same
river twice, so there are no two identical effects of the same fundamental cause. Having successfully
mastered the tricks and peculiarities of fundamental analysis, we will enter the halls of technical analysis. By
consistently going through the twists and turns of classical trend analysis and oscillator analysis, you will
learn the varieties of static and dynamic technical analysis. Additional possibilities of technical analysis will
be briefly revealed to you in the form of specific analysis and analysis of volume indicators. After wandering
through the corridors of technical analysis, we will enter the path of the risk management system, which will
show you the possible pitfalls in applying the acquired knowledge in the course of practical work with "live"
money. After passing the third whale (the first is technical analysis, and the second is fundamental analysis)
of trading, you will find yourself in the last limit of the labyrinth - the psychology of practical activity. This last
trap of the labyrinth lies in wait for every inattentive traveler on the way to money and fame. It’s just that the
light of incalculable riches has dawned, as the seemingly insignificant and inexplicable behavior of the
market, and sometimes your own actions, plunge you into the abyss, if not ruin, then significant losses. Most
loser traders end their careers at this end of the maze. At the exit from the labyrinth, as a reward for
successfully surviving, it was proposed to consider some interesting points of practical activity.
Before proceeding to the presentation of the main topic, it should be noted that the success or failure in
applying the provisions of this work will depend entirely on how you feel about this type of activity - as work,
play, or as a means of obtaining "easy" money.
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1. FUNDAMENTAL MARKET ANALYSIS
There are three main methods for analyzing financial and commodity markets: fundamental analysis, technical analysis, and
the intuitive approach to analysis. Fundamental analysis studies the
movement of prices at the macroeconomic level. It can help determine the main market trend (the trend is the main direction of
the market price dynamics), however, fundamental analysis is often not enough to determine the specific moment of the transaction.
In this area, technical
analysis.
Technical analysis is based on the following hypothesis - market prices are a reflection of the desires and actions of all market
participants. As a result, both price and volume reflect every trade made by thousands of traders.
The intuitive approach to analysis is professed by a small number of traders and, as a rule, is not
leads to long-term success. This approach will be discussed in more detail in Section 4.
The school of fundamental market analysis arose with the development of applied economics. She took as her basis knowledge
about the macroeconomic life of society and its impact on the dynamics of prices for specific goods. For example, knowledge of
the weather conditions in Latin America for
the current year can help calculate the volume of coffee production in a given year and, accordingly, the dynamics of coffee
prices during this period. If the main macroeconomic task of the school of technical analysis is to smooth out speculative price
fluctuations, then the main task of the school of fundamental analysis is to form and predict new trends in price dynamics. From
here we deduce the purpose of fundamental analysis - the analysis and forecast of fundamental factors and their influence on the
trend dynamics of prices.
Strategic investors who make long-term investments focus on fundamental analysis in their work, although they miss shortterm technical price fluctuations.
1.1. Basic definition of speculative markets 1.1.1. Currency
market
In international currency terminology, there are: - currency markets
where national currencies are traded. Sale or
the purchase of currency here takes place in the country of its origin;
- euromarket (eurocurrency market), where deposits and loans in any currency are traded,
regardless of its country of origin.
Currency trading here means a set of conversion (exchange) and deposit and credit operations in foreign currencies carried
out by participants in the foreign exchange market at the market rate or interest rate. If a German bank takes a loan from a bank in
US dollars, it trades on the international foreign exchange market,
and if the same bank receives the same loan in US dollars from a bank in London or Switzerland, then trading takes place on
the Eurocurrency market.
There is the concept of eurocurrency - eurodollar, euromark, eurofranc (Swiss), eurolira - all of these are currencies of the
same name on deposit and loan accounts of banks that are not located in the USA, Germany, Switzerland and Italy, respectively,
i.e. not "in the homeland" of these currencies.
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Thus, when we talk about the foreign exchange market itself, we mean both the foreign exchange
markets of national currencies (forex) and the eurocurrency markets
(deposits/loans). Earlier, we have already noted that trading in the foreign exchange market is
carried out in
two main directions: - Conversion operations - these are transactions for the exchange of one
national currency for another at the exchange rate agreed upon by the two parties on a certain date.
Conversion operations are carried out on the FOREX
(Foreign Exchange Operations) currency market, - deposit and credit operations are a set of shortterm (from 1 day to 1 year) operations to place free cash balances (deposit operations - deposits) or
to attract missing funds in foreign currencies (credit operations - loans) for a certain period at a
percentage fixed in the agreement. Deposit and credit operations are carried out in the money market
(Money Market Operations).
In turn, conversion transactions are divided into spot transactions (the date of delivery of currencies
on the next day after the conclusion of the transaction) and forward transactions (delivery time from
several days to several years). The main objects of conversion operations are: - US dollar - USD;
- German mark DEM; - Japanese yen JPY; - pound sterling
- GBP; - Swiss franc CHF; - Italian lira - 1TL; French franc - FRF; Belgian franc - BFR; Spanish peseta - ESP; Australian dollar - AUD; Canadian dollar - CAD. There
are several global financial
centers actively trading currencies. These include: in Europe - London, Frankfurt am Main, Zurich
and Paris; in North America, New York and San Francisco; in Asia, Tokyo, Singapore and Hong Kong.
According to the Bank for International Settlements (Basel, Switzerland), the volume of conversion
operations in 1989 amounted to 932 billion US dollars, and at the end of 1993 it exceeded 1,100 billion
dollars. The annual increase in the volume of international trade in currencies is 5-7 percent. The
largest market in the world is the London market, which accounts for about 480 billion dollars. The
volume of conversion operations in New York is about 220 billion dollars, and in Tokyo - 170 billion
dollars. Other markets are much smaller - Singapore accounts for 90 billion dollars, Frankfurt am Main
- about 60 billion dollars. The time when trading in London, Frankfurt am Main and New York (from
14:00 to 18:00 GMT - Greenwich Meridian Time, Greenwich Mean Time) is carried out at the same
time is the best time for large transactions, as these are the most liquid markets . The Asian markets
and the San Francisco market are much smaller in size than the European currency markets, so
individual large transactions made here can have a significant impact on the exchange rate.
If we talk about the difference in the functioning of foreign exchange markets, then it is necessary to bring
the following table showing the difference in the time zones of the financial markets.
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Table 1.1
Financial market
Difference in hours from GMT time
winter time -11
summer time
-12
Australia Tokyo,
+9
-10
Japan Hong Kong
-9
-9
+8
+8
+7
+8
+3
+4
+2
+3
+1
+2
+1
Wellington, New Zealand Sydney,
Singapore Moscow Kiev
0
Frankfurt
-4
-5
am Main,
-8
-7
Zurich London New York Los Angeles The main
participants in the
foreign exchange
market are: - central banks; - commercial
banks; - investment and pension funds; - enterprises carrying out
export-import
operations; - currency exchanges;
- currency brokerage
firms; - individuals. A special place in the structure of world currency markets is occupied by central
banks. The largest central banks that have the greatest impact on the dynamics of exchange rates are
the US Federal Reserve (US Federal Reserv - FED), the German Bundesbank (Deutsche Bundesbank Buba), the Bank of England (Bank of England - Old Lady), the Bank of Japan (Bank of Japan-BOJ). The
US Federal Reserve System (FRS)
was formed in 1913. It functions as an independent body of the US Federal Government and is
accountable to Congress, although the President appoints the members of the Fed's Board of Governors.
From August 1987 Alan Greenspan is chairman of the Fed's Board of Governors. In 1996, Greenspain
was 70 years old. The nearest date for the re-election of the chairman of the Council is June 20, 2000.
Separately, it is necessary to say about the FOMC (Federal Open
Market Committee - Federal Open Market Committee) - a committee within the structure of the US
Federal Reserve. It includes the full Board of Governors of the Fed. Mandatory member - President of
the New York Federal Reserve Bank; four other presidents of other federal reserve banks are members
of the FOMC on a rotating basis.
The FOMC holds its meetings once every 4-6 weeks. Decisions are made on the impact on the money
markets, lending volumes, interest rates, and the regulation of the foreign exchange market. The FOMC
is one of the most key figures in modern government regulation of international financial markets. Alan
Greenspein also heads the FOMC.
Bundesbank of Germany since 1992 and until 2000 headed by Hans Tietmeyer. This man has made
his agency one of the most powerful central banks in the world. Tietmeier is a supporter of the concept
that helping other countries to the detriment of Germany is unacceptable. Otmar Issing, chief economist
at the Bundesbank and an ardent monetarist, is said to be Titmaier's most likely successor in this post.
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The Federal Reserve and the Bundesbank are the most independent government structures among the central banks of the
leading industrial states. This allows them to pursue an independent policy in determining interest rates and the effective exchange
rate, which is only indirectly consistent with the opinion of the parliament and government of their country. At the head of the Bank
of England since 1993. worth Eddie George (Eddie George). The Bank of Japan has been headed by Yasuo Matsushita
since 1994. Among commercial banks, Barclays Bank, Chase Manhattan Bank,
Citibank, Deutsche Bank, Standard Chartered Bank, Union Bank of Switzerland and others
stand out. The daily volume of currency transactions of these banks reaches billions of dollars. At the same time, one can note
a high concentration of foreign exchange operations among a small number of banks - more than 3/4 of the daily turnover of the
foreign exchange market passes through less than 1000 banks in the world. Investment and pension funds pursue an active
policy of "portfolio" investment. This policy consists in the acquisition of government and corporate securities in various countries
of the world. These organizations are usually referred to simply as foundations. Among
the most famous funds are the Quantum fund, which is part of the "empire" of George Soros. The same group of participants
in the foreign exchange market includes financial organizations that are structural divisions of transnational corporations - General
Motors, Ford Motors, Coca Cola, Johnson & Johnson, British Petroleum, Sumi-tomo, Mitsubishi, Daimler Benz, etc. Here it is
necessary to note the existence of two main groups of funds - pension and hedge funds. Pension funds set their main task to
preserve the funds invested in them, and making a profit fades into the background. Managers of such funds receive remuneration
as a percentage of assets. From this it becomes clear that pension funds rarely carry out risky speculative transactions. Hedge
funds operate in the opposite strategy, and the Quantum fund is a prominent representative of them. Hedge fund managers are
rewarded in the form of a percentage of profits, hence the desire of hedge funds to earn on any, even the most risky operation.
Historically, pension funds were created earlier than hedge funds (in the 30s of our century compared to the 60s, respectively)
and today their total assets are much larger. However, the decline in the yield of classic investment instruments (government
securities and stocks) provokes an increasing number of investors to invest in hedge funds, despite the higher risk of these
investments. At the moment, the active speculative activity of hedge funds is the main source of instability in financial markets.
Often, just rumors that some large hedge fund has begun to conduct large-scale operations in the market for a certain product can
greatly “swing” the market in one direction or another. Brokerage firms are responsible for bringing together the buyer and seller
of foreign currency and the implementation of a currency transaction between them. For such mediation, brokerage firms receive
commissions. The largest brokerage firms in the foreign exchange market are Bierbaum, Courts, Harlow Buttler, Lasser Marshall,
Tradition, Tullet and Tokio and others.
Frankfurt Currency Exchange and the "Frankfurt Fixing". The beginning of this exchange was laid in 1953, when trading in
five currencies was carried out on its trading floor. Today, the Frankfurt Stock Exchange quotes more than twenty currencies daily
and is the second largest (after London) foreign exchange
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the European market. Quotations formed on the stock exchange serve as the main source for determining the
official exchange rates by the Bundesbank. In Germany, for accounting purposes, conversion transactions between
banks and their customers cannot differ from the official exchange rate by more than 40 points in both directions
(for the US dollar). The total spread is thus 80 pips. That is, if the official exchange rate of the German mark
against the dollar is 1.5763, then banks are required to sell dollars at a price not exceeding 1.5803, and the
purchase rate of dollars is not less than 1.5723. From 11:00 to 11:05 GMT, the exchange receives applications
from all over the country, according to which the "Frankfurt fixing" is determined, which is the official rate of the
German mark. The rest of the time, the Frankfurt Stock Exchange operates as a regular interbank foreign exchange
market. The importance of the "Frankfurt fixing" for the foreign exchange market lies in the fact that German banks
try to fulfill client orders at a rate that is as close as possible to the "fixing". Therefore, at this time, the exchange
rate of the German mark in relation to other currencies seems to freeze, making fluctuations in very a narrow
corridor (no more than the specified 40 points) A separate group of organizations that have a significant impact on
the
foreign exchange market,
comprise the following government bodies:
- US Treasury (headed since 1995 by Robert Rubin); - The Ministry of Finance of
Germany (since 1989 Minister of Finance Theodor Waigel - Theodor Waigel); - Treasury Department of Great
Britain
(since 02/05/97 Minister of Finance Gordon Brown - Gordon Braun); - The Ministry of Finance of France (since
1995 the Minister
of Economy and Finance Jean Arthuis - Jean Arthuis). Other participants in the foreign exchange market have
a
significant impact on the dynamics of the exchange rate and
They do not provide interest rates, so we will not consider them here.
And now let's consider the main historical milestones in the formation and development of modern
foreign exchange market.
From 1821 to 1914 - the era of the gold standard, when the pound sterling was freely and without restrictions
convertible into gold. At this time, the pound is actually the main reserve currency of world finance. 1914 - with the
outbreak
of the First World War, the US dollar comes to the forefront. A dollar zone appears with a composition from
the countries of North and Latin America. 1922 - conference in Genoa. It was
envisaged to create a gold standard and a system of reserve
currencies based on the pre-war model.
1925 - the establishment by Great Britain of a gold standard based on the pre-war parity of the pound sterling
and gold. Now the reserves were not limited to gold, they also included a gold-convertible currency (for example,
the US dollar). However, the new "gold standard" of the pound no longer corresponded to reality.
1929 - Stock market crash in the USA. Accompanied by a drop in stock prices by approximately 36%. Then stocks rose by almost
half the amount of the fall, and during the period from 1930 to 1932. dropped another 80%. The crisis gave impetus to fundamental
changes in the economic policy of the state in the financial markets. This period is commonly referred to as the "Great Depression".
1931 - a panic in the financial market of London, which led to the actual change of the leaders of the reserve currencies. The dollar
came out on top, and the pound moved into the background. It was caused by a prolonged depression in the US economy.
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September 1931 - the abolition of the gold standard by Great Britain and the introduction of a freefloating pound sterling. In order to manage the exchange rate, a special Exchange Stabilization Account
was
created. 1933 - the abolition of the gold standard in the United States and the introduction of a
free-floating dollar. 1933 - formation of the "gold block". It included France, Italy, Switzerland, Holland,
Belgium and Luxembourg. The purpose of the creation is to keep the gold convertibility of their currencies
at parities fixed in the 20s.
January 30, 1934 - US President Roosevelt ratified the Gold Reserve Act, which established a fixed
parity of the American currency against gold, amounting to $35 per troy ounce.
March 1935 - withdrawal from the "gold bloc" of Belgium and the devaluation of the Belgian
franc. September 1936 - the complete collapse of the
"gold block". September 25, 1936 — the signing by Great Britain, France and the United States of the
Tripartite Agreement, according to which these countries assumed mutual responsibility for the normal
functioning of the exchange market of their currencies. This was the first precedent to formalize the
intervention activities of central banks. July 1944 - the signing of the Bretton
Woods agreement, which approved the "dollar standard". The currencies of 44 countries were rigidly
pegged to the US dollar, and the dollar to gold ($35 per troy ounce). December 1945 - entry into force of
the Bretton Woods
agreements. 1947 - Introduction by Italy of a free exchange rate
against the US dollar, which had devastating consequences for the sterling area. This was reflected in
the appearance of an undervalued cross-rate of the pound against the dollar through the Italian lira at 2.60,
compared with the official rate of 4 dollars per pound. July 15, 1947 - British official announcement of the
convertibility of the pound sterling, which restored the conversion of sterling assets into dollars and into
gold for the first time since the war. August 1947 - An international stabilization fund, known as the IMF,
began its work. August 20, 1947 - temporary suspension of the convertibility of the pound sterling. June
1948 - carrying
out a fundamental monetary reform in Germany. July 1, 1948 - the adoption of
the Marshall Plan to restore the war-torn economies of Europe. 1948 Introduction by France of a free exchange rate against the US dollar. April 1949 - monetary reform in
Japan.
September 18, 1949 - 35% devaluation of the pound against the dollar. The
new rate is $2.80 per pound. 1950 - The European Payments
Union is founded, which has become one of the instruments of foreign trade policy of the OECD
(Organization for
European Cooperation and Development). The purpose of creating the ENP is to prepare European
currencies for convertibility.
March 1954 - the introduction by the UK of liberalization measures in relation to the exchange of the
pound sterling for other currencies. As a result, there was a convergence of the market and official rates of
the
pound. February 1955 - The pound sterling actually became convertible.
1958 - devaluation of the French franc by 17.55%, accompanied by a successful
deflationary policy.
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December 27, 1958 - convertibility officially came into force for all currencies of the member countries of
the European Payments Union. On the same day, the ENP was replaced by the European Monetary Agreement
(EMU). This convertibility was based on the dollar-gold axis.
1959 - Monetary reform in France. A new franc was exchanged for a hundred old francs.
October 20, 1960 - The price of gold on the free market in London reached an unprecedented level of $40
per ounce, which threatened the stability of the dollar as the world's reserve currency.
1960 - creation of the "golden pool". The goal - to curb the rise in the price of gold, was achieved. WITH
end of 1960 by the end of 1967 the price of gold has never exceeded $35.35 an ounce.
March 1961 - Revaluation of the German mark and the Dutch guilder against the US dollar.
The reason is the large positive balance of payments of these countries.
August - October 1962 the Cuban Missile Crisis. The removal of political tensions that could lead the world
into a third world war had the best effect on the US stock market. Between 1962 and 1966 share prices
skyrocketed. It was one of the most unpredictable stock booms of the 20th century, as it was accompanied by
rising inflation and a corresponding rise in interest rates.
1965 - Crash in the Japanese stock market.
February 1966 - The bullish trend in the US stock market is finally stopped. November
18, 1967 - Devaluation of the pound sterling by 14.3%. The main reasons are a significant amount of war
debts, obligations of the second reserve currency, restructuring of the British economy. The final blow to the
pound came after the June six-day war in the Middle East, a wave of sales of pounds by the Arab countries
and a huge trade deficit in the UK. The official parity of the pound fell from 2.80 to 2.40 US dollars. March
15-17, 1968 - the collapse of the "gold pool". The reason
is the sharp rise in gold prices. May 1968 - social unrest in Paris, to calm which the French
National Bank spent most of its foreign exchange reserves. As a result, this led to the subsequent
devaluation of the French franc.
1969 Special Drawing Rights (SDRs) created under the IMF. SDRs made it possible to consolidate the
world's foreign exchange reserves and manage them within the framework of a supranational body. Initially,
the SDR was supposed to be used as an alternative to gold as a filling of official reserves. Today, this
"monetary" unit is not very popular. August 8, 1969 - devaluation of the French franc by 11.1% against the US
dollar.
September 28, 1969 - Germany decided to introduce a floating exchange rate of its currency, which
further led to the growth of the German mark.
October 27, 1969 - Revaluation of the German mark against the US dollar by 9.3%. 1970 - All
year there was a decrease in interest rates in the United States, which initiated the dollar crisis. May 3-5,
1971 - massive dumping of US dollars by investors. May 9, 1971 Switzerland and Austria revalue their currencies by 7.1 and 5.1 percent respectively.
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August 15, 1971 - Convertibility of the dollar into gold is suspended. The reason for the abolition of the
"gold standard" is a significant revaluation of the dollar, accumulated by long-term negative US balance of
payments and trade. Nevertheless, the dollar remained the main reserve currency. The Bretton Woods
system has ceased to exist.
December 18, 1971 — The "Group of Ten" countries signed the Smithsonian Agreement in Washington,
according to which it was decided to revalue the currencies of the main industrial states against the dollar
and peg to it at a fixed parity. From that moment on, maximum fluctuations of 2.25% in one direction or
another were allowed. The official price of gold was $37-38 per ounce, but the convertibility of the dollar
into gold was not restored. In fact, there was a devaluation of the dollar by 7.66%.
March 7, 1972 - The first six members of the EEC formed a "snake in the tunnel." This meant that the
fluctuations of the currencies of these countries could not exceed 1.125% on both sides of the official
parity, amounting to a total of 2.25% against 4.5% stipulated in Washington. To maintain fixed parities, a
special system of interventions was created. The result of the creation of the "snake" is the formation of a
de facto zone of the German mark.
June 1972 - Great Britain decided to introduce a free float of the pound sterling. January 1973 - The
Italian
government was forced to split the foreign exchange market into two
sectors - commercial and financial.
February 12, 1973 - devaluation of the dollar against gold from 38 to 42.2 dollars per troy ounce. This
decision triggered a series of exchange rate changes and currency revaluations against the dollar
(Switzerland and Japan revalued their currencies by 12 and 7.5 percent respectively). March 1973 - Japan
and European hard currency
countries suspended their commitments to fixed exchange rates. July 1973 - G-10 central bank
governors agree to replace "managed
fluctuations" with floating exchange rates. This decision meant the end of the era of the official dollar
standard, although in fact the US dollar is still the main reserve currency to this day. 1973 - the first
significant (four times) increase in oil prices. Caused strong inflation in all industrial countries and a sharp
recession in the
economy of 1974-75. In the same year, the price of gold rose significantly.
1974 - crisis in the US stock market. 1975 the leading countries reached an informal agreement on the abolition of the official price for
gold.
January 1976 - The IMF conference in Jamaica noted the impossibility of a return to fixed exchange
rates. For the first time, at the official international level, each country was given the opportunity to adopt a
choice of fixed or floating exchange rates.
1976 - the main feature of the year - a strong "polarization" of European currencies. Traditionally "weak"
currencies (pound sterling, Italian lira, French franc) suffer from strong devaluation, while "strong" currencies
(German mark, Swiss franc and Dutch guilder) continue to strengthen. January 10, 1977 - The pound officially
ceased to function as a
reserve currency. April 1978 - The central banks of the leading industrial countries were allowed
to buy and sell gold without restriction on the free market.
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November 1, 1978 - The United States, Germany, Japan and Switzerland agreed on joint actions to
stabilization of exchange rates. The goal is to keep the dollar from falling.
1979 - The European Monetary System is established. A single settlement currency was put into circulation
- ECU (ECU - European Currency Unit).
1979 - the second oil crisis, which caused a new jump in oil prices. The main reason is the growth of
industrial production. The jump came in the midst of a disruption in oil production in Iran. As a result of the
recent rise in oil prices in the countries of the Middle East, huge amounts of free cash were generated, which
then poured into the financial markets of Europe and the United States in search of maximum interest.
August 1982 - Mexico's debt crisis, which showed the unreliability of the debts of "third countries" and
increased tension in the financial markets. This weakened the dollar for a while, but the Fed's drastic measures
to provide financial assistance to Mexico made it possible to avoid a dollar crisis. March 1983 - devaluation of
the
French franc. 1984 - the growth of the US dollar, due
to high interest rates against the backdrop of
moderate inflation.
Q4 1984 - US interest rate cuts designed to weaken the dollar. However, after a slight decline, the dollar
made another maximum. American industry began in earnest to switch to imported raw materials and transfer
production abroad. As a result, a strong dollar has become the main problem of the United States.
September 1985 - Agreement at the Plaza Hotel in New York with seven leading industrial nations. The
main solution is to depreciate the dollar through a controlled game by the central banks of the "seven" in the
foreign exchange market. This agreement actually meant the end of the free floating exchange rate regime
and its replacement with a system of regulated floating crus.
February 1987 - Louvre agreement between the countries of the "Group of Five" (USA, Germany, UK,
France and Japan) and Canada to coordinate foreign exchange intervention to stabilize the US dollar.
Disbanded after the October 19 stock market crash in the United States.
September 1987 - Crash in the Japanese government bond market. Japan turned from a buyer of bonds
into a seller, which provoked a subsequent significant drop in prices in the US government bond market.
October 19, 1987 - "Black Monday" - crash on the New York Stock Exchange. The Dow Jones average fell
508 points, or 22% of its value, close to that of the 1929 stock market crash. It was accompanied by a
simultaneous fall in the dollar, bonds and stocks. This collapse marked the transfer of economic and financial
power from the United States to Japan.
January 1988 - US dollar bearish run ends. This was due to an improvement in the balance of payments
and trade. Since then, the pace of the dollar's decline has slowed and has been punctuated by similar, albeit
weaker, periods of recovery. 1990 - German unification. It gave impetus to
the strengthening of inflationary processes in the united country and the subsequent increase in interest
rates. As a result, the balance of power between the German mark and other currencies included in the
European Monetary System (EMS) was upset.
1992 - Italy's exit from the EMU, accompanied by the devaluation of the Italian lira.
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September 1992 - devaluation of the pound sterling and the exit of Great Britain from the
EMU. June - July 1993 - the stability of the French franc and its withdrawal from the EMU are under threat. Well
franc against the German mark fell to the minimum allowable mark.
July 1993 - meeting in Brussels of heads of central banks and finance ministers of European states. The reason
is the destabilization of the EMU, threatening its destruction. Despite the lack of real results of the meeting, the
European currency market became calmer and the French franc kept in the EMU. February 4, 1994 - The US
Federal Reserve raised its base interest
rate from 3.0% to 3.25% for the first time in five years. Immediately after the announcement of the rate increase,
the German mark fell against the dollar by 300 points within fifteen minutes (from 1.7350 to 1.7650).
1994 - devaluation of the Mexican peso against the US dollar by 40%. The crisis in Mexico had a huge negative
impact on the US economy. As a result, the whole of 1995. the dollar against almost all currencies fell, reaching
historical lows.
March 8, 1995 - The hysterical selling of the dollar against the German mark and the Japanese yen brought its
rate to a historically low level - 1.3430 marks and 88.60 yen. Spreads between bid and ask quotes reached 50
points, and the only buyers of dollars in the market were only central banks. In eight days of March, the dollar "lost"
more than 8%. On April 19, 1995, the US dollar crisis reached its apogee. This was
expressed in the rapid fall of the dollar against all major currencies. Against the German mark and the Japanese
yen, it reached 79.70 yen The dollar has fallen more than 12% against the German mark and more than 22%
against the Japanese yen since early 1995. The main fundamental reason is the weakness of the US economy and
the flight of Japanese capital from the US.
April 20, 1995 - Japan lowers the discount rate to a historical low of 1%. At the then current level of inflation
(about 2%), the real percentage of Bank of Japan lending to commercial banks turned out to be negative. April 25,
1995 - meeting of the finance ministers of the "big seven" (USA,
Germany, Great Britain, France, Italy, Canada and Japan) in Washington. A common opinion has been
developed regarding monetary policy. A decision was made on joint interventions to help the dollar in order to keep
its rapid decline.
May 29, 1995 - First tangible results of the April 25 meeting. After another fall of the dollar against the yen, the
central bank of Japan carried out a large-scale intervention to buy the dollar. Later, the central banks of the USA,
Germany, France, Great Britain, Italy, Holland and Belgium joined it. As a result, the falling dollar was stopped. The
unanimous and coordinated actions of the central banks of the leading countries to support the US dollar turned
out to be a surprise for the market. Since that day, the dollar has entered a protracted "bullish" trend. April 1996 the next meeting of financial leaders of the "Big Seven". At the meeting, it was
stated that the optimal dollar/Japanese yen rate is near 110 yen per dollar. Germany and STA agreed to
continue joint efforts to support the dollar.
August 1996 - April! 997 - the pound sterling regained its previously lost positions (in 1992) on
against the German mark, up more than 20%.
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The reason is the strength of the UK economy against the backdrop of the weakness of the German economy.
Accompanied by a significant difference in the interest rates of these countries. The yield on UK government
securities is almost double the yield on similar securities in Germany.
January 1997 - impressive growth of the US dollar. Against the Deutsche Mark and the Japanese Yen
the dollar "heavier" by more than 7%. The reason is similar to the growth of the pound sterling.
February 8-9, 1997 - meeting of the "big seven" in Berlin. No specific decisions were made. In general terms,
it was stated about the need to maintain stability in the foreign exchange market. The next day, the market reacted
with another strong rise in the dollar. As a result, by May, the dollar has risen in price by more than 5%.
April 27, 1997 - a meeting of finance ministers and central bankers of the "Big Seven" in Washington. At the
meeting, the results of world development for 1997 were summed up. The successes of the United States and
Great Britain in terms of economic growth were noted. High unemployment (in Germany - the most high since
Hitler came to power) and an inefficient tax system were singled out as the main problems of the European
industrial states. No official decisions were made, however, an opinion was expressed about the adequacy of the
growth of the US dollar and the desired stabilization of exchange rates at the achieved levels. May 1997 - a strong
fall of the US dollar against the Japanese yen.The dollar "lost in weight" more
than 10%.The main reason for the fall is the revival of the Japanese economy, expectations of an increase in
interest rates in this country and, as a result, a change in long-term positions on the yen (from "bearish" to "
bullish").
1.1.2. Stock market
The stock market, also known as the securities market, is a combination of the money market and the capital
market in terms of trading in stock instruments that certify the property rights of their owners for various types of
goods of the above markets.
There are the following main varieties of stock instruments (securities): - shares - common
(ordinary) and preferred shares, registered and bearer shares; - share surrogates - these include depositary
receipts (ADRs),
warrants, options and
stock futures, convertible bonds; - bonds - government
bonds and corporate bonds; - deposit and savings certificates;
- bills and checks.
Shares - these securities certify equity participation in the capital of an enterprise operating in the form of a
joint-stock company. They give the right to receive part of its profits in the form of dividends, as well as the right to
vote at the general meeting of shareholders (except for preferred shares). Convertible bonds - give the right, upon
the
occurrence of certain conditions (usually after some time), to exchange bonds for shares of the enterprise.
Bonds - give the owner the right to receive a pre-fixed income in the form of interest.
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Depositary receipts - are evidence of ownership of shares in a block (pool) of shares
various companies. Issued by the bank holding the shares themselves.
Warrants are securities that are the right to buy / sell shares on certain
conditions or conversion into shares.
An option is a standard exchange contract for the purchase/sale of shares at a fixed price after a certain
period of time. The buyer of the option pays the seller, who bears the risk of exercising the option, a premium.
The buyer of the option has the right to refuse to exercise the option, but in doing so, he will lose the
premium. The seller, as a rule, is obliged to deposit a security deposit, which will guarantee the exercise of
the option by him. In fact, the subject of options trading is the amount of the premium paid by the buyer.
There are "European" and "American" options. The first ones are executed strictly after a certain period of
time. The latter can be exercised at any time, from the date of the conclusion of the option to the date of its
completion. Futures - a standard exchange contract for the purchase / sale of a certain number of shares at
a price fixed
at the time of the conclusion of the futures after a certain time. Both the buyer and the seller have an
unconditional right to exercise the futures. In order to properly execute the futures, both parties to the
transaction pay a standard margin.
Deposit certificate - a bank certificate of a monetary contribution of a legal entity. Savings certificate
- a bank certificate of a cash deposit of an individual. Promissory note - certifies the right of the owner
(bill holder) to receive the amount indicated in the bill on the same date in the place specified in the bill
from the drawer (the person who issued the bill and is the debtor under the bill) or another person (only for
bills of exchange, while this person must be required on the bill). Weskel is one of the oldest securities. It
dates back to the 12th century, when Genoese merchants began to pay money to local money changers in
exchange for written commitments to receive the same amount elsewhere. Thus, merchants got the
opportunity to move along roads that were very unsafe at that time, without risking losing money. A check is
usually a type of bill of exchange and a surrogate for cash. The stock market is divided into the government
securities market and the corporate
securities market. Among government securities, the following can be distinguished, presented in Table
1.2.
main varieties (classified by issuing countries).
Table 1.2
A country
short-term (up to a year)
USA
treasury bills (T
medium-term (from 1 to
10
years) treasury notes
bills)
(Treasury Notes)
Japan
treasury bills
discount bonds floating rate bonds
Germany
treasury bills
treasury bills
financing bonds
funding
Great Britain
treasury bills
long-term (over 10 years)
treasury bonds
(Government Bonds)
federal bonds
bonds
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The main participants of the stock market are: issuers - enterprises and organizations that attract financial resources for the placement of securities;
financial intermediaries (brokers and dealers) - have the appropriate licenses,
giving them the right to carry out intermediary functions between issuers and investors;
- exchange and over-the-counter securities markets - stock exchanges and over-the-counter trading
systems respectively;
- investors - legal entities and individuals who have free cash and wish to invest it in securities; bodies of state regulation and supervision - Ministry
of Finance, central
bank, Securities Commission, etc.;
- self-regulatory organizations - professional associations of financial intermediaries; - securities
market infrastructure - consulting and information firms,
registrars, depository and clearing networks.
The first stock exchanges arose in the 12th-15th centuries as bill fairs in the main trading cities of
that time - Venice, Genoa, Florence, Champagne, Bruges, London, etc. The name of the stock exchange
("Borsa") comes from the name of the old merchant family Van der Burse, whose coat of arms depicted
three leather bags (ter buerse) and whose house stood on the square in Bruges, where bills were
traded. In the XVI century, the first
two stock exchanges were formed and died - in Antwerp and Lyon. Not only bills of exchange, but
also state loans were already traded here, and official exchange rates were also set. In the 17th century,
the world's oldest stock exchange, the Amsterdam Stock Exchange, was created. For the first time in
the auction there are shares.
At the end of the 17th century, the London Stock Exchange (LSE) was created, which today is the
second exchange in the world in terms of the volume of trading in stock instruments. The LSE was the
first to use the words "bull" and "bear" in relation to securities traders. The meaning of the word "bear"
in this case was the same as it sounds in the saying "to share the skin of an unkilled bear" (in the
English version - "to sell bear's skin before one has caught the bear"). Although some believe that the
emergence of the analogy with animals was due to their natural behavior. When a bear hunts, he tries
to knock it down with his paw. When the bull attacks, he throws up the enemy with his horns from the
bottom up.
Among the stock exchanges, the New York Stock Exchange (NYSE), founded on May 17, 1792,
rightfully occupies the first place. There are currently 3,000 stocks traded on the NYSE worth $6 trillion
and owned by over 50 million people.
The third stock exchange in the world is Tokyo, the fourth is Frankfurt.
The over-the-counter securities market in Europe dates back to the moment the first joint-stock
companies were created in the 60s of the 16th century, when in 1568. one of the very first transactions
was registered. And in the 90s of the XVII century, this market began to trade not only shares, but also
derivative securities - futures and options. At the same time, securities of more than 100 joint-stock
companies and state obligations were circulating on it. A profession has appeared - bro
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securities broker. Today, the volume of exchange trading exceeds the volume of the over-the-counter
market by 3-30 times for different countries, although they tend to decrease. The emergence and
development of new information technologies, INTERNET give a new impetus to strengthening the role of
over-the-counter stock markets. The leading and most developed over-the-counter system is NASDAQ the Automatic Quotation System of the National Association of Investment Dealers (USA).
The stock market of each country has its own index, calculated as the ratio of current share prices to
the basic ones. The number of shares taken to calculate the stock index in different countries varies and
ranges, as a rule, from 10 to 500. The oldest stock index is the Dow Jones industrial index, created in 1884
and calculated based on stock prices of 30 leading stock companies. Stock indices were originally created
only to reflect long-term trends in the stock market. But later, starting from the 70s of our century, the
exchange indices themselves became the subject of active trading. Especially popular among traders is
trading in futures and options for the Dow Jones (DJI-30 - USA), Standard & Poor (S&P-500 - USA),
Footsy (FTSE-100 - UK), Dax (DAX-30 - Germany) and Nikkei (Nikkei-225 - Japan). Among the indices,
sectoral and complex ones are also
distinguished. An example of sectoral indices is clearly visible in the Dow Jones indices - DJ Industrial
(industrial index, calculated on the shares of 30 industrial enterprises), DJ Transport (transport index,
calculated on the shares of 20 transport companies), DJ Utilites (utility index, calculated on the shares of
15 mainly energy companies), DJ Composite (complex index, combines all three of the above indexes).
The center of world trade in futures contracts (futures and options) for stock indices and currencies is
LIFFE (London International Financial Futures and Options Exchange), located in London. Exchange
indices are also traded on CBOT (Chicago Board of Trade - USA), CME (Chicago Mercantile Exchange USA, is the center of futures trading in currencies), DTB (Deutshe TerminBorse - Germany).
1.2. Cause and effect
News is random and unexpected.
Unexpected and random news usually include news of political and natural origin, less often
economic. For example, news about
political instability in Russia can lead to strong
the fall of the German mark, as the German economy is highly dependent on the situation in Russia.
Wars have a particularly strong impact on financial markets. The military actions of Iraq are capable of
causing an increase in oil prices and thereby weaken the Japanese yen and slightly the German mark, as
the currencies of non-volatile countries. An earthquake or
other natural disaster in a country can weaken the national currency of that country, as funds will be
required for recovery, which can lead to increased inflation.
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News planned and expected.
Expected and planned news usually include news of an economic, less often political nature.
Fundamental factors can be divided into three groups according to their importance.
The first group includes: Trade deficit. With its growth, as a rule, the exchange rate of the national
currency is declining;
- balance of payments deficit (payment deficit). Its impact on the exchange rate is the same as that
of a trade deficit; inflation indices: consumer price index (CPI) and wholesale price index (PPI). With growth
inflation rate tends to decrease;
- official discount rates (repo, pawnshop, etc.). With their growth, the exchange rate, as a rule,
rises;
- Dynamics of gross national product (GDP). As GDP increases, the exchange rate tends to rise; data on unemployment (unemployment) or employment (employment). The growth of unemployment
(fall in employment), as a rule, is accompanied by a depreciation of the national currency. However, for
each of the countries today there are officially used data on effective unemployment. Those. on
acceptable and even desirable levels of unemployment for the prosperity of the economy. Today, these
sizes range from 3 to 7 percent of the total working population, depending on the country;
- data on the money supply (M4, MZ, M2, Ml, MO). The growth of the money supply, as a rule, is
accompanied by a depreciation of the national currency. However, sometimes data on money supply
growth lead to expectations of an increase in the discount rate and, ultimately, to an increase in the
exchange rate; - elections (elections) to the parliament (Congress, Senate, etc.), and presidential
elections. The change in course depends on the campaign promises of the candidates and the historical
preferences of the winning parties.
The second group includes:
- the size of retail sales (retail sales). With their growth, the rate may rise; dimensions of housing construction (housing starts). With its growth, the rate may also rise; - the
amount of orders (orders). An increase in the number of orders is usually accompanied by a slight
increase in the exchange rate;
- producer price index. Their growth may cause a fall in the exchange rate; - index of
industrial production (industrial production). Its growth may cause an increase in the rate; - productivity
in the economy (productivity). A drop in productivity can cause a price drop.
You will learn about the news of the first and second groups from news agencies (Reuters,
Dow Jones, AFX, Knight Ridder, Futures World News, etc.).
The third group of fundamental factors includes data that can be obtained in real time:
- forward rates of corresponding currencies (forward); futures exchange rates;
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is the effective exchange rate, which is calculated as the ratio of the change in national
currencies to a certain basket of other currencies;
- deposit rates (deposit repos); - stock
indices (NIKKEY, Dow Jones, DAX, FTSE, etc.) - the growth of these indices indicates good
the state of the national economy and increases the demand for the national currency of the country;
- price dynamics of government bonds (T-bills, T-bonds) - an increase in demand for government securities
and the subsequent increase in their prices, as a rule, is accompanied by an increase in the national currency.
In general, fundamental analysis cannot be carried out without comparing all sorts of interdependent factors,
such as inflation, interest rates and money supply dynamics, unemployment rate and GDP dynamics. Qualitative
fundamental analysis can only be carried
out by specialists in macroeconomics, therefore, the leading role in the analysis of fundamental factors is
played by their expert assessment and indirect assessment of these fundamental factors, expressed in market
expectations and reactions.
There are three options for the market's influence on the fundamental event that has taken place.
The first option occurs when the expectations of the market as a whole are justified. Then the dynamics
prices will not undergo significant changes.
In the second variant, market expectations are not justified only by virtue of the ongoing event, i.e. The market
has underestimated this factor. In this case, the price will continue the current dynamics with acceleration at the
moment the message appears.
In the third variant, market expectations are not only not justified, but turn out to be completely wrong. Then
we can expect a strong change in the course in the opposite direction to the previous one. Before changing the
direction of dynamics, we can expect a period of reflection by the market of what is happening. Market makers,
who previously opened positions under market expectations, may for some time hold back the course from a
sharp change in order to have time not only to close their "already unprofitable positions, but also to "turn over".
If fundamental news contradicts the current trend, then the time of its influence on the market dynamics may
be limited to an hour or several hours. If, on the contrary, the fundamental factor confirms the trend, then it
accelerates somewhat, followed by
possible rollback.
In general, all fundamental factors are assessed from two points of view: - how
this news will affect the official discount rate; What is the state of
the national economy of the country?
1.3. The life cycle of fundamental factors
1) Short cycle. As
a rule, all unexpected news has a short life cycle and is no more than one day. For example, in the hourly
chart
of the Japanese yen against the US dollar for one week from 16/09/96 to 21/09/96, we see a strong fall in the
dollar on September 18. This drop was only due to the publication by the US Department of Commerce of the
trade balance for August. The data showed a very large (more than $11 billion) US trade deficit compared to the
expected deficit of about $4 billion. Such a difference between expectations and the fact strengthened the yen
against the dollar by more than 150 points in two hours, despite there was a very strong bullish trend. But by the
end of the week, the rate won back half of this fall, and at the beginning I follow
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cabbage soup (this is not visible on the chart) continued to move up, far exceeding the
previous maximum quote.
Figure 1.1
#100 1 hour USD/JPY
sep 17
2) Long cycle.
The long life cycle lasts from several weeks to several years. Fundamental factors with a long
life cycle include all factors related to the general state of the national and world economy (the
dynamics of inflation, unemployment and interest rates, and other similar factors).
For example, on the daily chart of the Japanese yen against the US dollar below, we see a
long, more than a year, weakening trend for the yen. This is primarily due to the weakness of the
Japanese economy and low interest rates.
Figure 1.2
#337daily USD/JPY
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1.4. The main directions of economic policy of the governments of developed countries
Assuming that any government official (from the president and prime minister to a clerk) is appointed to his
position and dreams of either being promoted or at least staying in his place, the only way to avoid resignation
is to satisfy the interests, first of all , an influential minority with the best possible observance of the interests of
the entire population of the country. This is especially pronounced in the periods leading up to presidential
elections. But the situation is complicated by the difference in the interests of the main groups. Exporters benefit
from the
fall of the national currency, while importers benefit from its increase. Financial institutions (banks, funds,
etc.) benefit from high inflation, while consumers of borrowed money (industrial and commercial enterprises)
benefit from a cheap money policy. Real estate owners benefit from rising land prices, while those who do not
have it are unprofitable. The enumeration of such groups is ad infinitum. In the mutual opposition of the interests
of various groups, a certain optimal balance is born, the observance of which statesmen are called upon to
follow. The better these people will satisfy the interests of the largest and most powerful groups, the longer they
will remain in power. But here the feedback is also manifested - the longer the conductors of certain interests
remain in power, the more benefits the groups representing these interests receive and the stronger these
groups will be. Once we understand the inevitability of the ongoing feedback, we can confidently say that such
a policy will necessarily lead to distortions in the economic system of the state towards certain groups. And any
imbalance leads to the fact that the process develops cyclically, experiencing rise and fall. After the conductor
of certain interests comes to power, one of the groups begins to receive certain advantages over others. From
this, the group is strengthened and begins to influence the authorities with even greater force. Government
officials, seeing how one of the groups is gaining strength, are also trying in every possible way to get benefits
from this process, both material (money) and non-material (to remain in power). The situation comes to a
certain point, when the interests of one group begin to affect more and more the interests of other groups, and
not from the best side. The confrontation begins. Further, the situation can develop according to two scenarios.
The first leads to the fact that the ruling group begins to listen to the interests of other groups, assimilating with
them. This is a peaceful path, evolutionary, it does not lead to upheavals. The second scenario, revolutionary,
is a direct confrontation between the interests of the ruling minority and the interests of the majority. It leads to
the complete resignation of the ruling group and casts it away from power for a long time. A typical example of
the second scenario is Russia, from Tsar Nicholas II to the CPSU.
Now revolutionary ways of solving problems between different groups are not in fashion, so most situations
are resolved according to the first scenario - by holding peace negotiations and finding a consensus on a
controversial issue.
Knowing which group in a given country is now in power and what interests it has, it is possible to determine
and priorities in defining key economic and social policy issues.
The total interest of a group is the average collective interest of the members of that group. The main
interests of the average member of any group are
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stability and profitability. From here we get the average common interest of the group - obtaining a high income
while maintaining maximum reliability. This concept of average interest is inherent in all groups and underlies
the setting of the goal of the existence of the group. But with the same goal for any group, the means of achieving
it are different. This is what makes different groups different. Between some there is a fundamental, strategic
difference, between others the difference is insignificant and consists only in solving tactical issues.
Having determined the main priorities of the existence of any interested group to generate income while
maintaining high reliability, we can proceed to consider the issues of economic policy of developed countries.
Now the interests of the main groups in setting strategic goals practically coincide, and the main difference
accumulates only in the tactical ways of their decisions.
First, let us note the main strategic goals in determining the economic policy of developed countries. Consider
different gradations of solving the same questions (what is good and what is bad). At the intersection of these
gradations, an effective strategic solution to a specific goal is determined. Inflation. High inflation is bad, because
high interest rates, inevitable
with such
inflation, reduce the efficiency of production and determine the redistribution of capital from industries to
intermediaries (trade and financial institutions). Industry groups will oppose high inflation. Low inflation, or its
complete absence, is bad, as the interests of intermediaries begin to suffer. Trade begins to stagnate, as no one
wants to buy goods that practically do
not rise in price, or even fall. Financial intermediaries suffer from low interest rates.
The optimal value of inflation is good, since with a consistently high efficiency of the manufacturing sector,
intermediaries, especially financial institutions, still have opportunities for profitable business (“both the sheep
are safe and the wolves are fed”). Unemployment. High unemployment is
bad. It
contributes to social tension, a decrease in the number of people of the middle class ("pillars of democracy")
and a decrease in the net mass of real
income of the population.
Low unemployment is bad, as workers lose incentives to do good work and
the interests of employers begin to suffer.
The optimal value of unemployment is at the intersection of the interests of two large groups - employers and
workers. A compromise between them is inevitable, otherwise the suffering interests of one of the groups may
lead to a revolutionary solution of the issue.
budget deficit. It
represents the excess of budget expenditures over budget revenues. A large budget
deficit leads to an increase in public debt and can act as a catalyst for accelerating inflation. It is caused
either by significant expenses or small budget revenues. From this follow two ways of solving the problem of the
budget deficit - reducing expenditures (first of all, social expenditure items suffer - for health care, education,
etc.), or raising taxes. In the first case, the problem is solved at the expense of the low-income population of the
country, in the second - at the expense of taxpayers. In both the first and second cases, the solution to the
problem of the budget deficit affects the interests of the most influential groups, hence the complexity of its
solution. On the other hand, do not
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By solving the problem of the budget deficit, the government pushes up inflation and, as a result, interest
rates. And this is contrary to the interests of the majority of the country's population (who are buyers of goods
and real estate on credit) and the manufacturing sector. A slight budget deficit, or
even its complete absence, usually indicates either high taxes or low government spending (mainly due
to small military spending). In the first case, taxpayers suffer, in the second, the recipients of budgetary funds
(social programs and the military-industrial complex). A low budget deficit leads to a decrease in inflation,
with all the ensuing negative consequences (see inflation above). Due to the significant influence of the
military-industrial lobby on the policies of almost all developed countries, it can be concluded that a low
budget deficit is unfavorable for the governments of these countries.
An effective budget deficit is based on moderate inflation while respecting the interests
all groups interested in the country's budget.
Exchange rate.
A high exchange rate (an overvalued value of the national currency) is disadvantageous for exporters and
domestic producers. Gradually leads to a decrease in the export potential of the country. At low interest rates,
it is accompanied by the export of capital abroad (a typical example: Japan in the 80-90s of our century).
A low exchange rate (an undervalued national currency) is unfavorable for importers and domestic
consumers. This leads to higher prices for imported goods and contributes to higher inflation.
Effective exchange rate. The concept is relative. It is defined as a value close to the market, but most
likely different from it due to some speculative fluctuations. An efficient exchange rate is a strategic agreement
between the main groups of different countries about the satisfaction of common interests. Discount rate. A
high discount rate leads to an increase in the cost of credit and, as a result,
to economic
stagnation. It is a consequence of high inflation and one of the anti-inflationary measures. Unprofitable for
the bulk of the country's population and the manufacturing sector.
A low discount rate leads to the cheapness of money, the outflow of capital from the country and the
depreciation of the national currency. It is a consequence of lower inflation and a decline in business activity
in the country. It directly contradicts the interests of financial intermediaries, as it forces them to intensify their
activities.
Effective discount rate. Located at the intersection of interests of all interested
groups, both directly and indirectly.
The rest of the macroeconomic indicators are either derived from the above (balance of trade, balance of
payments, GNP, national income, money supply, etc.) or are less significant (retail sales, housing construction,
etc.). It is also necessary to note the interconnection and interdependence of
different countries among themselves. This is especially evident in the existence of exchange rates,
because at least two currencies are involved in their determination. Most countries can be divided into four
main zones - the dollar zone led by the United States (mainly the countries of America), the sterling zone led
by the UK (countries - former
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colonies of the great British Empire), the yen zone led by Japan (the countries of Asia) and the mark
zone led by Germany (the countries of Western, Central and partly Eastern Europe). Combining
countries according to the principle of the leading currency helps to consider one country as part of a
sufficiently large organism, where problems in one part of the body (country) immediately respond in
another part (country). For example, the debt problems of Mexico, which hit the Mexican peso very
hard, rebounded on the US dollar, weakening it. The explanation for this is quite simple. Countries in
the region where one of the currencies is the leading one (in the example of Mexico, the US dollar)
keep most of their reserves in this currency. First of all, national problems begin to be solved by selling
these reserves, inevitably causing a fall in the exchange rate of the reserve currency. Therefore, it is
important to know not only the interests of the ruling groups in the analyzed country, but also the
interests of the groups in power in the dependent countries. Usually, the interests of groups of
dependent countries are directly subordinated to the interests of groups of leading countries, but there
are exceptions, which are made up of historical, geopolitical and macroeconomic processes.
Sometimes even dependent countries manage to dictate their terms to leading countries, knocking
out significant concessions and concessions from them (in the example of Mexico, this country began
to exert such a significant influence on the US economy that at some points it becomes unclear which of them depend
Brief conclusions.
The economic policies of the leading countries are determined by politicians representing the
interests of various groups. Over time, the interests of one of the groups become the most influential,
crushing the interests of weaker groups. This leads to a confrontation of interests and a search for a
compromise between them. The option of a revolutionary resolution of contradictions in developed
countries is unlikely. The main interests of any group are reduced to the possibility of earning income
and not losing the acquired property. The observance of these interests in macroeconomic terms is
most influenced by the concepts of inflation, the discount rate, unemployment, the budget deficit and
the exchange rate. Satisfying the interests of various groups depends on how reasonably and
effectively politicians solve the problems associated with the concepts listed above. The situation is
complicated by the interconnectedness of different countries among themselves. Therefore, the
satisfaction of the interests of the national group can be affected not only by the policy of the
government of its country, but also by the governments of dependent and influencing states.
1.5. Relationship between fundamental factors and exchange rate dynamics
Before describing the real dependence, let us turn to the concept of a fundamental factor. By
fundamental factors here we mean macroeconomic indicators of the state of the economy (GDP and
GNP, unemployment and employment, inflation and money supply, national income, etc.). Let us pay
attention to the common
features inherent in a person (as an economic individual), an enterprise (as a combination of people
and machines working on it) and the state. The purpose of the
economic life of any person, as well as enterprises and states, is to satisfy their own needs. These
needs can be both the most primitive (food, sleep, sex) and more developed (mostly spiritual needs).
Although in the economic literature and
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it is argued that the purpose of the activities of enterprises is to make a profit, it can be seen that
almost all operating enterprises, provided that at least one person works for them, are not only
engaged in production, but also “live”. Let me explain this with an example. Imagine a car
manufacturing plant. The basis of this production is the cooperation between the designers who
design the new model and the marketing department, which has knowledge of the needs of the
market. Since the consumers of the products of this plant will be people, the simple mechanical
design of the car, as a self-propelled cart, is clearly not enough. It is at this moment that the
enterprise's need for the active participation of each of its employees, and not just the simple
performance of their official duties, is included. Here is a typical example of conveyor production. In
non-conveyor types of production, a similar need for a creative attitude to business is even higher.
Within the
framework of the state, the non-material needs of its citizens form the basis of the scientific and
creative potential of the country. It is impossible to see a single country that is prospering now, the
basis for the prosperity of which would not have been laid precisely in its
creative potential. Thus, we found out that the driving force behind development and production is
the incentive to meet needs.
Human needs differ from the needs of the state rather quantitatively than qualitatively. This gives
us reason to draw the following parallel, which we will reflect in Table 1.3. But first, consider the
general aspects of the economic interaction of needs and opportunities at the state level, reflected in
the following diagram:
there are opportunities
no opportunities
there are needs
no need
2
X
13
Where
1 - satisfaction of needs at the expense of one's own capabilities (internal production for one's own needs);
2- realization of one's
own capabilities to satisfy other people's needs in order to receive remuneration and the corresponding
subsequent satisfaction of one's own needs (export of goods and services);
3 - satisfaction of one's own needs at the expense of other people's capabilities, while for payment
the remuneration previously received from exports (imports of goods and services) is used.
Depending on the amount that stands behind a particular cell, the total amount of activity of the object under
study (state, enterprise or person) is determined. The interaction of economic factors at the level of the enterprise
and the family (person) is approximately the same. I will immediately answer the question why I consider a family
and a person on the same level. The reason for this is the common economic interests of all family members.
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Table 1.3
Comparative parallels of economic needs and opportunities of the main actors of macro- and
microeconomics
No. name p / p 1
needs, incl.
1.1 if there is internal
family (person)
company
state
- material - mental -
- capital
- territory - org.
spiritual
- management labor force
management - population
satisfied:
the following are
satisfied: -contributions
to the statutory fund and profit;
satisfied: - increase in
transport
the possibility of
- through work on
satisfy (through
home;
internal
production or work)
- reading books, watching films, improving selfanalysis and qualifications, etc.; - art classes
managers,
soul-searching, etc.
improving management
systems; -increase
accessibility (roads
and communications); adoption of the relevant
Constitution
and Laws; - improvement
qualifications
1.2 if this possibility is satisfied: no (through exchange) - through
loans and deferred payments; - communication, teamwork; communication
personnel,
health and
improving the remuneration
system are satisfied: - by
obtaining loans and
ecology
borrowings - hiring new
managers, using other
people's interests
satisfied: - military
conquests, expansion of
territory
economic
through experience
in the field of management; - hiring a new worker by
others
capital investments; exchange of experience with
strength
states in the field
state
management; > opportunities, incl.
are determined by the level are determined by education,
the volume of qualifications, capital investments,
the physical and mental development of management and the
emigration
determined
national
wealth, level
development of the
four
powers, mentality and
qualifications of the workforce
development of the nation
2.1 available for
satisfaction of one's
own
used for: - housework;
- self-education; -
used for: - domestic
production for
used for: - domestic
production
relaxation and
needs (analogue
own needs
production for
mental development
consumption) 2.2
available to be used for: satisfaction of strangers - work for hire;
needs (analogue - assistance, training and production for
consultation; - cooperation
used on: - joint
are used for: - export
of goods and activities,
services, capital; sale or barter - consultations,
manufactured products and services; - consultations
savings and
subsequent exchange)
3 Overall result
activities
and training; growth
of opportunities and
cooperation and
assistance;
growth of opportunities
and needs,
- immigration
growth of opportunities and
needs, expressed in growth expressed in growth in the volume
needs, expressed
of national
in the growth of > prosperity,
the level of education
and production, spiritual development
assets and quality
products
!wealth,
population and
economic
territories
interests
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You may have a doubt - on what basis do I draw such a parallel between
state, enterprise and family (individual). Let me explain this with an example.
Each of us can live by subsistence farming, producing food and building a home. With the growth of
needs (if we want to see the world, eat the food that we ourselves cannot produce, or satisfy other needs),
we will be forced to produce more than we can consume, assuming that we exchange the surplus. That
part of the products that will be exchanged will be called "export" in macroeconomic terminology. And the
result of meeting the new needs is "import". Similarly, in terms of microeconomics (for an enterprise), the
result of production for sale will be "revenue", and consumption - "cost" and investments in third-party
enterprises and organizations - "deposits", etc.
The positive difference between revenue and cost is profit, which corresponds to the growth of the
company's assets. But if this profit is not invested in one's own enterprise, but, for example, in bank
deposits, that is, it goes "to the side", then there is no real growth in the assets of the enterprise. Also
nationwide. A positive trade balance, corresponding to the excess of product sales over consumption,
does not yet mean a guaranteed growth of the national economy. If the negative balance of payments
(when the import of capital is less than their export) exceeds the positive balance of trade, then this means
a decrease in the real assets of the state. The situation is similar for a person. If a person earns a lot and
saves on everything, but puts all the money in a jar, then he will end his life as a beggar and after his
death everyone will be surprised for a long time how rich this miser was. The situation, however, can be
reversed. A person may not work all his life, but live like a real rich man. And if the legacy of a rich
grandfather is not to blame, then the only possibility for maintaining such a lifestyle may be significant
debts (they are also a negative balance of payments). Among states and enterprises, we can find many
examples of rich heirs of the past (Great Britain), "poor" misers (Russia and Japan), incorrigible debtors
(USA) and other characters of our everyday life.
Money or its substitutes are also present in the daily life of states, enterprises and people. Try to
introduce a surrogate for money in your family, which you need to pay for every service, help and gift. So
you will notice that the most active and useful member of your family (usually it will be a wife or mother)
will receive this "money" more than others. And if the life of your family is closed, then sooner or later all
the "money" of this peculiar "state" will be in the hands of one person. Now he will be able to live as a
rentier or give you alms, agreeing to work for you for free. In the latter case, money will lose its economic
meaning.
Growth
formula This formula considers aspects of growth only in the material well-being of countries
businesses and people.
Its purpose is a comparative analysis of the material development of the studied subjects according to
compared to the base or chain period.
The result of the calculation determines not only the relative advantage of one subject of analysis over another
at the present time and in retrospect, but also the strength of national monetary units.
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Growing, in material terms, a family can be recognized as a family whose income exceeds expenses. The main
measure of the growth of the family's well-being will be the constant accumulation of material goods, cash and stock
values. Higher, in comparison with other families, the growth rate of material condition is accompanied by an increase
in opportunities. Opportunities both to meet their own needs and to meet the needs of others. For the satisfaction of
other people's needs, the analyzed family will receive additional material opportunities. Thus, as in the proverb, "money
goes to money."
A growing enterprise, as recognized by economic science, will be one whose assets increase. However, the
company's assets can be divided into own and borrowed. Inefficient use of borrowed funds leads to excessive growth
of assets and subsequent repayment - up to the bankruptcy of the enterprise. Hence, a more precise definition of the
growth of enterprises is necessary - an enterprise is recognized as growing if its own funds are actually growing. By
analogy with enterprises and families, a growing state can be recognized as a state whose national wealth is growing.
The concept
of national wealth includes both state property, property of public organizations, as well as private and equity capital,
which has found its application on the territory of the analyzed state. The amount of national wealth thus obtained must
be deflated (reduced) by the amount of inflation.
If the rate of growth in the welfare of one state exceeds the rate of growth of another, then this
accompanied by a corresponding strengthening of the national currency of the first country.
The state growth formula will look like this:
RG \u003d (GDP + STB + SPB) • (1-I), where
- RG - the size of the state growth; GDP - the volume of GDP for the
period; - STB - trade balance for the period; - SPB
- the balance of payments for the period; - I - inflation
index for the period.
If the calculation of the compound formulas is made in different currencies, for example, GDP is in German marks,
and the value of the trade balance is in US dollars, then these data must be deflated by the inflation indices of the
issuing countries of the corresponding currencies.
The above formula can be applied in a truncated version, step by step comparing the growth rates of individual
elements of the formula in different countries. For example,
you can compare the GDP growth rate of one country in relation to the GDP growth rate for the same period of time
in another country:
RG(t) = GDP1 / GDP; RG(n) = GDP1 / GDP,
Where
- indices m and n - correspond to countries A/and N; Indices He 1 - base and reporting periods for comparing GDP. Comparison of RG(t) and RG(p) makes it possible to
judge the most probable dynamics of exchange rates of national currencies among themselves.
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Similarly, one can compare the growth rates of the sum of trade and balance of payments balances of different
countries. However, here it is recommended to compare the turnover and the turnover of means of payment
between the two analyzed countries. Otherwise, you run the risk of overvaluing one currency in relation to another,
despite the real economic relationship between them.
For example, the negative trade balance of the US may shrink, but against Japan, on the contrary, it will grow.
In this case, we can expect not the strengthening of the US dollar against the Japanese yen, but its weakening,
regardless of the state of Japan's trade balance.
An indirect estimate of the magnitude of the growth of the national wealth of a state obtained in this way can be
made by a comparative estimate of the length of the production cycle in a given state. After all, it is no secret that
the longer the production cycle, the greater the need of the enterprise for borrowed funds, for which it is necessary
to pay. This increases costs and reduces profits. At the state level, countries with a relatively short average industry
production cycle (due to the large share of the service sector, consumer goods industry, oil and gas production)
are growing faster than countries with developed heavy engineering and the agricultural sector. However, it is
rather difficult to calculate the length of the production cycle, and if you do not have direct statistical data on this,
then you can use an estimated calculation using the following formula:
DPC \u003d (GDP + E) / A,
where - DPC - the length of the production
cycle; - E - the value of exports for the
period; - A - the average value of all assets of the country for the period (national wealth, foreign loans and
other property under the jurisdiction of this state).
Thus, the higher the growth rate of the national wealth of the country and the shorter the production cycle, the
stronger the national currency of the country.
1.6. Rumor trading
"Buy rumors, sell facts."
Who and on what occasion came up with this statement first, history is silent, but it is applicable
it is in all financial markets.
The standard reaction of a trader to hearing is to be the first to make a deal. At this time, there is no time to
think, the main thing is the speed of reaction. At the moment when a rumor appears on the market, a new rather
powerful and fast wave is born, which is capable of forming any of the strongest trends.
The most common rumor in the stock and currency markets is the expectation of a change in the discount rate.
If the market expects an increase in interest rates, then this threatens the stock market with a decrease, and the
currency market with an increase in the national currency. And until this rumor has reached the very last trader,
the trend set at the very beginning will continue. The strength of the trend will then be directly proportional to the
number of new recipients of rumors.
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The second part of the statement is based on the fact that traders are interested in working
on a rumor exactly until the moment it is confirmed or refuted. In this case, as a rule, there is
a reverse movement of prices. And here it is already important to be the first to "jump off the
train." When one trend ends, a new one begins. Sometimes, after the end of the hearing
action, a flat begins. In any case, only long-thinking traders continue to work in the old trend
after the fact. When
rumors turn out to be false, blindly following them can lead to significant losses. At the first
sign of the market's reluctance to trust the rumors received, stop trading them. Be careful
when trading
rumors.
Now let's look at a few examples of rumors entering the market.
Figure 1.3
It is not known how the market would have reacted to the fact of an increase in interest rates in the
UK, but most likely there would have been a depreciation of the pound. It wouldn't be as strong as it
actually happened, but it would still happen.
In the example below, we can observe exactly such a fact, when interest rates were increased by
exactly the amount that the market expected. The dollar went through several
stages of market reaction to rumors of a possible increase in interest rates in the US. The
strengthening of which was accompanied by the growth of the dollar against the mark, and the weakening
was accompanied by a decrease or stabilization. The higher the dollar climbed, the less traders remained
on the market who did not believe in this rumor and did not buy the dollar. A month before the FOMC
meeting, the dollar began to decline, which can be explained by the lack of further buying dollars based
on the "old" rumor.
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Figure 1.4.
Some economists speak of market speculators as "forest orderlies." In doing so, they mean
the effect of the above statement. According to these economists, speculators do not so much
shake the market, reacting to a variety of rumors, as they stabilize it, anticipating possible
extreme reactions of the real sectors of the economy.
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2. TECHNICAL MARKET ANALYSIS
In this section, we will define the basic concepts and rules of technical market analysis. "Technical" because
in this type of analysis only the chart of price and volume movement from the past to the present is taken into
account, without taking into account all other factors.
Historically, classical technical analysis has developed in the following way. Initially,
when computer technology did not yet exist in nature, and no one tried to apply the methods of mathematical
analysis to analyze price dynamics due to the complexity of calculations, traders manually, using only slide rules,
drew charts on which they plotted straight lines. Later patterns were found in the ratio of these lines and price
charts. This is how trend lines, patterns and figures emerged.
Further, there was a need to move away from the straightforwardness of trend lines and patterns, and traders,
also manually, began to calculate average prices, which began to be successfully applied.
for analysis.
And already with the advent of computer technology, it became possible to calculate and apply the methods
of oscillatory market analysis (although the foundations for its occurrence were laid before the advent of the first
computers).
We will consider the methods of technical analysis, observing the historical paths
development of stock and currency markets.
2.1. General principles of technical analysis
1) The course takes
into account everything. The essence of this statement is that any factor that affects the price - economic,
political or psychological - is already taken into account by the market and included in the price. Therefore,
studying the price chart is all that is required for forecasting.
Despite some simplification of the real situation, since the time shift from the moment information is received
to its impact on the price is not taken into account, this situation is difficult to dispute at time intervals of several
hours or more.
2) The price moves in one direction.
This assumption is the basis for trend analysis and is the backbone of all technical analysis. There are
three types of trends: - "bull" trend prices are moving up. The definition of "bull" arose by analogy with a bull,
raising up on their horns the price;
- "bearish" trend - prices are moving down. In this case, the bear, as it were, crushes the price under him,
leaning on it from top to bottom with his whole body; sideways - there is no definite direction of price movement either up or down. Usually such a movement is
called "flat" (flat), less often - "yuncoy" (whipsaw). It can be immediately noted that a long flat is a harbinger of a
price storm in the market - a strong price movement in one direction or another. As a rule, prices do not move
linearly up or down. However, in a bullish trend, prices rise
more and faster than they fall. The same, exactly the opposite, occurs with a bearish trend.
Thus, if trends exist (and practice shows this over a period of more than a century),
then the basic laws of motion can be applied to them, such as:
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- "the current trend is more likely to continue than change direction", or - "the
trend will move in the same direction until it weakens."
3) History repeats
itself. The essence of this statement lies in the immutability of the laws of physics,
economics, psychology in different periods of history. Therefore, the rules that were in force
in the past are valid now, and will also be valid in the future. It is this statement that gives us
reason to conduct a technical analysis of reality and, with some more or less accurate
assessment, predict the future.
2.2. The purpose
of the analysis 1) Estimate the current direction of price dynamics (trend). Possible options:
a) upward movement;
b) downward
movement; c) flat.
2) Estimate the term and period of validity of this direction. May be:
a) a short-term trend; b) longterm trend; c) the beginning of a
trend; d) trend
maturity; e) death,
end of trend.
3) Estimate the amplitude of price fluctuations in the current direction (deviation from current quotes).
a) weak
course change (in a narrow corridor); b) a
strong exchange rate change (as a rule, a change of more than 1 percent per day or more
than 0.3 percent per calendar hour).
Having identified these three components of the price movement, we can, with a certain degree of confidence,
buy or sell the product under study.
2.3. Types of graphs and rules for their
construction It is easier for a person to analyze graphical information than textual or digital information.
Therefore, below I will briefly describe all the main types of charts that are used by traders.
Charts reflect the mass behavior of the market crowd over a certain period of time. At every moment,
the bulls are buying, the bears are selling, and the waiting traders ("square" in trader's slang) are
standing aside, instantly entering the trade. The presence of the last group of traders, the largest in
composition, puts pressure on both bulls and bears. Thus, each price is the result of the interaction of
these three groups of traders. The most popular among traders are line charts
and bar charts. Although it is possible to single out some territorial preferences of traders from
different countries. For example, Americans also often use "tic-tac-toe" charts in their work, and
Japanese traders use "Japanese candlesticks". Europeans prefer the chart of segments (bars)
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1) Line chart.
A line chart is recommended for plotting on short intervals from the tick mode
up to several minutes.
2) Segment chart (bars).
Maximum price (High)
Closing price
(close)
The segment chart is recommended for plotting at time intervals of 5
minutes or more.
Opening price
(open)
Minimum price (Low)
The highest price level (high) shows the strength of the bulls during the trading period. Most
the low price level (low) shows the strength of the bears during the trading period.
3) Japanese candles.
Maximum price (High)
Japanese candlesticks can be used instead of plotting segments (bars).
Minimum price (Low)
In the interval between the opening and closing prices, a rectangle is drawn, called the body of the candle. The
vertical sticks above and below the body are called shadows. If the body of the candle is black, then this means
that prices have decreased during the trading period (the closing price is lower than the opening price). If the body
of the candle is white, then prices have risen during the trading period.
4) Tic-tac-toe.
A specific schedule, for practical use, is recommended only after mastering
all other methods of analysis. The main difference of this presentation
of information is that there is no time axis here, and a new price column is
built after the appearance of another direction of dynamics.
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A cross is drawn if prices have decreased by a certain number of points (for example, 20). If
prices have risen, then a zero is
drawn. The Tic-Tac-Toe chart allows you to accurately display resistance levels and
support, which will be discussed below.
5) Volume charts.
Required for use as a confirmation. You can build starting from a few minutes or more. The
most informative, starting from an hour or more. Volume shows the level of market activity.
Graphical representation of information reveals the behavior of the market crowd in the past.
Graph analysis allows you to find patterns in the behavior of this crowd. When these patterns
reappear, traders make decisions. People who base their trade decisions on chart analysis
alone are called " chartists " .
On the daily USD/DEM chart, we can see all of the above types of charts. They
built on the same time period, which will allow you to compare them with each other.
Figure 2.1
Each of the presented types of charts has its purpose and its own analysis features,
which we will focus on below.
A trader builds charts using the following concepts: - Determination
of trend price dynamics, consisting of resistance and support lines, trend lines and patterns, simple and
complex averages, Bollinger lines, +/-DM indicator, ADX indicator, PTP line, and linear MACD ; - countertrend
price movement
analyzed using Momentum, ROC, CCI, RSI oscillators,
Stochastic slow and fest, MACD histograms and other oscillators;
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- the dynamics of volume change, considered on the basis of the analysis of volume indicators and its
interaction with the price chart;
- specific charts of yen changes ("Japanese candles", "tic-tac-toe", the theory of cycles,
Elliott wave theory, Fibonacci rays and periods, Gann rays). The art
of a trader is the ability to combine as many indicators from different groups as possible so that their
negative signs exclude each other, and positive signals are mutually reinforcing and
were supplemented.
2.4. trend models. Rules of construction and analysis. Confirmations
Before analyzing trend lines and patterns, let's remember one of the basic rules of work - "the trend is
your friend" ("the trend is your friend"). If you want to make an operation against the trend, then be prepared
for any surprises: do not work
against the trend.
Of course, none of the rules can be applied recklessly. And the main limitation for the above rule is that if
you apply it at the end of the trend life cycle (LCT), you risk being outnumbered in front of a huge market
and losing money. However, until the trend finally reverses, you won't lose much. Your main task in the
analysis of trend lines and patterns will be not only to identify the direction
of the trend, but also its life cycle. For ease of explanation, I will make an assessment that is characteristic
of the average LC, the concept of which is disclosed somewhat below.
For analysis, we will apply the following gradation of trend
strength: - strong trend, which will be designated as three pluses +++; - a trend of medium strength, which will be designated as two
pluses - ++; - a weak trend, which will be designated as one plus - +;
I will immediately note several important
rules: - confirmation is not necessary for a strong
trend; - for a medium-strength trend, it is obligatory to get at least one confirmation;
- for a weak trend, there must be at least two confirmations to your conclusions.
By confirmation, for the purposes of this analysis, we mean either a similar conclusion obtained in a
subsequent period of time when analyzing the same indicator, or a similar conclusion obtained in the same
period of time when analyzing another indicator.
"
dot"
I will show the recommended moment of the operation
purchase and sale of the analyzed product. However, it should be noted that if we hurry to
make a deal, that is, we make it immediately after receiving the signal, we risk finding
ourselves in a fairly common situation when the price has just touched the line of change and
moved back. Accordingly, instead of profit, we will receive losses (this situation is called a
"false breakdown"). - with
this icon I will denote the expectations of a "bullish" market, when the price
will rise.
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- with this icon, I will indicate the expectations of the "bear" market, when the
price will decline.
The direction of trend dynamics can be determined by analyzing the following indicators: classic trend lines and patterns; - dynamics
of simple and complex averages; dynamics of linear MACD; RTR line; Bollinger lines; indicator +/- DM.
By summing up all the conclusions from the analysis of these indicators and discarding false signals,
you can get a clear direction of the current trend and assess in which period of the life cycle the analyzed
price for the product is now.
First, let's look at trend lines, patterns, and figures in order. I
note right away that for the convenience of considering the price when analyzing trend lines
and models, a line chart is shown here, although for practical use it is more efficient to use
charts of segments (bars) or
Japanese candlesticks. 2.4.1. Trend lines at high prices ("resistance lines" - Resistance)
Lines of resistance (resistance) and support (support) are the foundation of classic trend analysis. All
trend lines, patterns and figures are just combinations of resistance and support lines. The appearance
of these lines has the following logical explanation.
The resistance line connects important highs (tops, peaks) of the market. It occurs when buyers are
no longer able or unwilling to buy a given product at a higher price. Simultaneously with each upward
price movement, sellers' resistance increases and sales increase, which also puts downward pressure
on the price. The upward trend stops and, as it were, rests on an invisible ceiling, which it cannot break
through at the moment. If the "bulls" gather their strength or the "bears" loosen their grip, then the price
is likely to break through the previously established resistance level. Otherwise, a reverse price movement
is inevitable (the so-called "rollback").
The support line connects important lows (bottoms, soles) of the market. The emergence and existence
of support lines is exactly the opposite of what I was talking about about the resistance line. Here the
"bulls" change places with the "bears". Sellers are active market players who push the price down, while
buyers are on the defensive side. The more active the sellers and the more passive the buyers, the
higher the probability that the support line level will be broken and the price will go further down. If both
the resistance line and the support line are strong and held
long enough, then depending on their combination, various images and associations arise, which give
the name to trend patterns and figures.
It is necessary to know and remember that it is better to draw resistance and support lines through
the price accumulation zones, and not through their maximum outbursts at the tops and bottoms. The
massive accumulation of prices shows that here the behavior of a decisive number of traders changed
its direction, and the maximum price surges in such places indicate the panic behavior of the weakest
market participants, hastily closing their unprofitable positions.
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The method of analyzing resistance and support lines helps traders to monitor the change in
the trend - its reversal or strengthening. These levels are especially important for setting
protective
stops. The existence of these lines is based on the memory of people. If a trader remembers
that the price recently bounced off a support level and went up, then next time he will most likely
prefer to buy at this level. If the price bounced off the resistance level and went down and the
trader remembers this, then, most likely, he will sell at this level next time.
the signal is strong
+++
medium strength signal
++
weak signal
+
line "A" confirmation
first confirmation at the level of line "A" second confirmation
at the level of line "B"
weak position, it is better to get confirmation from another
indicator
good position to
open up
middle position to open
up
2.4.2. Trend lines at low prices ("support lines" - Support)
the signal is strong
+++
medium strength signal
++
weak signal
+
line "A" confirmation
first confirmation at the level of line "A" second confirmation
at the level of line "B"
weak position, it is better to get confirmation from another
indicator
good position to
open down
middle position to open
down
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Figure 2.2
2.4.3. Transition of a support line into a resistance line and vice versa
the signal is strong
+++
medium strength signal
++
weak signal
line "A" confirmation
first confirmation at the level of line "A" second
confirmation at the level of line "B"
+
weak position, it is better to get confirmation
from another indicator
a good position to open
up or down respectively
middle position to
open up or down
respectively
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For example, here are some of the options above.
Figure 2.3
2.4.4. Channel lines
the signal is strong
+++
medium strength signal
++
line "A" confirmation
good position to
open up,
down respectively
middle position for
opening up, down
respectively
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weak signal
+
confirmation at the level of lines "A" and "B"
weak position, it is better to get confirmation from another
indicator
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Figure 2.4
2.4.5. Classic figures of technical analysis:
a) confirming the trend reversal: - "head and shoulders";
the signal is strong
+++
the signal is strong
+++
good position to open
down
good position to open up
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In addition, the following features of the head-shoulders figure can be noted. If an
inverted head and shoulders pattern appears on a bearish trend, then it is higher than
the first, second shoulder enhances the overall signal given by the figure.
If, on a bullish trend, the head and shoulders pattern has the second shoulder lower than the first, then this also
indicates a greater likelihood of a trend reversal to a bearish
one. It often happens that the course does not return back to the neckline when exiting the head-and-shoulders
pattern. But this does not mean that this design is not a "head and shoulders" figure. For
this figure, there is a danger of wanting to see it much more often than it actually exists. To prevent this from
happening, be sure to check your conclusion on the figure through volume indicators.
It should also be noted that, unfortunately, until you finally establish your opinion that the price movement you
saw still fits into the classic head and shoulders pattern, a significant movement in this price has already ended.
However, you have gained a very valuable insight into the direction of the new trend. Now let the price dynamics be
much calmer, but you know the direction of the trend and are more or less confident in your position.
Figure 2.5
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- triple and double top-bottom;
the signal is strong
+++
the signal is strong
+++
good position to open
down
good position to open up
medium strength signal
medium strength signal
++
++
middle position to open receiving
down
middle position to open up after receiving an additional signal
after
additional signal
There are many false signals among triples and especially double tops-bottoms. You can weed
them out using a parallel convergence/divergence analysis using the RSI oscillator as an example,
which we will consider below.
Most false signals are checked through the prism of the volume indicator, where on the first
movement of the rate to the resistance or support line, the volumes grow, and on the last one they
fall. Thus, at the beginning of this reversal pattern, the volume rises on the old trending price
movement. At the end of the figure, it begins to grow on the opposite of the old trend, the price
movement. By this, the market makes it clear that it is not interested in continuing the old trend.
Schematically, it looks like this.
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Figure 2.6
- "diamond";
- used only as a signal to turn the bull market after receiving confirmation at the level of the "A" line. Respectively
good position to open down.
volume indicator
A very rare figure.
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Figure 2.7.
b) confirming the continuation of the trend: - "flag":
the signal is strong
the signal is strong
+++
a good position to
open up after
receiving confirmation at
the level of the "A" line
+++
a good position to open down after receiving confirmation at the
level of the "A" line
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- "pennant";
the signal is strong
the signal is strong
+++
+++
a good position to open
up after receiving
confirmation at the level of the
"A" line
a good position to open down after receiving confirmation at the
level of the "A" line
Figure 2.8
- "wedge":
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the signal is strong
the signal is strong
+++
+++
a good position to
open up after
receiving confirmation at
the level of the "A" line
a good position to open down after receiving
confirmation at the level of the "A" line
Figure 2.9
- gap (Gap) and combinations of gaps;
single
gap
a combination of three consecutive
gaps followed by a single gap
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the signal is strong
+++
the signal is strong
a good position to open
up after receiving
confirmation at the level of the
"A" line
a good position to open down after receiving confirmation at the
level of the "A" line
+++
Figure 2.9
- gap (Gap) and combinations of gaps;
single
gap
a combination of three
consecutive gaps followed by a single gap
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the signal is strong
+++
the signal is strong
good position to open
down
good position to open up
+++
A gap occurs when a previous low price is higher than a subsequent high price, or
exactly the opposite - the previous High is lower than the next Low.
The gap can only be seen using a segment chart (bars) or Japanese candlesticks. In this
case, it is better to use a time interval, starting with daily charts and more. In the roundthe-clock spot currency markets, the appearance of a gap is a fairly rare occurrence, possible
only on transitions from one week to another. Gaps are not uncommon on stock exchanges.
Figure 2.10
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c) confirming the possibility of both a reversal and a continuation of the trend: - lines
of triangles (convergence and divergence).
Convergence
the signal is strong
+++
medium strength signal
++
medium strength signal
confirmation from an
additional signal
line "A" confirmation
++
middle position to open down
good position to
open up
middle position to open
up
the signal is strong
+++
weak signal
medium strength signal ++
+
line "A" confirmation
confirmation from two
additional signals
good position to
open up
weak position to open
up
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medium strength signal
medium strength signal
++
++
line "A"
confirmation
line "A"
confirmation
middle position to open
up
middle position to open
down
weak signal
weak signal
+
+
confirmation at level "A"
lines
confirmation at the level of line "A" and an additional
signal
And
additional signal
weak position
weak position to
open up to open
down
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medium strength signal
++
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weak signal
+
line "A" confirmation
confirmation from two
additional signals
middle position to open
up
weak position to open
medium strength signal
++
medium strength signal
++
line "A" confirmation
confirmation from an
additional signal
middle position to open
up
middle position to
open down 54
the signal is strong
+++
good position to open down
down
the signal is strong
+++
good position to open down
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Figure 2.11
discrepancy
medium strength signal
++
medium strength signal
++
line "A"
confirmation
confirmation from an
additional signal
middle position long
open down
middle position to open
up
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the signal is strong
+++
good position to open up
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the signal is strong
+++ •
medium strength signal
++
weak signal
confirmation from an
additional signal
confirmation from two
additional signals
middle position to open
down
weak position to open
+
good position to open up
up
medium strength signal
++
medium strength signal
++
confirmation from
an additional signal
confirmation from an additional signal
middle position to open up
middle position to open
down
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the signal is strong
+++
NAIMAN
weak signal
medium strength signal
+
++
confirmation from two
additional signals
confirmation from an additional signal
middle position to open down
good position to open
weak position for
up
opening up
the signal is strong
+++
medium strength signal
++
confirmation from an
additional signal
medium strength signal
++
line "A" confirmation
middle position to open up
good position to
open down
middle position to open
down
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Figure 2.12
An additional, reinforcing the general conclusion, signal for any triangle is the failure of the
last price movement to reach the resistance or support line before exiting the triangle. For
example.
In a practical example, this rule would look like this.
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Figure 2.13
It is necessary to highlight the following general rules of triangles: - in a classic
triangle there should be five lines from the moment of entry into the triangle (three down and
two up or vice versa);
- follow the direction of the entrance to the triangle. If the price enters from above, then there is a stronger position for the
price to continue moving down. If the price entered from below, then most likely the price will go up in the future; - follow the
general
direction of the angle of the triangle. If the angle of the triangle is directed upwards, then the price is also likely to go up. If the
angle is directed down, then the price will most likely go down;
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- the more lines in the triangle and the closer to the end of the triangle the exit from it, the stronger and
the price dynamics will be more significant upon exit, but subject to the following rule;
- Highlight the life cycle of a triangle. The whole triangle starts at the entry point and ends at the junction point
of the triangle lines. As a rule, the triangle ends in the first 3/4 and this is a signal for a good price movement after
the exit from the triangle. If the exit from the triangle occurred in the last quarter, then the subsequent movement is
likely to be sluggish and unstable.
2.4.6. Common features and contradictions of trend models
The common features of trend lines, figures and models include the following: - the signal
appears only when the resistance or support level is crossed, until that moment
the analysis is reduced to determining the possible behavior of the price within the framework of these models;
- the strongest conclusions about the upcoming movement can be made in the direction of the current trend; trend
patterns can be divided into confirming the trend, warning about a trend reversal and acting in the general
direction of the trend. In the latter case, the most qualitative conclusions will be in the direction that continues the
trend;
- for any, even the strongest signal, it is desirable to have additional confirming
signals of any kind;
- it is useless to look for trends in short periods of time (usually up to 5 minutes). The life of the trend in this
case is too short and can give such a small profit that even approximately it is difficult to compare it with possible
significant losses. In this case, you may encounter a contradiction between the direction of the short trend and the
direction of the long trend. In this case, the longer trend is stronger;
- instead of straight lines when building trend models, you can use any smoothly
curved line formations and even geometric shapes such as circles and ovals.
Contradictions between trend lines and models are manifested
in: - contradictions between the direction of the current trend and the predicted direction obtained during the
analysis (especially significant when the trend reverses); - it
is difficult to estimate the opening price when a trend is detected, based on only one general
construction figures (in this case, resistance and support lines help);
- contradictions in conclusions can also give trend lines and models built on different time intervals (for example,
a weekly trend will show "bullish" and a daily trend - "bearish"). When you encounter any of the contradictions
described
above, beware of making trades (opening) until the situation is clear.
In the example below, we note one of the variants of such a contradiction.
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Figure 2.14
In conclusion, I would like to note one of the most important rules for analyzing trend lines and patterns: "Do
not look for trend figures where they do not exist. Do not invent. Nobody doubts the abilities of your
imagination."
2.4.7. Trend life and its life cycle: a) short-term
trend; b) medium-term
trend; c) long-term trend.
All trends have a different lifespan, which also differs over time,
for which the analysis is performed.
The long-term trend continues for more than 1 year. The average duration of a long-term trend is 2 - 2.5 years.
Mediumterm lasts from 3-6 months to a year. Short-term
trends include trends from 1 day to 3 months. You can determine the
lifetime of a trend using the analysis of the life cycle. At the same time, it is very important
accurately determine the length of the cycle and its amplitude.
Trend Life Cycle Recognition (LCD):
a) the beginning of life - birth, childhood and adolescence;
b) the middle of the term - maturity;
c) the end of the trend - old age and death.
You may not have time to recognize the beginning of the life of a trend, and this is not the most important
thing. It is much more important to get at least into the middle of the trend, which, due to speculative warming up,
is usually much more profitable than the first phase of the trend. But be careful to open to either side when the
trend dies. You run the risk of failing not only
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earn, but you will also incur significant losses if you do not have time to react to a change in trend. In
general, when analyzing trends, the following rules for recognizing the life cycle can be
distinguished. The beginning of the cycle is characterized by an increase in the number of transactions
(volumes of transactions or open interest - open interest - for exchange trading). At this time, the oscillators,
which we will talk about later, begin to deceive you. In general, the beginning of a trend will take up about
one third of the total cycle length. For the first period of the beginning of the life cycle, prices on average
change from 1/4 to 1/3 of the total fluctuation and roll back from 1/5 to 1/4, respectively. A new trend is
formed by the transfer of capital between countries. In the middle of the first cycle to the fundamental movement associated w
By changing the investment regime in various countries, the first speculative capitals join.
In the middle of the life cycle, the first signs of market fatigue begin to appear. The market is "overheated"
and wants to "rest". There is some decline in activity, but this, as a rule, is not accompanied by a return to
previous quotes. As I noted above, in the middle of the cycle there is often a sharper price change than at
the beginning of the life cycle. This is due to the fact that it is at this moment that the army of speculators,
huge in terms of quantity and mass of funds, begins to join the pioneers of the new trend. And the overheating
of the market, in this regard, is much more significant than in the first period of the life cycle. This at the end
of the second period leads to a decrease in quotations to a level close to the one from which it began. As a
rule, quotes for the second period change from a whole to 3/4 of the total amount of fluctuations, and then
roll back from 3/4 to 1/2, respectively. In the last period of the life cycle, the
amount of free speculative capital begins to decline. This is reflected in a decrease in the number of
transactions. Sharp price fluctuations (compared to the second period) practically do not occur. Prices,
reaching their extreme (maximum or minimum), remain insignificantly and for a short period of time, and the
last fluctuations occur near the maximum. At the end of the last life cycle, the market becomes more nervous,
which is expressed in sharp multidirectional price fluctuations. Getting ready for a new trend.
It is recommended to conclude long-term deals starting from the second life cycle, capturing the first half
of the last life cycle.
Figure 2.15
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The volumes of transactions will look accordingly as follows.
For example.
Figure 2.16
We will consider the theory of cycles in more detail in Section 2.15.
Having considered trend lines, figures and models, we can conclude that this method of analysis seems to be
simple, and this is true. But behind this simplicity lies a lot of information.
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Insufficient attention during trend analysis can lead to very disastrous consequences. If you
"do not notice" the breakout of foam through a key level, then all your subsequent analysis will
be based on false impressions of the market. The situation has already changed radically and
your losses can be limitless. These moments are characteristic of trend reversals and its
accelerations. At this time, the support line turns into a resistance line, and vice versa.
Trend lines and patterns give you an idea of the mountain that foams are going up (bullish
trend) or prices are coming down (bearish trend). They can show you the paths that this price
can take. Your goal is to keep track of the price dynamics, otherwise you risk falling off the
mountain or getting lost. Fly like an eagle over a mountain, look around it, look for all kinds of
paths the price can take.
2.4.8. Acceleration and deceleration
of trends Acceleration of a trend is expressed in an increase in the angle of inclination of price dynamics
on a bullish trend or a decrease in the angle of inclination on a bearish trend. Acceleration is a characteristic
of a strong trend, when it appears, it should be expected to
continue. Graphically, the acceleration of the trend will appear as shown in Figure 2.17. On a bullish
trend, it is preferable to check the acceleration and deceleration along the line drawn at the bottom of the
price. On a bearish trend, it is better to build this line at the upper peaks of the price.
Figure 2.17
The slowdown of the trend is expressed in a decrease in the angle of inclination of the price dynamics on a
bullish trend or an increase in the angle of inclination on a bearish trend. Slowdown means the possibility of a trend
entering a flat or even its reversal (see Figure 2.18).
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Figure 2.18.
As you can see, when the momentum of the trend slows down, the price on the reverse
movement reaches a new low on a bullish trend or a higher one on a bearish trend (points "A"
on both
charts of Figure 2.18.). Acceleration and deceleration of trends is a good confirmation in life cycle analysis
trend. This type of analysis is recommended to be used at any time intervals of analysis.
2.5. Simple Averages 2.5.1. Rules
constructions and their types
Analyzing price dynamics, we are faced with the fact that the image of the market that we see
on the current price chart is instantaneous and poorly reflects the mood of market participants
over the analyzed period of time. Let me explain this with an example that is very similar to
creating a
cartoon. Assume that a given price is a photograph of a single character from the "Rise and
Fall of the Market" cartoon. The sum of the photos over a period of time gives us the opportunity
to see a moving image of this character and try to predict what he will do next. If we see in the
photo that the dog Pluto is standing with a fishing rod in his hands, then we can understand that
this photo is connected with fishing, but it is absolutely incomprehensible - he goes fishing and
is already returning from it (even having an empty bucket with Pluto does not always help ,
because on this day there simply could not be a bite). But if we look at several successive
photographs, we can assess where Pluto the dog goes - to or from fishing. Here I gave an
example of the price dynamics of one trader. The market is a set of actions of many traders. He
combines all the action into a group portrait, which is the plot for the feature-length cartoon "Ups
and downs of the market." The average in this sense will be a reflection of the main plot line of
the cartoon - here are the characters sitting at the festive table and eating
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Christmas cake, and here they are all together in the garden weeding the beds. Our main goal in the
analysis of averages is to determine the plot of the action being played and try to predict its further
development.
Technical analysis with the help of trend lines and models is practically not amenable to
computerization and, at the same time, suffers from its inherent subjectivity. Simple averages in this
sense are much more convenient and reliable to use. However, one important problem arises - the
problem of choosing the order for constructing the average (how many consecutive price values must
be taken to construct the average). The wrong choice of the order of the average will not only not give
you the desired signal, but can lead to ruin.
When constructing an average, it is important to remember several
essential rules: - the longer the time period on which you build the average, the lower the order of
the average you should choose (for example, for a period of time per day, it is not recommended to
use averages with an order of more than 89, for a weekly chart - no more than 21). That is, the longer
the time period, the lower the order of the average. While short averages can be used without
restriction; - the longer the average, the less will be its sensitivity to price
changes; - the average of a very small order will give a lot of false
signals; - the average of a very large order will be constantly
late; - with a sideways trend, use averages with a higher order than usual.
There are three main types of simple averages: simple moving averages; weighted moving averages; exponential moving averages. The
exponential moving average is recommended for use.
The method of constructing simple moving averages ("Moving Average -MA") is reduced to a simple formula
arithmetic average: MA =
(Sum of prices for a period of time) / order of average. Thus,
we see that this is the simplest average formula that a person is familiar with.
Accordingly, it gives the most approximate signals, usually slightly delayed.
When calculating weighted moving averages (Weighted Moving Average - WMA), each of
the prices of the analyzed period of time is given a "weight" that increases towards the current
day. The calculation formula will look like this:
WMA = (Sum of product of prices and weights) / (Sum of weights).
It is believed that giving more weight to later price values gives better information content for conclusions than a
simple average. It can be noted in this regard that for long periods of time (a day and a week), it is recommended to
use a simple average MA for analysis. When analyzing short periods of time (less than an hour), it is possible to use
EMA or WMA. At medium time intervals (one hour and three hours), the use of both MA and EMA and WMA is
recommended.
When calculating the exponential average (Exponentially Moving Average - EMA) also produced
assigning weights to different prices, the highest weight is assigned
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at the same time the last values of the price. Its distinguishing feature from the weighted average is that it
includes all the prices of the previous period, and not just the interval specified when setting the period. The
formula will look like this:
ÿÿÿ(t) = ÿÿÿ(t-1) + ( ÿ • [ Price(t) - ÿÿÿ (t-1) ] ), where - index
(t) means today, and (t-1) - yesterday; - K = 2 / (n + 1), where n
is the period of the average.
Thus, the moving average curve is smoothed relative to the price chart. MA reacts to one course
change twice. It is said that a simple average "barks" like a dog - the first time when a new value is received
and the second time when this value is removed from the calculation of the average. Compared to a simple
average, the EMA reacts to a change in one rate value once - when it is received. Therefore EMA is more
preferable for application.
The choice of a specific average is made depending on your ability to build
various averages. But the EMA gives more opportunities to open a position on time, without delay.
As for specific suggestions for constructing averages, I can recommend that you start using the following
orders of averages. When analyzing a 6-day price chart - 8, 13, 21 orders of average. When analyzing
a 1-day price chart - 8, 13, 21, 55 and 89 orders of averages. When analyzing a 3-hour price chart - 8,
34, 55, 89,144 orders of average. When analyzing a 1-hour price chart - 8, 34, 55, 89, 144 orders of
average. When analyzing less than 15-minute price charts - 34, 55, 144 orders of average.
2.5.2. Analysis rules:
The general rules for the analysis of simple averages include the following: find the points of intersection of the average and the price
chart; - find the points following the maximum or minimum of the average (turning points); - find
the points of the greatest discrepancy between the average and the
price chart; - follow the general direction of movement of the average. This is the most important signal showing
trend direction.
Below we will consider with examples all the possibilities provided by the analysis of the average. It is
important to remember that these rules will work well only on correctly chosen orders of averages. The
correctness of the choice of the order of the average is checked by viewing historical data - how informative
this average was in the previous period of time, and necessarily by practice. But if you did everything right,
then the results will not slow down to show themselves. The method of analysis of averages can be correlated
in importance with the analysis of trend lines and patterns, if not more. You will receive conclusions on the
direction of the trend, its strength and amplitude, as well as on the trend's life cycle. At the same time, the
method of analysis of averages has a very important advantage over the analysis of trend patterns, which
consists in the fact that the average will show you earlier about the changes that occur with the trend. But try
not to build your decisions based on the usual analysis of averages when the trend is sluggish or sideways.
Lagging averages will nullify all your extraction efforts.
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profit, in this case, take the opportunity to increase the order of the average.
To analyze different types of averages (EMA, MA, WMA), the same methods are used that
give the same signals. Therefore, we will consider averages regardless of what kind of specific
average we use.
a) Points of intersection with the price chart (the price is indicated by a solid line, the
average - by a dotted line):
- the price crosses the average from the bottom up:
the signal is strong
+++
medium strength signal
++
confirmation from an
additional signal
weak signal
+
confirmation from two additional signals
weak position to open up
good position to
open up
middle position to open
up
This construction is typical for strengthening the bullish trend or reversal of the bearish one.
- the yen crosses the average from top to bottom:
weak signal
+
medium strength signal
++
confirmation from two
additional signals
confirmation from an
additional signal
weak position to open
middle position to
open down
down
the signal is strong
+++
strong position to open down
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This construction is typical for strengthening a bearish trend or a bullish reversal. Let me
give you a few charts as an example.
Figure 2.19
b) Turning points (price is indicated by a solid line, the average is indicated by a dotted line):
- reversal of the average at the minimum value:
medium strength signal
++
confirmation from an
additional signal middle position
to open down
weak signal
signal is very weak
+
confirmation from two
additional signals weak
position to open
down 69
confirmation from three additional signals very weak
position to open down
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Such a reversal is typical for the strengthening of the bullish trend.
- reversal of the average at the maximum value:
medium strength signal
weak signal
++
signal is very weak
+
confirmation from an
additional signal
confirmation from two
additional signals
middle position to open
up
weak position to open
confirmation from three additional signals
very weak position to open up
up
Signals from such a reversal are typical for the strengthening of the bearish trend.
Figure 2.20
The chart shows that almost all signals are late, and some are given just when it is time to enter into
directly opposite transactions. This delay can be reduced by decreasing the order of the average. It is also
necessary when working with averages to follow the general direction of the trend. The signals given by the
averages within the current trend are much stronger than those that contradict the trend.
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c) The maximum divergence from the price chart (the price is indicated by a solid line,
the average is dotted):
- yen BOTTOM, middle top:
signal is very weak
weak signal
+
medium signal
++
confirmation from three
additional signals
confirmation from two
additional signals
confirmation from an additional signal
very weak position
weak position for
to open up
opening up
middle position to open up
- average from below, yen from above.
signal is very weak
weak signal
signal average ++
+
confirmation from three
additional signals
confirmation from two
additional signals
very weak position
weak position to
open down 71
opening down
confirmation from an additional signal
middle position to open down
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Figure 2.21
d) The general direction of the
mean. Carefully and briefly work against the direction of movement of the middle. The average in this case is
an analogue of a trend line with all the ensuing consequences.
Try to make transactions in the direction of the current trend at a price that is as close as
possible to the average price at the moment or even more profitable than this price. If you made
such a trade far from the average price, then this means that you made a trade only in order to
do something.
Figure 2.22
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2.6. Complex averages
2.6.1. Construction and analysis of two averages on one chart and a combination of pairs of averages.
It is logical to assume that the construction of two averages with different periods on the same price chart
will give us the same information as the analysis of one average relative to the price chart. The only and
rather significant difference in this case is that the results of the analysis of pairs of averages will either lag
behind the analysis of one average, or be ahead of events. It depends on how close you are in building
averages to the cycle of exchange rate fluctuations. The more accurately you guess the cycle, the earlier
and more accurate your conclusions will be. But if you build an average with a significant shift from the
course cycle, you may encounter a phenomenon where the rules for analyzing averages not only do not
help you, but also give exactly the opposite results.
Specifically, we can recommend you to start using the following combinations of averages (in this case,
under the average with the order of 1, we mean the actual price chart). The
combinations are given in the order in which the signals are received. If you observe a direct contradiction
in the received signals, then it is better to wait until you get a clean, consistent
signal.
When analyzing a 6-day price chart - 1-8; 8-13; 8-21; 1-21;
contradictions in the signal can be at the intersection - 55-144 and 89-144.
When analyzing a 1-day price chart - 8-13; 8-21; 1-55; 1-89;
no contradictions are observed.
When analyzing a 3-hour price chart - 34-55; 1-89; 1-144; 8-89;
contradictions in the signal can be at the intersection - 13-144 and 21-144.
When analyzing a 1-hour price chart - 1-34; 34-55; 1-144; 8-89;
contradictions in the signal can be at the intersection - 55-89.
When analyzing less than a 15-minute price chart - 34-144; 1-144; 1-55.
Analyzing other combinations of averages can give you a lot of false signals. However, you must
remember that the financial markets are not a rigid system, the rules here change quite often. Therefore, it
is important to know the general principles of construction and calculations in order to be ready to respond
in time to such changes.
The general rules for analyzing a combination of averages include the following:
- find the points of intersection of the
averages; - find the points of greatest discrepancy
between the averages; - watch the general direction of moving averages and try not to work against
them. At the same time, a slow average will show you the desired direction of work, and a faster one will
give you buy / sell signals in a given direction.
Graphically, these rules will look similar to those presented in paragraphs a) and c) of paragraph 2.5.2. charts,
where the price chart will correspond to one of the faster averages (with a lower order). For example,
here are some pictures.
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Figure 2.23
Figure 2.24
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Figure 2.25
2.6.2. Price change channels
Price change channels are based on the principle of price volatility. An
important element in the study of price behavior is the analysis of price deviations from its moving average,
i.e. study of the random component of course change. The quantity characterizing deviations is called
"variability" (volatility). Variability is defined by different authors in different ways: as the largest range of
fluctuations, as average deviations, or as standard deviations. Here we will consider the definition of volatility
as the standard deviation of the price from the moving average SMA. Any of the moving averages (SMA,
WMA, EMA, MEMA) can be
chosen as SMA. Prices, experiencing fluctuations around their regular movement, form the so-called
price change channel. The width of the price channel is determined by their volatility. The simplest (and
oldest) of these price volatility indicators is the Price Channel .
(Price Channel Upper -PCU). To build a price channel in this indicator, a simple moving average SMA is
calculated and a band is drawn around it. The upper bound of the band is obtained by deviating from
SMA up by a value calculated as a certain percentage of both SMA, and lower - retreating down by a
percentage d of SMA.
u = { 1 + u / 100} * sma(p,n) u
L = { 1 - d / 100} * SMA (P,n), where
- U - upper band of the price
channel; - L - lower band of the
price channel; - and - the percentage of deviation of the upper band from the moving average
set by the trader; - d - the same for the
bottom band; - SMA(P,n) - moving average.
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It is assumed that with a successful choice of indicator parameters, the constructed channel will correspond
to the equilibrium state of the market, and, therefore, all price exits beyond its limits must be accompanied by
its return. Therefore, a signal to buy or sell is an increase or decrease in the current price per band. The
parameters selected by the user are the averaging period i and the upper and lower bandwidth v.
Figure 2.26
In Figure 2.26, we see two price channels - one is narrow with U and L values of 1 and the other is wide
with U and L values of 2. In a bearish trend, the price moves between the lower PCU line and the middle line.
With a weak downward price movement, the support level for it is a narrow channel. When the bearish trend
accelerates, the price moves out of the narrow channel and finds support in the wider channel. Similarly, the
PCU indicator interacts with the price on a bullish trend. Here, the upper lines of the narrow and wide channels
are resistance levels for the price.
The main indicator of volatility is the Bollinger Band (BB). Before considering the BB, it should be noted
that it does not belong to the actual trend indicators and is a completely independent type of analysis. This
indicator characterizes an abnormally sharp price deviation from the current trend. By trend here we mean the
moving average. BB lines are built as a band around the middle one. The band width is proportional to the
standard deviation from the moving average for the analyzed time period. At the same time, unlike PCU,
Bollinger bands are not parallel to the average.
Graphically, Bollinger is represented by two lines that limit the price dynamics from above and below,
respectively. These are a kind of support and resistance lines, which most of the time are at levels far from the
price. The main rule when building Bollinger lines is the following statement - about 5% of prices should be
outside these lines, and 95% inside.
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A decision based on Bollinger analysis is made when the price either rises above the
upper resistance line or falls below the lower support line. If the price chart fluctuates between
these two lines, then there are no reliable buy and sell signals based on Bollinger analysis.
At the same time, it should be borne in mind that the decision to open a position is made only
when the price chart crosses the Bollinger line to return to normal.
state.
Figure 2.27
When going beyond the border, Bollinger can even work against the trend. However, it must be taken
into account that transactions against the trend are a game of professionals. And if you don’t feel like
yourself yet, then it’s better to refrain.
Sometimes going beyond the Bollinger line means a "fake breakout", i.e. when prices just tried a new
level and immediately bounced back. In this case, you also have the opportunity to work against the trend,
but carefully evaluate whether the "breakdown" is really "fake". A good confirmation in such cases is the
volume indicator, which in a "fake break" should
drop sharply.
Additionally, we can highlight the following signals that we can get using Bollinger lines. At the same
time, we note that all the signals below are weak and confirming in relation to other signals.
a) Convergence of Bollinger
lines. A Bollinger convergence occurs when the market settles down and no significant
fluctuations. There is a consolidation to the continuation of the current or the emergence of a new trend.
weak up signal
weak down signal
weak signal
trend continuation
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Figure 2.28
b) Divergence of Bollinger lines.
The divergence of the Bollinger lines is observed when the current trend strengthens or a new one begins.
The divergence with increased volumes of transactions is a good confirmation of the trend.
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weak signal
weak signal
breakout
in continuation of the trend
Figure 2.29
breakout upwards
weak signal breakout rather down
The general analysis of the Bollinger lines can be presented in the following figure.
Figure 2.30
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Bollinger analysis works well with the moving average chart. As a rule, in a growing market,
when the price spends more time near the upper Bollinger line, its lower level finds its support
near the middle one. In a bearish trend, the price fluctuates from the lower Bollinger line to
the middle line, which is a kind of resistance line. For example.
Figure 2.31
2.6.3. Construction and analysis of MACD (method of convergence-divergenceconvergence of divergence)
MACD belongs to the class of oscillators, but this indicator is built on the basis of averages, therefore
we can safely consider it in the chapter on complex averages.
At its core, this is an improved visual perception of the analysis of two averages. There
are two ways of constructing and analyzing MACD, which have different purposes: - MACD is
linear, more suitable for trend analysis; - MACD-histogram, according
to the method of analysis and value, rather belongs to the class of oscillators.
a) MACD histogram analysis.
When calculating the MACD, from the exponential average with a smaller period (the authors of this method
suggest using an average with an order of 12), the exponential average with a large period (with an order of 26) is
subtracted, and the results are again smoothed using EMA to eliminate random fluctuations:
MACD = ÿÿÿ(9) [ÿ], where ÿ = ÿÿÿ(12) [1] - ÿÿÿ(26) [ij; - i price.
The visibility and efficiency of this method of analysis of two averages made it possible to win a large
popularity of this indicator among modern analysts.
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The MACD-histogram shows the best results when analyzing it on time intervals of a day or
more. More caution should be exercised when analyzing the MACD-Histogram for periods of less
than a day. Periods of less than an hour, although they carry information, can give you a lot
false signals.
The general rules for analyzing the MACD-histogram include the following:
- find the points of intersection of the MACD with the middle ("O" on
the x time axis); - find the points of intersection of MACD with a given limit of values
(the calculated limit); - find the points following the maximum or minimum of MACD values
(turning
points). When analyzing the MACD-histogram, it should be taken into account that all signals
received using it need at least one confirmation.
All signals can be divided into three categories according to the
degree of their significance. The first category includes signals given by the value following the
maximum or minimum of MACD values. This is a warning signal. You can only respond to it if you
receive at least two additional signals. "Hurry up and make people laugh."
The second category includes signals that occur when the MACD crosses with a given border
values. It's time to make the decision to open. The golden mean of signals.
The third category includes signals that come when the MACD crosses with the middle. The last
category, opening on the basis of which you can be late. This is especially true when the trend
changes or fades. The losses then will be quite significant. Therefore, as well as when receiving
signals of the first category, it is necessary to receive at least two additional signals. Below we
will consider an example of MACD-histogram analysis without additional signals.
Figure 2.32
1. The signal appeared as a combination of two signals - the MACD value following the maximum and
crossing from top to bottom of the border of values. Very good position to open down.
2. We close previously opened positions, because MACD began to rise in an uncertain situation. This
is a trend strengthening signal (in this case, bullish). 3.
Received the first signal to open down. Expect time to sell when MACD
breaks the given limit.
*4h:
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4. Good position to open down. We make a deal. 5. Received a
signal of the third category - the intersection with the middle. You can close some of the previously opened
positions for sale. 6. Received
first category signal to open up. We close all remaining from earlier
open positions down. We are waiting for a confirmation signal to open up.
7. Good position to open up. We make a purchase. 8. We close part
of the open positions. 9. We close all previously
opened positions. Very good confirmations for MACDHistogram signals are indicators
volume, but we will consider their influence later.
When deciding whether to open up or down based on the signals received from the MACD-Histogram, it is also
very important to look at how prices change in the period when we want to make a particular trade. After all, we
analyze according to the price schedule, which has already arrived. And while making a decision on a specific
transaction, we are in a real environment of constantly changing quotes. In this situation, it is usually advised to wait
for a real change in quotes in the direction
that you predicted. Even if at the same time you will not receive any amount of profit, this will save you from
possible significant losses if you open it prematurely.
It is necessary to note the following features of the MACD-histogram: - if the values of the
MACD-histogram are close, but have not reached the extreme lines of the maximum or minimum, and at the same
time have already begun to decline (increase, respectively), then this is also a signal for a market reversal, only
weaker in comparison with a signal that appears after crossing the lines of extremums. If such a signal is given in the
direction of the current trend, then this signal is considered strong enough to make a deal;
- when changing the direction of the analyzed MACD-histogram, which contradicts the previously received signals,
it is necessary to close part or all of the positions opened in accordance with the previously received signals;
- if the next maximum peak of the MACD-histogram is lower than the previous one, then this indicates a weakening
of the bullish trend or its possible change. The same is exactly the opposite at the minimum MACD values;
- if the next maximum peak of the MACD-histogram is higher than the previous one, then this indicates an
intensification of the bullish trend. The lowering of the lows indicates an intensification of the bearish trend. The last
two
features require their additional consideration on the chart, and the same features can and SHOULD be used in
the analysis of oscillators. It is important to note that on a bullish trend, the focus is on the maximum values of the
indicator, and on a bearish trend - on the minimum values. If the trend is not pronounced or is lateral, then both the
maximum and minimum values of the indicator are equal in this approach to analysis.
The top chart is the price chart. The
bottom chart is a MACD-histogram chart that belongs to the same time period as the price chart. The left chart is
bullish and the
right chart is bearish. It is necessary to consider two charts - the price chart
and the MACD-histogram chart - in parallel.
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Bear convergence
(built on the bottoms)
Bullish divergence
(built on tops)
Here we see a signal either about a
reversal of the bullish trend, or about
its temporary attenuation.
Here we see a signal either about a reversal of the bearish trend, or
about its temporary attenuation.
For example.
Figure 2.33.
It often doesn't matter if the MACD-histogram has crossed the zero border of its values between two
peaks or not. There will be only one conclusion - to make transactions in the direction
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4. Good position to open down. We make a deal. 5. Received a
signal of the third category - the intersection with the middle. You can close some of the open
earlier to sell positions. 6.
Received first category signal to open up. We close all remaining from earlier
open positions down. We are waiting for a confirmation signal to open up.
7. Good position to open up. We make a purchase. 8. We close part
of the open positions. 9. We close all previously
opened positions. Very good confirmations for MACDHistogram signals are indicators
volume, but we will consider their influence later.
When deciding whether to open up or down based on the signals received from the MACD-Histogram, it is also
very important to look at how prices change in the period when we want to make a particular trade. After all, we
analyze according to the price schedule, which has already arrived. And while making a decision on a specific
transaction, we are in a real environment of constantly changing quotes. In this situation, it is usually advised to wait
for a real change in quotes in the direction
that you predicted. Even if at the same time you will not receive any amount of profit, this will save you from
possible significant losses if you open it prematurely.
It is necessary to note the following features of the MACD-histogram: - if the values of the
MACD-histogram are close, but have not reached the extreme lines of the maximum or minimum, and at the same
time have already begun to decline (increase, respectively), then this is also a signal for a market reversal, only
weaker in comparison with a signal that appears after crossing the lines of extremums. If such a signal is given in the
direction of the current trend, then this signal is considered strong enough to make a deal;
- when changing the direction of the analyzed MACD-histogram, which contradicts the previously received signals,
it is necessary to close part or all open ones in accordance with the previously received ones
position signals;
- if the next maximum peak of the MACD-histogram is lower than the previous one, then this indicates a weakening
of the bullish trend or its possible change. The same is exactly the opposite at the minimum MACD values;
- if the next maximum peak of the MACD-histogram is higher than the previous one, then this indicates an
intensification of the bullish trend. The lowering of the lows indicates an intensification of the bearish trend. The last
two
features require their additional consideration on the chart, and these same features can and should be used in
the analysis of oscillators. It is important to note that on a bullish trend, the focus is on the maximum values of the
indicator, and on a bearish trend - on the minimum values. If the trend is not pronounced or is lateral, then both the
maximum and minimum values of the indicator are equal in this approach to analysis.
The top chart is the price chart. The
bottom chart is a MACD-histogram chart that belongs to the same time period as the price chart. The left chart is
bullish and the
right chart is bearish. It is necessary to consider two charts - the price chart
and the MACD-histogram chart - in parallel.
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Bear convergence
(built on the bottoms)
Bullish divergence
(built on tops)
Here we see a signal either about
a reversal of the bullish trend, or
about its temporary attenuation.
Here we see a signal either about a reversal of the bearish trend,
or about its temporary attenuation.
For example.
Figure 2.33.
It often doesn't matter if the MACD-histogram has crossed the zero border of its values between two
peaks or not. There will be only one conclusion - to make transactions in the direction
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It is too late and dangerous to break the trend, but it is also too early and no less dangerous to work
against the trend. In this case, it would be best to evaluate the life cycle and wait for the formation of a
new trend or the continuation of the old one. If you are impatient, and sometimes you have to wait a long
time, then it is recommended to use the same tactics as for working on a sideways trend at short time
intervals with the obligatory setting of stop-loss orders .
A slightly different situation occurs when the price remains in place, and the MACD-histogram (or
other oscillator) moves to the middle, i.e. "wins back" to normal values. In this situation, with a very high
degree of probability, the trend that was in effect before will continue.
b) Linear MACD analysis.
Linear MACD consists of two lines, one of which is a smoothed value of A (the difference between
ÿÿÿ(12) and ÿÿÿ(26) - see MACD-histogram calculation), and the other is simple, not smoothed A. These
lines repeat price movements and therefore are a fairly accurate copy of the trend dynamics of the price
of the studied product. The general rules for analyzing
linear MACD include the following: - find the points of intersection of two
MACD lines with each other - the most significant signal; - find the points of intersection of
MACD lines with a given limit of values (calculated limit); - find the points following the maximum
or minimum values of the "fastest" (with
lower order) MACD lines.
These signals can be divided into three categories according to their
degree of significance. The first category includes signals that come when both MACD lines cross. At
the same time, if the fast line crosses the slow one from top to bottom, then this is a signal to sell and
play down. If the fast line crosses the slow one from the bottom up, then this is a signal to buy and play up.
The second category includes signals given by the value following the high or low values of the fast
MACD line. This is a warning signal. You can react to it only when you receive the next signal in the form
of the intersection of both MACD lines.
The third category includes signals received when the linear MACD crosses the calculated limits of
values. The last category, opening on the basis of which you can be late. You must receive at least two
additional signals.
It should also be noted that MACD line crossovers occurring far from zero shows that the market has
already turned in the opposite direction to the previous trend. If the intersection occurred near the zero
line, then this indicates the indifferent behavior of the crowd, the absence of market emotions, and
therefore can rarely indicate some kind of productive price change.
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Figure 2.34
. Linear MACD will give more significant signals if a buy signal is received at MACD values below zero, and
a sell signal is above zero, respectively.
Comparing two nearby peaks or lows, one can obtain information about the strength of the current
trend similar to how we did this comparison for the MACD-Histogram.
The chart below shows both types of MACD and you can clearly see the advantages and
the shortcomings of each.
Figure 2.35
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Be careful if the price trend on a shorter period (for example, a day) of the analysis has turned,
and the linear MACD on a longer period (respectively, a week) is late. You can earn a lot, but with
a lot of risk.
2.7. Other trend indicators
2.7.1. Construction and analysis of the PTP (Parabolic Time Price System) line
The FTP indicator was developed and described in 1976 by Welles Wilder. Initially, the name of this indicator
was SAR as a combination of capital letters "stop and revers" - "stop and reverse". Due to the complexity of the
calculation, RTR has found active use in the era of dominance in the technical analysis of computer technology. In
Russian transcription, this indicator is sometimes also called the Parabolic system. It is named so because the
signals to close, given in the course of price changes, draw a semblance of a parabola.
This indicator is a line that is above or below the price chart and signals a downtrend or uptrend, respectively.
To build it, one of the technical analysis programs is used. The general principle that is applied to calculate the PTR
can be pictured as a stop and reverse system. When the price chart intersects with the PTP line, the latter reverses
in the opposite direction to the previous direction. The starting point for this will be the maximum or minimum price
for the period preceding this reversal. The main task of the PTP indicator is to show the main trend and at the same
time determine the moment
closing previously open positions during a trend reversal.
The closing price is set by the PTR indicator daily according to the formula:
Stop(tomorrow) = Stop(today) + AF * [EP(today) - Stop(today)], where
- Store(today) - current closing price;
- Stor(tomorrow) - tomorrow's closing price; EP(today) - extreme trading level for the current day: if a buy position is open, this is the upper price since the
purchase (high), if a sell position is open, this is the lowest price since the sale (low);
- AF - averaging factor - determines the speed with which the closing price should be shifted towards the open
position. It depends on the number of new tops since the purchase or the number of bottoms since the sale. On the
first day, AF is usually taken as 0.02. Increasing or decreasing the starting value AF allows either increasing or
decreasing the sensitivity of the PTP line accordingly. If new highs were reached 5 times with an open buy position,
then AF = (0.02 + (0.02*5)) =
0.12. With the number of new high 2 AF = (0.02 + (0.02*2)) = 0.06. AF has a
limit of 0.2 which corresponds to
9 new tops or bottoms. At the beginning, the acceleration factor
is small and equals 0.02. With an increase in the number of quotes and a general revival
of the market, prices begin to reach new highs and lows. The acceleration factor starts to rise,
reaching its local maximum at the time of the trend reversal.
In the computer version of building the PTP line, an open position is understood as the corresponding trend
dynamics. That is, on a bullish trend, it is understood that you have made a purchase, and on a bearish trend, it is
understood that you have made a sale.
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Therefore, the classic signal for making a deal based on the PTP line is the fact that the price chart
crosses the PTP line. This moment signals either a trend reversal or its temporary stabilization. Also,
when analyzing the RTR,
the following points can be distinguished: - follow the direction
of the RTR movement, an upward movement will mean a bullish trend, and a downward movement
will mean a bearish one. At the same time, the greater the angle of inclination of the PTP from the time
axis, the stronger was the first
movement of the current trend; - if the price chart strongly deviated from the RTR line, then their
convergence is possible
despite the direction of the RTR movement; - two periods of life of the RTR line can be distinguished maturity and old age. In the mature period, the price chart, as a rule, runs parallel to the PTP line, and in
old age, these charts begin to converge until the intersection. Accordingly, the received signals can be
divided into correct (in the mature period) and false (in old age).
Thus, the PTP line is a good confirmatory indicator for determining
current trend. Below
is an example of a PTP line.
Figure 2.36
Having carefully looked at the figure, you can see that the PTR corner points correspond to
the minimum or maximum price values for the analyzed period, and the first movement of the
line is almost parallel to the price dynamics similar in time. Convergence and intersection of the
PTP line and the price chart may occur due to a sharp trend reversal or its gradual fading. A
rapid trend reversal is accompanied by a sharp convergence of the price with the PTP line and
a short life cycle of the latter.
2.7.2. Construction and analysis of the "Directional Movement" indicator (Directional
Movement - +/- DM) This indicator was developed by J. Wilder in the development of the
RTR indicator and performs two roles - it identifies the long-term market trend and shows the
degree of direction of a particular market.
The "Directional Change" indicator measures how much today's range of a high
the price low goes beyond yesterday's. If big
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part of today's price range is higher than yesterday's, then the value of DM is negative, and if it is lower, it
is positive.
Directional movement (+/-DM) - is built in the form of two mutually opposite lines. The first line goes in
the direction of price dynamics, the second - in the opposite direction. The close interweaving of these two
lines indicates slight fluctuations in the exchange rate. The greater the deviation of the lines from each
other, the stronger the trend that was in effect at
that moment. Formulas for
calculating +/-DM lines: +DM = (High - Highl) / (High Low) if High > Highl; -DM = (Lowl - Low) / (High - Low) if
Low < Lowl, where - High maximum value; - Highl - previous maximum
value; - Low - minimum value;
-Lowl - previous minimum value. Signals in
the analysis of DM are the following: - intersection
with the lines of extremum. If the extremum lines are not reached, the signals come from the reversal of
the lines from the maximum or minimum values down or up, respectively. As a rule, such signals will
simultaneously come from both line 1 and line 2. The conclusion from such signals corresponds to the
classical analysis;
- the intersection of line 1 and line 2. Such an intersection usually precedes strong price fluctuations
when a new trend appears, the current trend strengthens or the rate rolls back strongly. This is a very
strong signal; if line 1 is above line 2, then this indicates a general upward trend dynamics. If line 1 is below line 2,
then there is a downtrend in the market;
- if the lines diverge, then the trend dynamics intensifies, if the lines converge, then the trend fades
(temporarily or is preparing for a reversal).
Figure 2.37
The basic rules for analyzing the "directional change" indicator
are: -buy and hold while +DM (heavy line here) is above -DM (thin line); - sell and hold
while - DM is above +DM.
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2.7.3. Construction and analysis of the average indicator of probable directionality (ADX)
The ADX probable direction indicator is calculated as the absolute modulo difference between
the +/-DM lines. Thus, the more significant the divergence of the +/-DM lines, the greater the ADX
value, regardless of the price movement direction.
This indicator helps to clarify the nature of the likely path of the trend continuation. When the
ADX rises, it shows that the market trend is getting stronger. At such a time, it is desirable to enter
into transactions only in the direction of the trend. When the ADX falls, it means that the trend is
in question. In this case, the signals given by the oscillators are important.
Figure 2.38
In general, the simultaneous use of indicators +/- DM and ADX is recommended. Their
interaction is expressed in the following rules: - buy when
+DM is above -DM and sell when - DM is above +DM; - when ADX is very small, then the trend is weak
and it is not worth following it; - when ADX goes down - the trend weakens.
The market is in the stage of correction, reversal or transition to a calm phase after the end of the trend. When the
ADX drops, false signals are common. Do not trade in the direction of the trend;
- when ADX rises - the trend is getting stronger, it is suggested to make deals in the direction of the trend. If +/-DM
is in the zone of maximum (minimum) values, then it is recommended
make short-term transactions;
- if ADX reversed from the bottom up, it indicates the market revival and the birth of a new trend. You can perform
operations according to the signals received from +/- DM; - when ADX has entered the
zone of maximum values, then you should carefully monitor a possible change in the direction of the trend. If you
are open at this time, then it is worth taking profit from at least part of your positions; - when ADX reverses from top to
bottom, it means
that the market is overheated and wants to let off steam.
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2.8. General conclusions on the trend analysis of
the market Having analyzed the market by trend lines and models, by average, linear MACD and RTR, as well
as by evaluating the life cycle, we get a general idea of: - the
direction of the trend (up, down or flat); - the
strength of the trend (there is a sharp rise or sluggish); - in
what period of the life cycle is this trend (birth, maturity, old age or death); - we should now
expect strengthening, weakening or even rollback of the trend (under the "rollback" here
we mean a short-term price movement in the opposite direction to the trend).
Such an analysis allows us to decide on a strategy for working with this product. At the same time, the most
The main thing is to know the following "not":
- do not buy in a pronounced "bear" market and do not sell in a pronounced
"bullish" market, unless, of course, you close previously opened and already won positions;
- do not open long positions in the flat market and prepare for any strong
price movement (again, the longer the flat lasts, the stronger the exit from it will be); - do not open long
positions on weakening and "old" trends; - do not make transactions if you
do not understand what the trend is now or at what stage of the life cycle it is
located, find another product;
- never open long positions against the trend, and always be ready to take short positions
close at the first sign of a resumption of the previous trend dynamics.
Everything else, but only in the direction of the current trend, can be done. The
strategy also includes the following steps. If you opened a position following the trend and started making
money, then be prepared to close all or part of the positions at the first signs of trend fatigue. It's better to open up
again. Most likely, you will be able to do this at a better price.
General rules for determining the strength of
a trend: - the longer the trend lasts, the stronger it is, but everything has a limit;
- over time, the trend tends to weaken; - the steeper
and faster the trend - the stronger it is; - a long
gentle trend has great chances for its continuation; - a very steep trend can also turn
over abruptly. The truth lies in the reasonable combination of
these rules. A common measure in determining what
the rule operates now most strongly, is time - time of action of this rule.
2.9. Oscillators 2.9.1. General principles of construction
and calculations, types of oscillators
According to the figurative expression of one of the technical analysts, oscillators resemble a rubber ball. If this
ball is immersed by hand under water, then it will tend to jump out. We don't know how long the ball will stay under
water and how deep it will sink, but sooner or later it will rise to the surface of the water. If a rubber ball is tossed
into the air, then it will
will fall
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although it is known in advance how high he will fly before that. So are oscillators - they inevitably
return to their normal state, corresponding to the average values of the indicators. The analysis of
oscillators is based on this principle.
1) Momentum, ROC and CCI.
The easiest way to plot oscillators is the Momentum indicator. Each Momentuma value is
calculated as the difference between the price values after a certain time interval. The resulting
negative and positive values are plotted with a reference zero line. The general formula looks like
this: M = P1 RO, where - P - closing
price; - index 1
indicates the
current day, and index 0 indicates the specified number of days ago. As in the case of the
average, Momentuma lines that are more sensitive to the price movement will be those with the order
less.
The Momentuma derivative will be the Commodity Channel Index (CCI). which normalizes the
Momentuma plot by dividing its values by the largest amplitude achieved. Thus, CCI will vary from -100
to +100. Approaching the upper or lower border, it signals that either consolidation or recession is
coming (rise, respectively). The recommended order of CCI is 8 on any analysis time period. The CCI
creator Donald Lambert recommended dividing the index by a factor of 0.015 in order to bring the
indicator values to the interval from +100 to -100:
- X = (1/3) • (Close + High + Low),
where - Close - closing
price; - High - maximum price for the analyzed period;
- Low - the minimum price for the analyzed period; dX = (1/n) - e [X(i) - SMA(X,n)], where
- n is the length of the analyzed
period; - X(i) - price value at time i; SMA(X,n) - moving average for the time period n.
Although CCI is designed as a "channel" indicator, but, in essence, it is an oscillator,
so I took the risk of including it in this point of analysis.
The Rate of Change (ROC) is essentially a surrogate for Momentuma. Its difference lies in the fact
that the values are calculated not as a difference, but as a quotient of dividing the closing price of the
current day by the closing price of the previous period. ROC values will change one by one with
Momentum, except that the baseline will not be 0, but 100.
To obtain clear signals, the derivative of Momentuma is used - CCI, which we will continue to use
as Momentum.
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Figure 2.39
2) RSI (Relative Strength Index).
The RSI indicator was developed by J. Wilder Jr. (Welles J.Wilder Jr.) and published in 1978 in his one
of the most important books in the history of technical analysis, New Concepts in Technical Trading
Systems. The author justified the need to create the RSI indicator by the significant shortcomings of the
Momentum indicator, which was leading at that time. The
Relative Strength Index is one of the most popular oscillators today. Formula
to calculate RSI looks like this:
RSI = 100 - [ 100 / ( 1 + RS ) ] ; RS = AUx / Adx,
where - x index denotes the number of days in the analysis period (RSI
order); - AU - the sum of positive price changes for the
period; - AD - the amount of negative price changes for the period.
As you can see, the basic principle for calculating the 'RSI is the theory of probability. Based on the
application of this theory, it can be said that the price cannot rise indefinitely, as well as fall. You can check
this position on a completely random process - tossing a coin with two outcomes of such tossing "heads"
and "tails".
Although the fact of price change is not an absolutely random process, nevertheless it is subject to
some elements of probability theory. Another basis for
the application of RSI is the knowledge of the psychology of human behavior, because it is people who
make the decision to buy or sell. And people are inherently excited during a period of significant price
changes. This is expression
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zhaetsya in manifestations of overbought or oversold goods with the inevitable subsequent
rollback of prices to a lower (higher respectively) level. The main value of oscillatory methods
of analysis is precisely to show such moments of resale and repurchase.
We will consider the detailed application of this oscillator below, here we only note that RSI
is mandatory for use in analysis at any time intervals. The recommended order of RSI is 8, on
any time period of analysis (although the creator of the described indicator used the order of
14 in his calculations, since he saw its main use on daily charts, based on three five-day, oneday working weeks).
Figure 2.40
3) Stochastic (Stochastic lines), Stochastic slow (PKS), Stochastic fast (PKF).
Stochastic was developed by C. Line many years ago, but has become widespread
only with the advent of computers.
The purpose of the stochastic is to identify price trends and reversals by tracking the placement of
closing prices within the latest series of highs and lows. This method is based on the observation of the
following fact. When prices rise, their daily closes tend to be closer to the high that ends their last series.
If prices continue to move flat, or rise, and the closing prices of daily trading begin to fall within the range
of the last series, this signals the internal weakness of the market and the readiness of its trend to turn.
The opposite pattern occurs during the down market stage: downtrends are confirmed when closing prices
are close
to the bottom of the last series of lows. When they rise higher within the ranges of the series, they
show the market's inherent strength.
Stochastic lines include -% K.% D. %R.
The construction of the %K and %D lines is based on the fact that when prices rise, the trading day
usually closes at levels that are closer to the maximum prices reached during it. In a downtrend, the
opposite effect occurs.
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The formula for calculating stochastic lines reflects the location of the current closing price
relative to the selected time period. Usually, the% K line is calculated over a period of 5 days:
%ÿ = 100 • [ ( ÿ1 - L5 ) / ( ÿ5 - L5 ) ],
where - ÿ1 - current closing
price; - L5 - the lowest level for the last 5 days;
- H5 - the highest level for the last S days.
%K is more sensitive than %D. Formula for calculating %D:
%D = 100 • CL3 / HL3, where CL3 - three-day amount (Cl - L5); - HL3 three-day amount (H5 - L5).
The stochastic lines constructed in this way are called fast, the orders of these lines are 5 and
3.
The %R calculation is a modified formula for %K.
It is recommended to use stochastic lines in the analysis at any time intervals.
In addition to the classical methods of analysis common to all oscillators for stochastic lines, one can
highlight some features:
- intersection of lines %K and %D. Such an intersection may be one of the main signals
to make a decision on the transaction;
- two consecutive oppositely directed intersections of the lines %K and %D indicates that the first signal was
premature and possible resumption of the previous price movement, moreover, a stronger one;
- overbought and oversold limits for the %K and %D lines are set within the range from 70-80 to 30-20,
respectively, and for the %R line - 90 and 10.
Stochastic slow (PKS) and fast (PKF) are stochastic lines, slow and fast respectively. For more cautious
traders, it is recommended to use PKS due to the smaller number of false signals compared to just stochastics
and PKF. But PKF is very good for charts from one-day and above, as it will give a signal much earlier than PKS.
Signals given by stochastic lines: - if the fast line crosses
the slow one from the bottom up, then this is a buy signal; - if the fast line crosses the slow one
from top to bottom, then this is a sell signal; - the direction of movement of stochastic lines
shows the dynamics of the trend; - if the PKS and PKF signals are mutually opposite, then
this situation should be dealt with additionally, with an in-depth analysis of other indicators; - signals of stochastic lines
will be much stronger if they come from overbought or oversold zones.
Below I will give an example of the construction of the above oscillators.
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Figure 2.41
Stochastic lines are one of the best oscillators and are recommended for mandatory use in the
analysis of any markets.
4) Construction of averages by RSI.
The construction of RSI averages can be used for the reason that RSI is driven into certain limits
(from 0 to 100) by the price. The price is inherently unlimited, and RSI acts as a limiter to the price
dynamics and a kind of layout of this dynamics. This gives us the right to build RSI averages and
analyze the constructed averages. For the analysis of
averages built on RSI, the same methods apply as in the analysis of averages built on the price chart.
The advantages of the analysis approach proposed here lie precisely in the limited fluctuations of the
RSI and the emergence of opportunities to outperform the signals from the RSI averages compared to
the signals obtained from the averages plotted on the price chart.
5) Building RSI and Momentum on average.
This approach in the analysis is recommended to be used for short periods of time (no more than an hour). The
reason for constructing oscillators based on the average is the elimination of random price fluctuations that most
strongly affect the calculation of oscillators precisely in short periods of time. Random price fluctuations must be
eliminated, as they can give, when included in the calculation of oscillators, false signals, which, accordingly, can lead
to significant losses.
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6) Other types of oscillators.
Aleksanders filter (ALF) - similar in calculation and application to Momentum. The recommended
order is 8. ALF analysis can be carried out on almost any time period. ALF fluctuates around 0. ALF is
analyzed in the same way as Momentum.
Figure 2.42
The Kairi method (Kairi -KRI) is closer in application to Momentum. It fluctuates around 0, but with a wider
amplitude of oscillations. The recommended order is 13. KRI can be applied at any length of time. This is one
of the simplest oscillators. When constructing this indicator, the price deviation from its simple moving average
is calculated, and the result is expressed as a percentage of the average.
KRI indicator formula:
- P - price value; SMA(P,n) - moving average with order n.
In the case when the price movement does not have a pronounced trend, a large positive value of the KRI
indicator indicates an overvalued price and gives a recommendation for sale. A large negative value is a buy
recommendation.
With a pronounced trend, due to the time lag of the moving average from the current price value, the KRI
value will take stable positive values in the downtrend, and stable negative values in the uptrend. Therefore, if
the values of the method do not change sign for a long time, it can be used as a trend indicator.
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Figure 2.43
Signals appear when the indicator goes above 1 (overbought zone) and below -1 (oversold
zone) and the subsequent KRI reverses from these zones to the middle.
An additional signal is also a bullish divergence and a bearish convergence of the indicator with
the price.
Oscillator < Oscillator - OSC). One of the most common technical analysis methods. Using this
method, price movements with a given period are detected. To do this, two simple moving
averages are calculated - short and long, and the average with a long period is subtracted from
the average with a short period:
OSC = SMA(P,m) - SMA(P,n),
where - SMA(P,m) - moving average with order m - long;
- SMA(P,n) - moving average with order n - short.
Thus, on the one hand, we eliminate all short-term price fluctuations and, on the other hand, we
remove long-term trends. For example, if we want to trade hourly price swings, we choose one
hour as a short averaging period so as not to follow shorter-term swings. In this case, for example,
a time interval of one day can serve as a long period. By subtracting the long period average, we
lose information about the average level that distinguished one day from the next. This, however,
pays off with greater visibility of the indicator. Large positive values of the OSC indicator mean
prices are too high in relation to the long-term trend and give a buy signal. Large negative values
give a signal to sell.
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Figure 2.44.
The classic OSC signals are bullish divergence and bearish convergence. At the same time, on a clear
confirmed bullish trend, the OSC crossing from below-up the zero line is a signal to buy (an earlier signal will be
a reversal of OSC in the direction of the trend dynamics below the zero line). On a bearish trend, on the contrary,
the OSC crossing the zero line from top to bottom will be a signal to sell. An earlier signal is a reversal of the
indicator, which is above the zero line, from top to bottom. These are trend signals.
Signals against the trend - OSC reversal from overbought and oversold zones.
The ultimate oscillator (Ultimate Oscillator - UOS). This indicator was proposed by Larry Williams as a
development of the idea embodied in the ACD. This indicator measures buying or selling pressure over three
different periods and calculates the average value over these periods. Pressure is calculated by how close the
closing price is to the highest or lowest price in a given time frame.
The formula for calculating UOS is as follows:
- Close(i) - closing price; Low(i) - the minimum price for the analyzed period k; - High
(i) - the maximum price for the analyzed period k.
The main signal of this indicator is the divergence in the trend of the UOS indicator with the price dynamics.
This indicates a glut of the market and serves as a signal to buy or sell.
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Figure 2.45
Percent of Resistance (PC R). This indicator is based on the concepts of support and resistance
levels, when it is believed that once a maximum or minimum is reached, it serves as a psychological
barrier to further price movement. The PCR method uses this representation. It calculates how much
the price is close to the highest (lowest) price for the analyzed period of time.The degree of closeness
is presented as a percentage of the range of prices for the given period.
Where:
- high - the highest price for the analyzed period n; low - the minimum price for the analyzed period n; - ÿ
- the last value of the price.
When the PCR value is close to 100%, a sell signal is given, close to 0 is a buy signal.
The developers of the method advised using the PCR value of 80% as the overbought
(repurchase) boundary, and 20% as the oversold (resale) boundary. As a parameter that
must be selected for the best work of the method, there remains the time period n, on which
the highs and lows of the rate are tracked.
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Figure 2.46
Almost all the time, the PCR indicator was below the middle line (50), which gave a buy signal. Short-term
peaks of the indicator corresponded to sell periods and gave buy signals when reversing.
Force Index (Force Index Short Term -FI). FI was developed by Al. Elder as an oscillator, but also taking
into account the volume indicator. This distinguishes it favorably from other oscillators. The Force Index is
calculated as the difference between the closing prices of the current and the previous day, multiplied by the
volume of the current day. The formula for calculating the Force Index is as follows:
FI = Volume today * (Close today - Close yesterday) / ÿ1ose yesterday,
where - Volume today - the volume of transactions or contracts concluded
today; - Closetoday - closing price today; Close yesterday - closing price yesterday.
At the same time, for a short game, it is better to use an average FI of order 2, and for a long game - an
average of order 13. The main
signals given by the indicator are the direction of FI movement and the ratio of the minimum and maximum
values of the index. The direction of movement of FI shows us the general direction of the proposed transactions,
and the ratio of highs and lows - the strength of the current trend. Typical signals here will be a bullish
divergence and a bearish convergence of the FI indicator and the price chart. If the index is above zero, then
this indicates the strength of the bulls. If it is negative, then bears dominate the market. A buy signal comes
when the average value of the indicator is below zero, and the market is in a bullish trend. If the average for the
indicator is above zero on a bearish trend, then a sell signal is received.
Money Flow Index (MFI). This indicator is a volume-weighted Relative Strength Index (RSI) and is used in a
similar way. MFI measures the cash flows in and out of the market. Formula for calculating the index:
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MFI = 100 - [ 100 / (1 +MF) ], where -
MF - the ratio of the total turnover for periods of price growth to the total turnover for days of falling prices. Here, the
period will be the corresponding value of the analyzed chart. For daily charts - day, for weekly charts - week, minute
charts - minute, etc.
Let's consider the MFI index using the GBP/USD 15-minute chart as an example.
Figure 2.47
In the above figure, we see both classic oscillator signals (reaching overbought and oversold zones) and convergence/
divergence signals.
2.9.2. Analysis Rules
1) General rules for the analysis of oscillators.
In general, the rules for analyzing oscillators coincide with the rules for analyzing MACD, but below we will
nevertheless consider the analysis of oscillators, with the aim of both repeating what has been done and revealing some
new points that we could not consider before.
The general rules for analyzing oscillators include the following: - find the points
of intersection of oscillators with the middle (for Momentum and CCI -O, for RSI, PKS and PKF - 50, for ROC - 100);
- find the points of intersection
of the oscillator with a given limit of values (for RSI, the upper limit is in the range from 60 to 80, and the lower limit
is from 20 to 40; for PK.S and PKF, the upper limit is about 90, the lower limit is about 10; for the rest, the limits are
calculated ). It should be noted here that in the flat market the RSI borders are 30 and 70, in the bull market - 40 and 80,
in the bear market - 20 and 60. The same rule will apply to other oscillators. Raise the boundaries in pronounced bull
markets and lower them in clear bear markets;
- find the points following the maximum or minimum of the oscillator values. Good results of
the analysis of oscillators will appear when the market is calm (trend or
sluggish or absent).
On a strong current trend, a negative result of the oscillator analysis is also
good information confirming the action of the trend. How right
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Fork, if with a strong trend up (down), the oscillator will show down (up) and the price will not go in the
direction indicated by the oscillator, then the stronger the upward (downward) trend will be in the future.
When
the trend changes, the oscillator can both deceive you the most and be the first to warn you about a
trend change. Therefore, be on the lookout at the end of
the life cycle. All signals can be divided into three categories according
to the degree of their significance. The first category includes signals given by the value following the
maximum or minimum of the oscillator values. Warning signal. Make a deal only when you receive at
least two additional signals.
The second category includes signals that occur when the oscillator crosses a given limit of values.
It's time to make a deal. But it does not hurt to have at least one signal in confirmation.
The third category includes signals received when the oscillator crosses with the middle. Opening at
this point, you can be late. To conclude a deal, you must receive at least two additional signals.
Below we consider the classical analysis of an oscillator, regardless of what type this oscillator
is. Figure 2.48
1. The signal occurred when the oscillator crossed the middle of the values from the bottom up. If
we had a position open up, we can partially close it
2. Return of the oscillator to the area of values below the middle. Short sale possible. 3.
Repeated crossing signal from bottom to top. I didn't mark the top-down signal, because it arose
while the oscillator was in the "dead zone" and did not leave it after the arrival of signal No. 1.
4. Received the first signal to open down. We are waiting for the oscillator to break through the given
border.
5. Good position to open down. We are making a sale. 6. Received a
signal of the third category - the intersection with the middle. You can close some positions. 7.
Return of the oscillator to the range above the middle. Short term purchase available. 8.
Repeated signal of the third category. We look forward to further developments.
9. Received first category signal to open up. We close all remaining from previously opened
positions down. We are waiting for the signal to open up.
10. Good position to open up. We make a deal to buy. 11. We close part
of the positions opened up.
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2) The interaction of the above oscillators with the price chart.
Lines of convergence, divergence and parallelism are drawn using RSI resistance and support
trendlines (or long averages) and the price chart. The purpose of identifying such lines is to determine
the direction of movement of the price and the oscillator and the strength of this dynamics.
a) bearish convergence (price up, oscillator down).
average signal
price changes should be
expected (if the end
of the oscillator is close
to the upper limit, then
a decrease is possible; if the
end of the oscillator is closer to
the middle of the values,
then the rate may stabilize)
average signal
weak signal
we should expect
price stabilization
followed by a
trend change
a trend change
should be expected
(if the end of the oscillator is
close to the upper
limit, then
the trend may strengthen; if
the end of the oscillator is
close to the lower limit, then
an increase will most
likely occur;
if the end of the oscillator
is closer to the
middle of the
values, then both the fall and
the price stabilization are equally likely)
Figure 2.49
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b) bullish divergence (price up, oscillator down).
average signal
strong signal
average signal
price changes should be
expected (if the end
of the oscillator is close
to the lower limit, then
an increase is possible; if
the end of the oscillator is
closer to the middle of the
values, then a decrease
will occur more likely)
we should expect
price stabilization
followed by a
trend change
a change in the trend should be expected (if the end
of the oscillator is close to the lower limit, then the trend may
strengthen; if the end of the oscillator is close to the upper
limit, then the exchange rate may stabilize; if the end of
the oscillator is closer to the middle of the values, then both
growth and stabilization of the price are equally probable)
Figure 2.50
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c) parallelism (price on top, oscillator on BOTTOM).
average signal
average signal
strong uptrend
should expect a
trend change
medium signal strong trend down
Figure 2.51
3) Analysis of RSI averages.
The rules for analyzing the averages for RSI are the same as for the analysis of averages for the price
chart, i.e.: - find the points of intersection of the average and
the RSI chart; - find the points following the maximum or minimum of the average (turning points); - find
the points of the greatest discrepancy between the average and the RSI
chart; - follow the general direction of movement of the
average. At the same time, it is necessary to take into account the fact that averaging over RSI will lag not only by
an order of magnitude of the average itself, but also by an order of RSI. Therefore, it is recommended to build an
average with an order less than RSI by an order of magnitude. For example, you want to build an average for RSI
with an order of 21. The order of the RSI itself is 8. Then the average will need to be assigned an order of 21-8 = 13.
This type of oscillator analysis contributes to trend analysis. An average with a large order (for example, 34)
will be above the middle on a bullish trend and below
- bearish.
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4) Analysis of RSI and Momentum by average.
The advantage of this analysis is the elimination of random price fluctuations that are possible during the execution of
single transactions. The oscillator chart obtained using the average will have a rather nice smooth appearance. You will
better see the trend of the oscillator.
Minus - the summation of the oscillator lagging behind with the lagging average. This can be partially avoided by
applying the same construction tactics as described in the previous paragraph. In this case, it is recommended to build
an oscillator based on the average, with the order of the average not higher than 3. In this
case, it must be taken into account that the averaging of oscillators will lag not only by the order of the oscillator itself,
but also by an order of the average. Therefore, it is recommended to build an oscillator with an order less than an order
of magnitude of the average. For example, you want to build an oscillator based on the average with order 8. The order
of the average is 3. Then the oscillator will need to be assigned the order 8 - 3 = 5.
5) Additions to the analysis of oscillators.
It is very important to know and remember that oscillators can often deceive you on a strong trend. Therefore, if you
are working in a strong trend, then be careful about oscillator signals. If the signals given by the oscillators are false, then
this rather indicates the opposite - strengthening of the current trend. In this case, work should be carried out in the
direction of this trend. Novice traders make many mistakes using only classical analysis methods.
oscillators and forgetting about possible contradictions in the directions of trends and oscillator signals. If the trend is
up, then the oscillators will be in the overbought zone most of the time. If the trend is down, then the oscillators will be
more likely to be in the lower half of the chart. This must be kept in mind when making decisions based on oscillator
analysis.
Figure 2.52
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2.10. Analysis of volume indicators
2.10.1. Rules for constructing and calculating volume indicators
There are no pure volume indicators in the round-the-clock FOREX market. We only know
that the minimum amount of one transaction is equivalent to at least 5 million USD.
But this has its own advantage. We get rid of the influence of single transactions on large amounts, which,
as a rule, are carried out at non-standard (only close to market) rates. Moreover, it is the number of
transactions that gives us a more or less complete picture of market sentiment, because one transaction is
not only 5 million dollars, but also one vote for a given price movement.
Thus, observing the number of transactions as a surrogate for the volume indicator, we are present at the
voting, where all votes are equal regardless of the number of shares (transaction amount) they own. For
exchange commodities (currency futures market, stock market, commodity market, etc.) indicators of the
volume of transactions are given in two sections: - the
number of purchased and sold contracts during one (current or past) exchange session; - indicator of the
total number of
open contracts at the end of the day (code name "open interest" - "open interest").
2.10.2. Analysis of volume indicators
Volume indicators are of great importance not only when deciding on the moment of opening
position, but also when analyzing the general mood of the market - the market is bullish or bearish.
The basic rules that can be applied when considering volume indicators are
include the following:
1) The volume chart on the stock exchanges during the trading session usually looks like the letter V:
Trading hours during business hours
Volume
At the beginning of trading, orders accumulated by brokers overnight and transactions ordered by forced
traders (importers and exporters, etc.) are executed, so the number of transactions at the beginning of the
trading session is large at first. Then it decreases, reaching a local minimum in the afternoon. By the end of
trading, already professional players begin to conclude an increasing volume of transactions, thereby forming
the closing prices of the
market. 2) The chart of volume in the currency market of spot contracts looks exactly opposite to the exchange one
with a peak from 11 am to 2 pm CET.
3) A decrease in volume shows us a decrease in interest in this course dynamics. It may
lead to a change in the trend, or to a temporary stabilization of prices.
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4) An increase in volume shows an increase in the interest of market participants in a given price
movement. There are prerequisites for strengthening the existing dynamics in the market, or for
the emergence of a new direction of price change.
5) Sometimes a gradual decrease in volumes is accompanied by a sharp change in price dynamics.
This is possible when the struggle of one of the parties stops, their actual surrender to the new trend.
6)
Closely follow the change in volumes at lunchtime (in large exchange centers, especially in Western
Europe) and at night, when the majority of market operators are not working (mainly in Western Europe
- London, Frankfurt, Paris). At this time, even the smallest amounts can lead to significant exchange
rate fluctuations, the market becomes unpredictable. A decrease in volume at this time is not
necessarily a decrease in interest in transactions given the dynamics of the course. Beware of the
market after 17:00 CET. 7) It should be noted that there is also a
seasonal factor that has a significant impact on both the dynamics of the volume indicator and the
dynamics of prices. For the derivatives market of futures and options, the expiration date of the nearest
contract is essential (usually the end of each quarter). For the entire market, the end of the financial
year and calendar year is also significant. The volumes of transactions, as a rule, fall at this time, and
open interest falls to the minimum values.
8) Volume peaks that stand out against the general background signal a possible trend reversal.
Figure 2.53
The analysis is carried out in two
sections: - bar to bar, when the past value of the price and volume are compared (past, because
the current is still in the process of changing) to the previous past,
- considers the general dynamics of volume changes and adequate display of the price dynamics.
The application of the first method of analysis allows us to draw specific conclusions from the analysis of the general
market situation. Analysis according to the second method gives us
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the ability to assess the overall activity in the market and the degree of representativeness of volume indicators for
analysis.
Specifically, we can single out the following scenarios for the development of events in the market and their
interpretation using volume indicators using the first method of analysis.
bearish convergence (top price, bottom volume)
Very weak trend
Strong trend
Average trend
Amplification of the previous
output
Strong confirmation of
the downtrend
Good confirmation of the downtrend
Figure 2.54
As a rule, convergence is a characteristic of a bearish trend, while divergence is a characteristic of a bullish trend.
An
important addition to the Convergence/Divergence indicators is the fact that if prices were falling and volume was
rising, and prices then stopped falling while volume continues to rise, then expect price to rise. If prices were rising, and
the volume reached a maximum, and prices stopped rising at the same time, expect prices to fall.
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bullish divergence (top price, bottom volume)
Very weak trend
Weakening trend
Average trend
Strengthening the previous
output
Strong reversal of the
uptrend
Good confirmation of the uptrend
Figure 2.55
Typically, a divergence is a characteristic of a bullish trend. If prices
were falling and volume was rising and then the price drop stopped with increasing volume, then wait
price increase.
The area where there was recent high volume will be the pivot point for the next price decline. Here you
can buy. This is the area of the greatest concentration of interests of sellers and buyers, which is why it is
so significant. For example:
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Figure 2.56
parallelism (top price, bottom volume)
Strong trend
Very weak trend
Weakening trend
Strong confirmation of
the uptrend
Strengthening the
previous confirmation by volume
Strong reversal of the downtrend
Figure 2.57
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2.10.3. Interpretations of the volume
indicator OBV- On Balance Volume indicator - equilibrium
volume. Designed and popularized by Joseph Granville in 1963. OBV Represents a trend-following
line built on the basis of volume recalculation through the corresponding price change. For example.
Figure 2.58
The analysis of the OBV indicator is carried out similarly to the trend analysis when breaking through the levels
resistance and support. Additionally, the following buy-sell signals should be noted:
a) when OBV reaches a new low - this confirms the strength of the bears and indicates a possible further decline
in prices, which gives us a reason to make a sale; b) when OBV reaches a new
high, this confirms the strength of the bulls and indicates a possible further increase in prices, which gives us a
reason to make a purchase; c) this indicator gives strong signals when it diverges
from the price. If the price rises to a new high, and OBV does not reach its previous high or reaches it, but with
less force, then this creates a bullish divergence and gives a strong sell signal. If the price drops to a new low and
OBV reaches a new low of its value with even greater force,
rather than the price, it indicates a bearish convergence and gives a buy signal. In
this case, the long-term divergence is more important than the short-term one.
Chaikin's indicator of accumulation/ distribution (Volume Accumulation -VA) - accumulated
volume. This indicator is an alternative to the OBV indicator and was developed by two authors at once Mark Chaikin and D.B. Lambert. Formula for calculating VA:
VA = {[(ÿ - L) - (ÿ - ÿ)] / (ÿ - L)} • V, where ÿ is the closing price;
L - minimum price; H - maximum price; V - volume.
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The action of this indicator is based on the fact that with a strongly growing trend, closing prices
are closer to the maximum price for the day (week, month, hour), and the trading volume exceeds the
average value. On a strong bearish trend, the opposite picture will be observed - the closing price will
be close to the minimum price for the period with also large values of the volume indicator.
Signals for applying the VA indicator will be confirming trend growth signals - unidirectional
dynamics of the indicator and price on a bullish trend and divergence on a bearish trend, as well as
signals refuting the trend - bullish divergence and bearish convergence of the indicator with the price
chart.
Based on the Chaikin indicator, you can also calculate the Chaikin Index, which is an n-day cash
flow indicator. It is equal to the sum of the values of the Chaikin indicator for n days, divided by the
sum of the volumes for these n days:
Index VA = e VA / e V.
If the Chaikin index is greater than zero and rising, then this is a signal of a bull market. If the index
is below zero and decreases, then you are observing the characteristics of a bear market. On
increasing volumes, these are buy and sell signals, respectively.
Applying to the calculated VA the techniques that were developed in the OSC method, we
we get the indicator of the Chaikin Oscillator (Chaikin Oscillator - CHO):
CHO = SMA(VA,m) - SMA(VA,n), where - m
is the higher order of the mean; - n lower order of the mean.
The rules for analyzing the Chaikin oscillator are similar to those for the classic OSC oscillator.
Indicator A/ D - Accumulation / Distribution - accumulation / distribution. Developed in 1972
by Larry Williams, it is the accumulation of the difference between all moves up (accumulation) on days when the price has
risen by the close and down (distribution) on days when it has fallen:
A/D = [(ÿ - ÿ) / (ÿ - L)] • V, where ÿ is the
closing price; L minimum price; O - opening
price; H - maximum
price; V - volume.
The analysis of the A/D indicator is similar to the analysis of oscillators. The strongest1 signals of this
indicator will be signals from the convergence / divergence of A / D with the price.
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Figure 2.59
Unlike OBV, another indicator - Volume Price Trend (VPT) tries to take into account not only the direction
of the price change, but also the magnitude of this change.
- VPT(l) - previous value of the VPT indicator; Volume - volume, number of changes; - ÿ current price value; - ÿ(1) previous price value.
In the latter method, a large positive value of the indicator indicates an overbought (overbought) state of
the market, and large negative values indicate an oversold (oversold) state of the market, respectively. The
boundaries of overbought and oversold, as in all other methods, are selected manually by the analyst, based
on his own experience, or are the subject of computer optimization.
2.11. An example of a complex analysis In this
paragraph, we will consider an approximate procedure for conducting a complex analysis,
which includes all the main methods and approaches of technical analysis of financial markets.
For analysis, we will use the USD/DEM chart for 01/12/96. The course of analysis is -1.5395.
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Figure 2.60
We carry out the analysis in three sections - identifying the direction and strength of the trend, analyzing oscillators and
specific analysis. The time
periods of the analyzed graphs are a month, a week, a day and 12 hours.
2.11.1. Trend identification
1) Identification of the direction of trend dynamics.
To identify the direction of trend dynamics, we use: - trend lines and
models; - simple and complex
averages; - trend lines and models
by RSI; - linear MACD; - RTR line; - lines
+/- DM; - ADX indicator.
Analysis of the monthly chart is most significant at the beginning of the new and the end of the old months. The
conclusions from the analysis can be used as reference material to determine the general dynamics of the trend, its
strength and limits of action, and possible deviations. Mandatory for use in the derivatives exchange market of futures and
options.
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Figure 2.61
Graph 1. Here we see a clear converging triangle. Now the course is in the last third of the triangle, so the
exit from it will be sluggish and contradictory. The entrance to the triangle was from above, but its end is directed
upwards, so it is impossible to unequivocally assume the direction of the exit of the course from the triangle.
Both lines of the linear MACD are pointing up and are near 0, which indicates a strong uptrend. Let's highlight
the resistance levels - 1.55 and 1.58, and support - 1.50 and 1.47.
Chart 2. The analysis of the averages shows that all averages are directed upwards. The average with the
order of 8 crossed the average with the order of 13. All this indicates a strong upward trend. But the value of
averages with orders of 8 and 13 is near 1.5050, which indicates the possibility of a rollback of the rate to the
level of these averages. The +/-DM indicator is converging, and this is the third consecutive attempt by +DM
(thick line) to get close to intersect from top to bottom with -DM. This indicates a weakening of the bullish trend.
Chart 3. Both Bollinger lines move up with a slight divergence. With such Bollinger dynamics, the rate can
move between the middle (1.5050) and the upper BB line (1.5750). There are no trend patterns on RSI. The
only thing that can be assumed is the formation of a head-and-shoulders pattern, but such a pattern will be
confirmed only if the current RSI values of the previous high (81.5) are not reached and the neck line (58.5)
returns. Chart 4. The PTR line is
directed upwards, but for quite a long time already. Therefore, it cannot be unequivocally said that the trend
is bullish. The ADX indicator is growing and indicates a strengthening of the bullish trend, but the ADX is small
enough, so it is impossible to recklessly believe in the strengthening of the trend.
Japanese candle. The penultimate candle showed that the market has no desire to strengthen the bullish
trend. The last candle showed that the market does not want to go down and even went up quite well.
Expectations for the next candle - a white candle or dodge, which indicates a bullish expectation of the market.
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Final conclusions on the monthly schedule. The trend is bullish, but weak. Strong movement
neither up nor down is expected. It is better to buy in case of breaking through the resistance lines
(1.55 and 1.58) and at levels below 1.5250. Sell from 1.58. If the rate fails to break through 1.55,
then you can sell from this level.
Analysis of weekly charts is usually made at the beginning of a new working week and serves as
reference material for the work of this week. Mandatory for use in all markets with all types of goods.
Often sets the tone for the week.
Figure 2.62
Chart 1. Here, as well as on the monthly chart, we see a converging triangle. Now the fifth line of this
triangle is being formed, which may signal an exit from the latter in the direction of movement of this line.
We can also note the strong last movement within the triangle, and this also provokes us to conclude that
the bullish exit from the triangle. But we must not forget that now the course is in the last third of the
triangle - a signal of a weak and contradictory exit. Both lines of the linear MACD are pointing up and are
slightly above 0. The fast line is preparing to cross the slow line (marked in bold) from below. We also
note the parallelism of the MACD lines and the rate chart, where the double bottom of the MACD
corresponds to the double bottom of the rate. This amplifies the signals given by the MACD. Let's highlight
the resistance level - 1.54 and support - 1.50.
Chart 2. All averages are directed upwards. This indicates a strong bullish trend. The average value of
the averages is near 1.51, which indicates the possibility of a rollback of the rate to the level of these
averages. The +/-DM indicator converges. +DM approaches to intersect bottom-up with -DM. This indicates
a weakening of the bearish trend and its possible reversal to the bullish one.
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Chart H. Bollinger lines diverge slightly in different directions. This is a signal of an increase in the course
dynamics. But there is no definite bullish trend. With such dynamics of the lines, the rate can move between the
middle line (1.5150) and the upper BB line (1.55). There are no trend patterns on RSI. One can only note the
parallelism of the dynamics of RSI and the rate - in this interpretation, this is a signal of a bull market.
Graph 4. The PTR line is directed downward and is at the very beginning of its life cycle. But the course is
very quickly approaching from top to bottom to the RTR line with the possibility of crossing it. Therefore, according
to the RTR indicator, it is impossible to unambiguously say that the trend is bearish. ADX is declining and is quite
small, so it does not give unambiguous signals.
Japanese candle. The penultimate candle showed that the market has no desire to continue the bearish trend
(an increase in low with an almost unchanged high and a body near the high). The last candle showed a strong
move up. The expectation for the next candle is a white candle or a dodge, indicating that the market is bullish.
Final conclusions on the weekly schedule. The trend is bullish with opportunities for strengthening and
breakout of the triangle. It is better to buy in case of breaking through the resistance line at 1.54. Sell if the rate
exits the triangle down at the rate of 1.50. It is not recommended to perform operations inside the triangle.
Analysis of daily and 12-hour charts is performed at the beginning of a new working day and determines the
work strategy for the day. Departure from the chosen strategy is made only when the essential market conditions
change (unexpected news of a fundamental nature arrives) or it is recognized as erroneous.
Figure 2.63
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Chart 1. In recent days, a strong upward channel has formed with very narrow fluctuation boundaries. The
movement of this channel could not be prevented by a good resistance level at 1.5350. Both lines of the linear
MACD move up strongly and are near 0 - this indicates a strong bullish movement. Resistance levels - 1.54
and 1.5450. Support levels are 1.5350, 1.53, 1.5250 and 1.52.
Chart 2. All averages are directed upwards. Just a few days before the day of analysis there was a
complex crossing of the averages. All this indicates a strong bullish trend. The value of the averages is near
1.52, but in the near future, on such a strong upward movement, there is little chance of the rate rolling back
to the level of the averages. The +/-DM indicator diverges and reached its maximum values during the
analyzed period. This indicates a strong bullish trend and the possibility of weakening this movement.
Chart 3. Bollinger lines diverge quite significantly. The rate went beyond the upper line of BB (1.5350).
With such Bollinger dynamics, the rate can move between the middle (1.52) and the upper BB line (1.54).
There are no trend patterns on RSI.
Chart 4. The RTR line is directed upwards and is approximately in the middle of its life cycle, therefore, a
reverse movement of the rate towards convergence with the RTR indicator is possible, but now this indicator
can clearly say that the trend is bullish. The ADX indicator is growing and is in the zone of maximum values.
It shows a very strong bullish market movement. Japanese candle. The penultimate
candle showed a strong bullish movement with a slight pullback from the highs of the day (short upper
shadow). Expectations of some stabilization of the rate could appear, but the last candle refuted these
expectations. The upward movement of the market continued and even intensified. A comprehensive
examination of these candles allows us to conclude that the next candle will be a short white or
dodge.
Final conclusions on the daily chart. Strong bullish trend. There is a high probability of continuation of the
movement, but after some stabilization or even a rollback, it is better to buy at levels close to the average
(1.52, and taking into account the dynamic strong movement of the averages -1.53). It is better to refrain from
selling altogether.
PHCVHOK 2.64
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Chart 1. Throughout the week, the rate has been moving in a strong upward channel. Both lines of the
linear MACD are directed upwards and are in the zone of maximum values, which indicates a strong
upward movement. The resistance level is 1.54. Support levels - 1.53, 1.5250, 1.52, 1.51.
Graph 2. Analysis of the averages shows that all averages are directed at a large upward angle.
Recently, short averages have crossed over a slower one. All this indicates a strong upward trend. The
value of the averages ranges from 1.53 to 1.52, but with such dynamics of the averages, they will quickly
reach values of 1.54-1.53. The +/-DM indicator converges from its maximum values. This indicates a
weakening of the bullish trend.
Chart 3. There is a significant divergence in the Bollinger lines. With such Bollinger dynamics, the rate
can move between the middle (1.53) and the upper BB line (1.5450). By RSI trend patterns
No.
Chart 4. The PTR line is directed upwards, but for quite a long time already. Therefore, it cannot be
unequivocally said that the trend is bullish. The ADX indicator is growing and is in the zone of maximum
values, so this upward movement may weaken soon.
Japanese candle. The penultimate candle was quite strongly bullish. The last candle showed some rate
stabilization. Expectations for the next candle - almost any, from black to white. Final conclusions on the
12hour chart. A strong upward trend with the first signs of fatigue. Expectations for the continuation of the
trend are uncertain. It is not possible to give clear recommendations for performing operations.
When receiving signals from the analysis of the monthly and weekly charts, we must take into account
the
following: - the work is in a very long position, so it does not interfere with sometimes closing and opening
later again;
- the amount of profit that we expect when opening a position is quite significant; - we can
afford to leave small amounts open at night; - the game on the basis of monthly and weekly
charts is practically not performed by daily working dealers; - the most useful information of such an
analysis is a
warning - very carefully open against long trends; - in general, the information from the analysis of the
monthly and weekly charts can rather
be considered as a reference or confirming.
Analysis of one-day and 12-hour charts is one of the main ones for work, and in general it
have the same features as the monthly and weekly charts, with the exception of:
- working against the one-day trend is much more risky; - the
position should be shorter; - the
amount of possible profit is less significant; information from the analysis is the basis for deciding on the strategic direction
work with this product.
Orders of indicators used in the analysis: averages with orders 8, 13 and 21;
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- RSI and CCI 8; - linear MACD - order 8-13-21; PTP line - 0.2; ADX indicator - 8; lines +/- DM - 8; lines BB - 21.
2) Identification of the life cycle of the trend.
To analyze the life cycle, consider a weekly chart.
Figure 2.65
According to two characteristic features (the length of the trend and the number of characteristic
cycles of decline and rise), we see that the rate is now at the last stage of its life cycle of a bullish trend
- old age. This period of a trend's life is characterized by great market uncertainty about the future
direction of movement. After some time, it may also turn out that this is already a trend reversal. But so
far nothing definite can be said. Let us note the following rules for working in different periods of the life
cycles of trends. By the way, I will note the following point - a bullish trend does not always change to a
bearish one, and vice versa.
Proceed cautiously at the beginning of the LCT, gradually increasing the number of open positions
as new confirmations are received. Act boldly and decisively in the first period of the middle of the life
cycle, not forgetting to periodically close positions ("scalp" profits). By the time of the speculative
overheating of the price change, try to close all your positions in the previous direction in order to reopen
them at the beginning of a new rise. Be most careful at the end of the life cycle, you cannot discount the
possibility that the trend will reverse quickly and unexpectedly for you.
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After receiving the results of the analysis of long charts, be sure to get confirmation of your conclusions in volume.
The same applies to all previous analysis. If the volume is not confirmed, but does not contradict the conclusions you
received, then you can also trust these conclusions.
3) Analysis of oscillators.
First of all, let's analyze the oscillators on the monthly chart.
Figure 2.66
The RSI is heading higher but low enough (66) to give any clear signals.
CCI is pointing down. It also doesn't give any signals.
The MACD-histogram is directed upwards and does not give signals about a reversal of movement
from top to bottom. The fast PKS line is trying to cross the slow line in its current movement, which
indicates a good opportunity not only for the current, but also for the next months to continue the bullish
trend.
The analysis of oscillators on the monthly chart shows the bullish potential of the market.
Analysis of oscillators on the weekly chart.
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Figure 2.67
The RSI is pointing up and is signaling a reversal of its short weekly bearish trend.
CCI confirms what we said about RSI.
The MACD-histogram is also moving upwards and is preparing to cross the zero line. You can also note the fact that
the second bottom of the histogram turned out to be less than the first one, parallel to the course chart. This indicates a
fairly confident uptrend.
PKS gives a bullish signal (the fast line crosses the slow line). Oscillators on the
weekly chart generally confirm the bullish trend. Analysis of oscillators on the daily
chart.
FIGURE 2 .68
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Analysis of the daily chart shows that:
- RSI has reached its maximum level (100) and its value is in the overbought zone, but
does not yet give signals about a market reversal;
- CCI is also in the zone of maximum values, but not as much as RSI. This indicator is simply directed upwards
and is still far from the previous maximum. In this case, we observe a classic situation when the rate remained flat for
some time or even went up, while the oscillator played back. This fact only strengthens the conclusions about the
strong bullish sentiment of the market; - MACD-histogram is steadily going up, having reached the maximum for the
analyzed period
values. This indicates a good move up;
- both PK.S lines are directed upwards. The fast line is preparing to turn down and speaks of
possible market reversal. But now there are no downward signals.
The result of the analysis of the daily chart oscillators is the conclusion that despite the fact that the exchange rate
is in the overbought zone, the oscillators still do not give signals for a rollback.
Analysis of oscillators on a 12-hour chart.
Figure 2.69
Analysis of the 12-hour chart oscillators: - RSI
reached its maximum and turned down, which gives the first signal about the market turning down; - CCI is also in the
zone of
maximum values and turned from top to bottom. This speaks of
possible market rollback;
- MACD-histogram starts to decline, having previously reached the maximum values for the analyzed period. The
indicator gives a pullback signal; - both PK.S lines are slightly directed upwards.
The fast line is preparing to turn down and speaks of
possible market reversal. But now there are no downward signals.
Summarizing the analysis of the 12-hour chart oscillators, we note that the rate is in the overbought zone and the
oscillators begin to give signals about the market reversal, which indicates the possibility of a rollback or temporary
stabilization. The result of the oscillatory analysis can be
the following generalization. Long charts (monthly and weekly) confirm the bullish
mood of the market, the daily chart indicates the approach of a possible rollback or stabilization of the rate, and the 12hour chart is already giving the first signals of the rate rollback after a strong bullish movement. In general, in order to get
some reliable conclusions about the market, it is necessary to combine the conclusions obtained from trend analysis and
oscillator analysis.
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4) Final results of the analysis.
The result of the analysis will be the creation of the following table.
Table 2.1
trend
Oscillator
month
a week
day
up
up
up
Specific Analysis
force
force
direction
direction
weakly
strongly
strongly
up
up
up
Total
medium
medium
weak
"japanese
resistan
candles"
se
white or
DOJ
1.55
1.50
and 1.58
and 1.47
white
1.54
1.50
white
1.54
1.53,
and 1.5450
1.525 and
1.54
1.53,
support
UP
UP
UP
1.52
12 o'clock up
strongly
down
medium
any
1.525 and
FAST
UP
1.52
Total
1.53
UP HIGH UP MEDIUM WHITE 1.54 and
1.55
UP
and 1.52
Thus, we have obtained a final assessment of the market, based on three different methods of
analysis (trend, oscillator and specific) and using 12 indicators. In this example, the indicators were
surprisingly unanimous, but this is not always the case. In such cases, it is necessary to compare the
strengths of various indicators with the conclusion of the final score. If there is a contradiction in the
conclusions for different time periods, then it must be remembered that the strongest signals will be
received on longer charts, but they may appear later than shorter ones. Therefore, react first to short
charts, but keeping a different scenario in mind at all times. You will have to react at any time to changes
in the situation, because you already have a plan.
Now let's see how events unfolded next week and how right or wrong
we were right.
Figure 2.70
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On the whole, it can be noted that our forecast was justified - the week turned out to be upward, and
the first upward movement of the market upon exiting the triangle looked like a flying cork of champagne.
But the market has not been able to gain a foothold on the milestones reached (very short white body on
the indicated day of the maximum). Fundamental reasons influenced the fall of the dollar against the
German mark, but even they could not break the strong bullish trend. Moreover, the lower point of the
rate's fall was the resistance level, which we marked as the nearest one - 1.S300. In the longer term, the
dynamics of the USD/DEM exchange rate looked like this (let's take
until 01/03/97).
Figure 2.71.
The conclusions on Japanese candlesticks at all periods of the analysis turned out to be correct. The
exit from the triangle was initially weak and indecisive, but later there was a strong movement in
continuation of the trend. The resistance level at 1.58 was passed quite quickly and the rate fluctuated in
the range from 1.58 to 1.60 for some time. The life cycle of a trend is similar in nature to the second stage
of the life cycle, which means that the previous conclusion that the price is in the third stage of life cycle is
incorrect. In general, the results of the USD/DEM analysis over a long period can be considered satisfactory.
2.11.2. Identification of the moment of the conclusion of the transaction
After you have assessed the direction, strength and life cycle, thereby determining the strategy of work,
It's time for tactical decisions. You start choosing the moment of opening a position.
It is very important to accurately enter the market exactly at the moment when it is most profitable. This
can help you close with minimal losses if you are wrong with the direction of the trend (and there is always
a possibility of error, even if you are a genius). If you are not mistaken with the trend, then even then you
should use the moments to "scalp" the profits, because on any, even a very strong movement, there is
always a "rollback" of the rate by 20-30 points. You can also take short-term positions to open them against
the trend or in the absence of a trend. In this case, the ability to find the moment to conclude a deal is
simply irreplaceable.
Let's make an approximate analysis of GBP/DEM dynamics for the period from 29/10/96 to 01/11/96. in
order to identify the moments of opening a position. Here we will specifically work with a different currency,
and not with the one we analyzed above. This
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will really make it possible to feel the disadvantage of using only "short" schedules (up to an
hour) in practice. To select
the moment of making a deal, we use: - analysis
of simple and complex averages; oscillators (we use classical analysis) - PKS, RSI, CCI, MACD-histogram; - linear
MACD; - Bollinger
lines; - RTR line;
- indicator +/DM; - ADX indicator;
- indicators of
volume. We select
the time interval for the analysis of short trends from 15 to 5 minutes (it is possible to use one time
interval of 8 minutes). When receiving signals when
analyzing current prices, we must take into account the following: - your main
desire in this position will be to make a better deal on
compared to what you would do simply because something needs to be done;
- if you decide to play very short ("scalping" the market is recommended with an absent or sluggish
current trend), then do not keep such a position open for more than 3 hours. This method of work is
actively used by experienced traders.
Recommended order of indicators:
- simple and complex averages - the order of averages
55, 89.144; - PKS with
order 5/5/5; - RSI and
CCI with order 8; - linear MACD and MACDhistogram - 8/13/21; - indicator
ADX and +/-DM 8; - RTR line - 0.2; - Bollinger lines -21.
Figure 2.72
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In this figure, we see a standard situation when, after a strong movement, the rate stopped
for a while and even made a slight rollback. How confident is it to conclude any deal in this
situation? Let's try to answer this question.
Buying after such a strong downward movement is a big question, and the latest movements
of the +/- DM and ADX indicators completely reject this possibility (the first went to the next
intersection of +DM with -DM, and the second does not confirm the bullish attempts of the market
with its decline). The volume reading confirms our conclusion that the market is unwilling or
unable to go up now (upward divergence).
There are also no signals for selling yet. Oscillators are not yet giving signals to open down,
only the MACD-histogram starts to unfold from top to bottom.
Based on the foregoing, we can conclude that you should look for a moment to sell,
but the conclusion of the transaction should wait.
10 minutes have passed (two candles of five minutes each). The situation has changed a lot.
Figure 2.73
It is possible to note a diverging triangle with an entrance from above and already formed five
lines inside the triangle. This suggests going down rather than up. The course has closely
approached the RTR line for crossing from top to bottom. The fast stochastic line crossed the
slow one. The fast MACD line turned down. The MACD-histogram has already gone down quite
confidently. In general, all indicators either give a sell signal or do not refute it. Volume confirms
the move down. At the moment, you can decide to sell the pound against the mark. But purely
technically, it is better to sell after exiting the diverging triangle and breaking through the
resistance level at 2.4340. Now the course is just on this line.
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Figure 2.74
On the upper right chart of this figure, we see the moment of selling the pounds against the mark
marked with an arrow. Now we are faced with the task of closing the position in a timely manner so as
not to lose the already received profit and try to take the maximum out of this transaction.
Now the rate has reached the level of 2.43 and it is possible to close the position and make a profit
of about forty points (2.4340 - 2.43). At the moment, it would be better to close the position at the current
quote, because both the oscillators and the MACD-histogram have already reversed upwards, while the
ADX indicator has fallen to its minimum values. All this speaks of the difficulties in continuing to move
down. In this position, you can even think about buying, the only limitation for this action is the fact of a
strong bearish trend.
The example of a transaction considered here is an example with a positive result. But in your
practice there will be losing trades. The rules for exiting a losing position are similar to the rules for
closing profitable positions.
2.11.3. Establishing a plan to maintain and close a position
When opening a position, you must have a plan of your actions without fail
(preferably in writing), i.e. you will need to be clear about:
- the rate at which you would like to close (+/- 5 points) - take
profit; - the time during which you would like to keep this position
open; - the rate at which you will close if you incur losses stop loss. Deviations from a predetermined plan are possible only with sufficient
confidence in a positive course change for you, otherwise you risk not only losing profits,
but also being in big losses.
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Additions to the position maintenance
plan. 1) If during the time allotted by you in the plan before closing the position, the price turns out to be
more profitable than the one at which you opened, i.e. you make a profit - and at the same time:
- analysis on the same time period continues to confirm what was originally done when
opening output in the direction of the trend - stay open;
- analysis no longer confirms anything, but does not contradict anything either - close most of the open
positions;
- if the analysis begins to contradict the conclusions made earlier, then it is better to close all
positions until the situation is clarified.
2) If the price is holding at the same level when you opened, and at the same time: the analysis continues to confirm the conclusion made initially at the opening of
direction of the trend - close part of the positions;
- the analysis no longer confirms anything, but it does not contradict either - it is better to close most of or
all open positions;
- if the analysis begins to contradict the conclusions made earlier, then close all positions up to
until the situation is clear. 3)
If the price change leads to losses, and at the same time: - the
analysis continues to confirm the conclusion made initially at the opening of the
direction of the trend - close part of the positions;
- the analysis does not confirm anything, but does not contradict either - close all open positions; - if the
analysis begins to contradict the conclusions made earlier, then close all positions and
evaluate the possibility of playing against the direction you originally chose;
- if the price has changed below the threshold, below which you no longer want to carry
losses, then close all positions, no matter what conclusions the analysis gives you.
Once again, it should be noted that the analysis should contradict or confirm only on the same
the period of time on the basis of the analysis of which you made the discovery.
2.11.4. Features of determining the moment
of closing Close open
positions: - after the expiration of the estimated time - use the rules to determine the
moment
of opening; - upon receipt of the estimated profit - just close the position at the desired rate, but
necessarily using the rules to identify the moment of opening; - when
receiving an estimated loss - act as if receiving an estimated profit; - upon reaching the maximum
profit - but first, evaluate whether this is the truth of the maximum profit; - close the position if you see
that you can later make a deal at a better price,
this will save you from unnecessary worries and save money and nerves.
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2.12. Specific analysis 2.12.1. Japanese candles
(Candlesticks) The oldest known technical analysis method, originating in 18th century Japan to
predict the future price of new crop rice. He gained a second youth in the 80s of our century with the
rapid growth of the forward exchange market of futures and options. The
following main eleven types of candles can be distinguished:
All other candles are a kind of modification of these, due to lengthening or
shortening bodies and shadows.
If we take each of the candles separately, then we can highlight some inherent in them
features that must be used in practice.
Table 2.2
Candle type Desire (trend)
Opportunities (trend strength)
Total expectations for the next candle
excellent strength good strength
weak strength strength not
black candle black candle or dodge
candle number 4, 8 or dodge any of
the possible
any
The trend is down, "bears"
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determined
56
78
Up trend, bulls
9 10 AND Trend not defined
excellent strength weak
strength good strength
strength undefined
any white candlestick number 4,
8 or dodge white candlestick or
dodge any of the possible
force not defined force
rather up force rather down
any of the possible more white
candle more likely black candle
Candlestick analysis is based on the following three
principles: - the power of negation - if the market does not go in the expected direction, then the more
confident it will go in the opposite direction. Many classical combinations of candles are based on this principle,
but at the same time, its practical confirmation on the next candle is mandatory;
- strength of the body - the longer the body, the stronger the desire to go in the chosen direction. For a
white candle - go up, and for a black one
- down; - the strength of the shadow - the shorter the shadow on either side, the more opportunities to continue
movement in this direction.
The combination of these principles makes it possible to independently derive more than one law of analysis
Japanese candles.
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Figure 2.75
The Appendix to the book contains the main combinations of candles that meet generally accepted
standards. For a more in-depth analysis of Japanese candlesticks, I recommend that you study the special
literature on this issue. For
example, I will give several charts using Japanese candlesticks with a brief description of them.
analysis.
Figure 2.76
2.12.2. Construction and analysis of Fibonacci lines and periods and Gann lines
1) Analysis of Fibonacci lines.
Leonardo Fibonacci was one of the best mathematicians of his time and lived between 1100 and
1200 of our century. He put forward a number of new mathematical ideas, one of which was the series
of natural numbers. Each number of this series was the sum of the two previous numbers: 1+1=2;
1+2=3; 2+3=5 etc. This eventually led to the next number series - 1,2,3,5,8,13,21,34,55,89,144, etc.
Fibonacci derived his series by observing the perfect proportions of the great Egyptian pyramids.
The division of any two adjacent numbers from the Fibonacci series resulted in an average of 0.618,
which was considered the number of the golden ratio in ancient Greek and ancient Egyptian cultures.
It was this number that became the basis for the use of Fibonacci lines in technical analysis, where
0.618 turned into 61.8%.
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Angular Fibonacci lines are three lines built on the basis of the [A-B] line plotted on the price chart.
The line [A-B] is drawn from the key points of the chart, its turning points - price highs and lows. For the
best use of Fibonacci lines, it is recommended to draw the specified line [A-B] when the bullish trend
reverses from the maximum to the minimum, and when the bearish trend reverses from the minimum to
the maximum. It should also be taken into account that the Fibonacci lines constructed in this way are
fixed and, in case of a sharp change in the situation, they may need to be built again, based on the new
line [A-B]. As you can see in the figures below, the line [A-B] is the diagonal of the rectangle (dashed
lines), inside this rectangle, lines parallel to the time axis are plotted at the level of 61.8%, 50% and 38.2%
of the total value of the square. The points of intersection of these lines with the right vertical side of the
rectangle (marked with circles) will give us reason to draw the Fibonacci lines. What do the Fibonacci
lines constructed in this way say? Fibonacci lines show strong resistance and support levels. In a bear
market, this is usually the resistance line, and in a bull
market, it is the support line. Moreover, you can see that these lines continue their action much longer
than the trend on the basis of which they were built. There is one significant drawback of Fibonacci lines
- they give clear and good signals for the past market, which cannot be said for the future. It should also
be noted the subjectivism inherent in Fibonacci lines, because there is no unambiguous law of the market,
which says that the price will definitely find its support or resistance on one of the Fibonacci lines, in
nature.
In the first picture, we see the Fibonacci lines built on the weekly chart of the Japanese yen against
the US dollar. The lowest Fibonacci line was a very good resistance level in a bearish trend. But when
the trend ended, and it was at this moment that we built the indicated lines, the lowest Fibonacci line
could not provide adequate resistance to the strong bullish movement of the rate. However, the second
two lines as a whole were some lines of resistance.
Figure 2.77
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In the second picture (the daily chart of the German mark against the US dollar), two types of
Fibonacci lines are built - for the bearish trend and for the bullish trend that replaced it.
The lower two Fibonacci lines, built on a bearish trend, were good resistance levels for the future
market, and the upper line was a support level after it was quickly broken. After exiting the rectangle of
building
Fibonacci lines based on a bullish trend, you can see that the rate subsequently moved within these
Fibonacci lines. Here we see an example of building Fibonacci lines on a trend that has not ended yet.
In fact, when we plot Fibonacci lines, we still cannot know if the trend has reversed or if this is just a
temporary rollback.
Figure 2.78
2) Analysis of Fibonacci
periods. Fibonacci periods are a series of vertical lines corresponding to the Fibonacci number
series. These lines symbolize key moments in the course dynamics. It can be either a trend
reversal, or an acceleration, or just a temporary strong movement.
When constructing Fibonacci periods, the rule of the Fibonacci number series is used, where
the distance between the indicated vertical lines is the sum of the previous two distances (similar
to the Fibonacci numbers, where 5+8=13,
8+13=21, etc.). When analyzing Fibonacci periods, the first three lines
are usually ignored. In order to build a Fibonacci period, you need to mark one of the key
moments, in your opinion, on the chart (in our figures, such moments are marked with a thick
solid line). Further construction of Fibonacci periods will happen automatically for those who have
at their disposal a program that allows you to build Fibonacci periods. Who does not have such a
program, the construction of Fibonacci periods is
difficult. Figure 2.79. a weekly chart of the Japanese yen against the US dollar is shown,
where the solid thick line marks the beginning of the construction of Fibonacci periods. The dotted
lines mark the first three Fibonacci periods, for analysis of the game
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burrowing. The circles mark the places of good signaling of the indicator about the market reversal.
In all other cases, the Fibonacci periods did not coincide with significant movements in the rate, but
in general they gave at least short-term signals.
The second figure shows two groups of Fibonacci periods.
Bold solid lines mark the places of the beginning of these groups of periods. Less bold solid lines
are the places where the periods from the two groups coincide. Thin solid lines are plotted over the
period of one group. The circles mark the places where the key moments in the course dynamics
coincide with the Fibonacci periods.
In general, it can be noted that Fibonacci periods are a good signal of the possibility of a key
moment, starting from the third period, sometimes from the second period.
Figure 2.80
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3) Analysis and construction of
Gann lines. William D. Gann (1878-1955) was a legendary stock and commodity trader. He
was one of the first to use the principles of mathematics and geometry for analysis, which
contributed to the success of his
practical activities. The relationship between time and price is the basis of Gann's work. The
most important in the construction of the Gann lines is the 45-degree line (the ratio between price
and time is 1 to 1, marked in the figures by a thick solid line). Any intersection of the price chart
of this line signals a strong trend change. The full range of Gann lines includes the following 9
lines:
Table 2.3
TIME
1
1
1
1
1
2
3
4
8
PRICE
X
X
X
X
X
X
X
X
X
8
4
LINE, in degrees 82
1/2 75
71
1/4 63
3/4 45
26
1/4 18
3/4 15
7
1/2
=
=
=
3
=
2
=
1
=
1
=
1
=
1
1
=
The most important lines are the middle five - from [71 1/4] to [18 3/4] inclusive.
When drawing Gann lines, it is necessary, as well as when drawing Fibonacci periods, to
choose a key moment from which the above lines will be drawn. Gann lines are good lines of
resistance and support, although their construction naturally shows the subjectivity of the
analyst. In the figures below, you can see some examples of building and analyzing Gann
lines.
Figure 2.81. it can be seen that the rate as a whole is inside the Gann lines, constantly
tending to the 45-degree line during the action of one trend.
Figure 2.81
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Figure 2.82 shows two sets of Gann lines, and we also see the trend towards the 45-degree
line. The most difficult thing when plotting Gann lines is to determine the key moment. As a rule,
if the course goes beyond the Gann lines, then a mistake was made in choosing a reference
point. Although short-term strong price fluctuations are also possible, which can knock the course
out of the usual rut of changes for a short time.
Figure 2.82
2.12.3. Construction and analysis of "tic-tac-toe"
The author of plotting a tic-tac-toe chart (points & figures) is Charles Dow
(founder of the famous Dow Jones index).
First used in 1886, starting in 1901, this method of analyzing price movements began to gain
popularity in the United States and remains one of the most popular among American traders
today.
When constructing this chart, only the absolute price change (for example, by 10 points) is
taken into account, regardless of the time period after which it occurred.
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Figure 2.83
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Now let's look at some practical examples:
Figure 2.84
in this figure, we see that along with the correct signals, tic-tac-toe also gives false signals,
although their number is relatively small. Bold solid lines mark strong resistance and support
levels. With the help of the tic-tac-toe chart, it is sometimes much better to see a strong
resistance level or support than on a simple line or bar chart.
Figure 2.85
Thus, we can single out two positive qualities of such information display - in general, fairly
reliable buy and sell signals and getting good resistance and support levels.
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2.13. Dynamic technical analysis 2.13.1. origins
dynamic technical analysis
Almost all of the technical analysis described in previous chapters is inherently static, as it is based
on the latest price and does not take into account the current price dynamics. As a rule, while such a
technical analysis is being carried out, the situation changes and it becomes necessary to clarify the
conclusions just obtained, and so on ad infinitum. Static technical analysis is ideal for analyzing
commodities after the close of the market when there is no trading, but it suffers from limitations for the
24/7 FOREX currency market and during stock exchange sessions. Therefore, it becomes necessary to
supplement it with a dynamic
technical analysis.
The basis for dynamic analysis is the principle that George Soros in his book "The Alchemy of
Finance" called the law of reflexivity. Its essence is that any price change affects the behavior of market
participants and pushes their actions in one direction or another, thereby provoking a subsequent price
change.
The full scheme of the dynamic analysis action is as follows.
First thoughts about the market.
1) The market has an initial state of price I.
2) Each of the market participants, in the course of static technical analysis, fundamental research,
or other considerations, has their own thoughts about where this price may change in the future. We
note right away that even the right thoughts are not always confirmed by the actions of the market, so
we will avoid the definitions of "correct" - "incorrect" thoughts. 3) Depending on the strength of these
thoughts, self-confidence or
general impatience, the market participant has a desire to make a deal or remain "square". 4) Desire
is transformed into action or inaction, respectively. 5) By the time his desire was
being transformed, the price had already changed (someone was more
impatient or more self-confident when performing an action).
6) This price change either confirms the participant's thoughts, or does not confirm, and perhaps
even refutes.
7) Thus, the participant's thoughts were externally influenced by new information. If the
participant's thoughts have not been refuted by the market, then the desire of the participant is
transformed into reality - making a deal or passively observing the
market. Passive market analysis takes us back to the beginning of this cycle until the
the willingness of a market participant to make a deal.
After the deal.
8) By the fact of the conclusion of the transaction, the participant expressed that he thinks about the
future state of this price. This action of his, thus having an impact on the price, albeit insignificant, had
an impact on other market participants. True, we must not forget about the parallel actions of market
participants - if one sold, then the other
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definitely bought. Therefore, the fact of a price change is taken into account: the more significant such a
change as a result of the transaction, the stronger the desire of one of the parties to conclude this
transaction. If compared with the previous price, then one will make a deal at a better price (which is
natural), and the other at a more disadvantageous one. What should have provoked the second
participant to conclude a deal at an unfavorable price, we will answer right away - only his great desire
to conclude it. We list the factors that influence the strengthening of the desire of this participant:
- psychological factor - protracted passive observation of the market. The longer a person remains
"square", the greater his desire to make a deal. But this is an indicator of the trader's unprofessionalism,
so such a person either becomes a professional and controls his emotions, or leaves the market. There
are few non-professional traders on the market and the influence of this factor on the market is
insignificant; - conscious factor analysis of the situation in such a way that the price of the transaction in a short period of time will be
profitable. The most numerous group of transactions is based on the action of this factor;
- forced circumstances - a market participant, due to some circumstances, is forced
to have a deal. 9)
Thus, one action of a market participant produced two consequences at once - it showed the whole
market his thoughts about the future state of the price and changed the previous price in the direction of
this thought. That is, if I think the price will go up, then I should go long and buy. Thus, I raise the price
and set, albeit for a short period of time, the direction of price dynamics that I need, and I also show that
I am playing for an increase. The more I raised the price relative to the previous quote, the greater the
overall impact of this transaction on the market. 10) Based on the totality of actions of individual market
participants, a general direction of price dynamics is formed. The greater the general cumulative
desire to play in one particular direction, the greater will be the effect it produces and the overall impact
of the transactions produced on the market. Thus, we will observe a self-reinforcing process. All that will
be required of us is to evaluate the direction of action of desire and its strength (how to evaluate them,
we will consider later), and then enter the market in the right direction. 11) Now let's note how the actions
already taken affect the market. If a market participant
receives confirmation of his thoughts, then this strengthens his desire and pushes him to make a
deal, thereby strengthening the process of price movement. An already "open" trader will either remain
open or will make another deal in the direction he has chosen earlier. Therefore, he, at least, will not
interfere with this movement, and even, if possible, help. The same trader who has remained "square"
before will choose the moment to make a trade. 12) If the trader turned out to be "open" in the opposite
direction and initially does not receive confirmation of his thoughts, and
then generally observes a refutation by him, then after some time he will simply close his position with
a loss. Thus, at first he will not contradict this movement, but then he will even help him when he closes
his deal. If the actions of the first and second trader at this moment coincide, then we can expect a
mandatory acceleration of the price dynamics. The total number of market participants initially "opened"
in the "wrong" direction will decrease over time, but being replaced by other participants.
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Closing the deal.
13) Before concluding a deal, each of the market participants clearly imagines the closing price of a deal with a
profit - the so-called stop profit. The more similar ideas on this account all market participants have, the higher the
probability of the price stopping at this particular mark. Until this rate is reached, the process will either be reversed
(go in the opposite direction and incur losses) or self-reinforcing. Only shortly before reaching this mark, selfamplification will stop and turn into a weakened and sluggish continuation of the trend.
14) In the case of a reverse (opposite) price movement, the trader waits for the situation to change for the better
until a moment determined by him. If the situation does not improve, then he closes the deal at a loss. The more
market participants have determined the same price level to close unprofitable positions, the higher the probability
of self-amplification of the price movement at this very moment with a possible push of the price above this level,
bringing additional losses to these traders.
Self-reinforcement of the price movement process.
15) Self-strengthening occurs when:
- joining new like-minded people. Moreover, initially the inflow comes from its own
ranks, and then from the camp of anti-thinkers;
- at the level of one trader - the conclusion of new transactions, as a rule, leads to a price movement
stop profit in the direction greater than the initial level;
- unwillingness of opponents to conclude transactions at current prices with a given price dynamics
(inaction is also an action); - massive
closing of unprofitable positions by anti-mooners. 16) A self-reinforcing
process is characterized by a sharp unidirectional change in quotes
with an increase in the number of transactions.
Based on all of the above, we are faced with the task of assessing the direction of action of desire
majority of market participants and its strength.
2.13.2. Analysis of the desire of the market, its direction
and strength The purpose of the analysis is to determine the direction of the desire of the market and the
strength of this desire. The objects of analysis for us are the rate of price change, measured by the number of transactions, and
the mass of the change, defined as the difference between the previous and current quote.
In the initial flat position, the desires of all market participants are proportionally equal, i.e. the number of
traders willing to buy is equal to the number of traders willing to sell. The longer the flat lasts, the narrower
the limits of price fluctuation and the limits of getting a stop profit.
But over time, this ratio begins to change. The boundaries of fluctuations are expanding and
Limits of receiving a stop-profit increase. The total number of transactions also increases.
After some time, the general direction of price dynamics appears and a self-reinforcing process begins.
Further, this process weakens,
a rollback occurs and the price enters another flat.
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In the course of all the above movement of the market, it is simultaneously affected by the
desires and active actions of bulls and bears. Passive actions of "square" traders do not have
a strong impact on the market, and it is not possible to calculate them. Thus, we constantly
observe a kind of tug-of-war between bulls and bears .. It remains only to calculate which of
them is currently pulling this rope more strongly and whether its grip is weakening. The
reference point in the movement of the rope is the previous last quoted price. Each subsequent
movement of the rope in one direction or another shows the simultaneous effort of one of the
market participants to pull this rope over. The sum of these efforts makes it possible to assess
not only the momentary, but also the general direction of the trend, as well as its strength.
One tick of price change gives an idea of the market preferences of only two market
participants. The next sequence of these ticks already shows the mood of all market participants.
But only by connecting the feedback effect to the tick sequence (described in detail in paragraph
2.12.1) can we really assess the dynamic change in the desires of traders. The indicator
calculated on the basis of the above material, I call the "Rope". Schematically, the "rope" looks
like this:
The calculation of the "rope" consists of the following successive stages. 1)
Evaluation of the strength of bulls and bears, including:
- Calculation of the static strength of bulls and bears on the last corresponding tick; comparison of the static strength of bulls and bears to identify the strongest party in a given
moment (we find the direction of the effort and the force of its action in a given direction);
- calculation of the dynamic change in the strength of bulls and bears, which gives us the opportunity to evaluate - not
is any of them weakening;
- comparison of the dynamic change in the strength of bulls and bears to identify the strongest
parties over a long period of time.
But being physically stronger does not mean becoming a winner. A more nimble opponent can achieve better practical
results due to the speed of blows. It looks like a fight between a heavyweight boxer and a little karateka. Hence the need
arises to calculate and compare the mobility of batches. 2) Evaluation of the mobility of bulls and bears, including: calculation of the frequency of blows by parties of bulls and bears
on the enemy (under the blow of a bull or a bear
here we mean a positive or negative tick rate change, respectively); - comparison of the frequency of strokes;
- calculation of the dynamic
change in the frequency of strokes; - comparison of the
dynamic change in the frequency of strokes. A mobile and
strong fighter can lose to a more professional one, so one dimension
the strength and speed of the "blows" of the market at a price is not enough, it must be backed up by the calculation of skill.
3) Evaluation of the professionalism (skill) of bulls and bears, including: - calculation
of the skill of bulls and bears; - comparison
of static skill; - calculation of dynamic
change of skill;
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- comparison of dynamic change of skill; 4) The final assessment of bulls and
bears, including: - static assessment;
- dynamic evaluation; general assessment of
bulls and bears.
Evaluation of the strength of bulls
and bears. We calculate the strength of bulls and bears in a static state using the following formulas. Sat =
SPIi, where Sat
is the strength of
the bulls; SPIi - the sum of positive changes for the analyzed period of time. Cm = SOIi,
where Cm is the
strength of the bears;
SOIi - the sum of negative changes for the analyzed period of time. Comparing the
obtained values \u200b\u200bSb and Sm with each other, we get which of the two parties in the last
time is stronger - bulls or bears. If Sat >
Sm, then bulls are stronger than bears. If Sb < Sm,
then bears are stronger than bulls. Comparing with
each other the change in the values of Sb and Sm in time, we will obtain data on the strengthening and weakening
of the observed opponents. If the current value of ÿÿ (ÿÿ) is greater than the previous one, then this indicates the
strengthening of the bulls (bears), otherwise, their weakening. Having analyzed
simultaneously the static state of bulls and bears, as well as the dynamic
changing this state, we can get the final assessment of the strength of bulls and bears.
If Sat > Sm and (Sb1 - SbO) > (Sm1 - SMO), then this indicates the overall growing strength of the bulls
(here index 1 marks the current value of the force, and index 0 the previous value). If Sb > Sm and (Sb1 - SbO) <
(Sm1 - SmO), then this indicates a general, but falling strength of the bulls. If Cb < Cm and (Cb1 - CbO) >
(Cm1 - CmO), then this indicates the overall, but falling strength of the bears. If Cb < Cm and (Cb1 - CbO) < (Cm1
- CmO), then this indicates the overall growing strength of the bears. Evaluation of the mobility of bulls and
bears. The mobility of bulls and bears in a
static state is calculated by the following formulas. Pb = KPIi, where Pb - the mobility of the bulls; KPIi - the
number of positive
changes over the analyzed
period of time. Pm = KOIi, where Pm is the mobility of bears; KOIi - the number of negative
changes for the
analyzed period of time.
Comparing the obtained values of Pb and Pm with each other, we get an analytical
assessment of which of the market parties - bulls or bears - is more mobile and, accordingly, has a greater influence
on the situation on the market.
Further, the dynamic analysis is carried out similarly to the one we considered above in the analysis of the force with
relevant conclusions. Evaluation
of the skill of bulls and bears.
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The skill of bulls and bears in pursuing their policy on the market is manifested in the following
formulas:
M b = SPI1 / KPI1;
Mm = COH1 / KOI1.
All subsequent static and dynamic analysis of skill is carried out similarly.
considered by us above in the analysis of strength and mobility with the corresponding conclusions.
The final assessment of bulls and
bears. The final assessment of bulls and bears is the sum of the results of the analysis of strength, mobility
and skill of bulls and bears.
If Sat > Sm, Pb > Pm and Mb > Mm (subject to the dynamic ratios that were given above), then bulls are
much more preferable in their movement than bears and it is worth considering only buying options.
If at least one of the above inequalities has an opposite sign (<), then the movement of the bulls is not
as confident as it might seem at first glance. In this case, you can also consider options for sale.
If Sb < Sm, Pb < Pm and Mb < Mm (subject to dynamic relationships), then the bears
much better than bulls. Only sale is desirable.
If at least one of the above inequalities has an opposite sign (>), then the bearish movement is not so
strong and buying options can also be considered. In the real example
below of GBP/USD dynamics for the period from 25/11/96. to 27/12/96
we will consider the full range of analysis of the "rope" indicator.
BULL - bull market;
**
- BEAR - bear market;
***
- MINIBULL - weak bull market;
****
- MINIBEAR - a weak bear market.
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In this example, we see the first reversal of a bullish trend to a bearish one marked with color and an oval.
This was accompanied by the general indicator fluctuating from bullish to no trend (see rightmost column) and
confirmed by the dynamic part of the indicator (see columns under the heading "DYNAMICS"), which began to
fluctuate from a weak bullish to a weak bearish trend. In the second highlighted spot, you can see the bearish
market reversing to the bullish side. Although the signal received at the moment from the indicator was fuzzy and
not suitable for practical use.
Here we see that the static part of the indicator is more stable and changes only after long-term market
changes. So, in the given example, the static indicator in the period from 02/12/96. to 08/12/96 fluctuated from a
weak bullish to a bearish trend, then turning into a prolonged weak bullish trend. The dynamic part of the
indicator is more mobile and reacts much faster to trend changes, although false signals may also occur due to
frequent volatility.
Below we will consider an example of graphical analysis of the "rope"
indicator. For human perception, this method of analysis is much clearer and more convenient, so we will pay
special attention to it.
Figure 2.86
The USD/DEM half-hour chart gives us the opportunity to observe both the signals coming from
the indicator itself and the signals given by the average.
First of all, I would like to note the following rules for graphical analysis of the "rope"
indicator. A) Signals given by the average, built on the indicator (order
8). 1) Bullish divergence and bearish convergence. In the above figure, we can see a classic
bullish divergence signal when the second top of the average for the indicator was lower than the
first, and the second top of the price was higher than the first. 2)
Parallelism, unidirectional dynamics of the average and prices. Confirms the current trend.
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3) The position of the average above the zero line indicates the bullish mood of the market, when it is better to look
places to buy. 4) The
position of the average below the zero line indicates the dominance of the bears on the market at the moment.
This is the best time to make a sale.
5) When the average is near the zero line for a long time, then the market has the possibility of a sharp exit in one
direction or another. Get ready to make a deal. The convergence of the average to the zero line after sharp fluctuations
up and down also warns of the possibility of a change in the price level.
6) Intersection of the average with the zero line. Gives buy signals if the average crosses the line
zeros from the bottom up, and sell signals - if the average crosses the zero line from top to bottom.
B) Signals given by the indicator itself. 1) Find the key
points corresponding to the maximum values of the "rope" indicator (marked on the indicator chart by thick vertical
lines, and on the price chart - by black circles). If the indicator has taken the extreme upper position, then the optimism
of the bulls is at the peak of its capabilities. This is a sell signal. If the "rope" is at its lowest point, then this can serve
as a signal to buy. The "rope" gives the best signals on a strong trend, warning about extreme points, corresponding,
in the terminology of oscillators, to overbought and oversold zones. This rule does not work in a flat market, when
small price changes have a significant impact on the indicator's dynamics.
2) Bullish divergence and bearish convergence. It is checked when considering two adjacent values of the indicator
and the price. As a rule, this signal anticipates the price dynamics for a short period of time. C) Signals given by the
interaction of the "rope" and the
average of the indicator. 1) If the dynamics of the average and the indicator itself are
multidirectional, then this is a characteristic of a weakening trend. 2) The position of the indicator for a long time
below the average
indicates the strength of the bearish trend. But if after that the indicator rises above the average, then be prepared
for a trend reversal. It's time to buy. 3) If the "rope" is above the average for a long time, then the bullish trend is strong.
At the first
If the indicator falls below the average, get ready to sell - an early trend reversal is possible.
4) Buy when both the average and the rope move up and the average is also positive. Sell when the average and
rope are down at the average
below zero.
D) Signals from the intersection of two averages (on short charts - averages with orders of 8 and 34). 1) A buy
signal occurs when a short average crosses with a longer one from the bottom up. 2) Sell should be after
crossing the short average long from top to bottom.
Let's take a look at how the above rules work on a 5-minute USD/DEM chart.
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Figure 2.87
Here we see signals of the intersection of two averages. White circles indicate buy signals,
black - sales. These signals are valid for half an hour.
The bearish convergence twice signaled a suspension or reversal of the bearish trend. But both
times the effect of the discrepancy was short-term. In conclusion, there was an important break of the
support line, based on the weakening of the bulls.
The strongest signal was the dynamics of the average with the order of 34. The fact of the intersection of the average (34) with
the zero line from top to bottom is marked with a square. It was a signal of a long bearish trend.
Figure 2 88
On this five-minute chart, you can see that the market was bearish almost all the time (the averages
and the indicator were mostly below zero). The bearish convergence and bullish divergence signals
were correct, but a bit late.
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The extreme values of the indicator showed quite well the extreme moments of the price movement. In the
previous figures, much attention was paid to the analysis of averages, and now we
Let's consider the analysis of the indicator itself.
Figure 2.89
Only one type of "rope" signal is taken into account here - its reversal. In general, he gave rather confident buy
and sell signals. Although it is necessary to take into account the fact that the signal appears only at the end of the
analyzed period of time and the decision on the transaction will have to be made on the next "candle" (meaning the
next period of time). But this minus is conditional. First, a buy (sell) signal can warn you against selling (buying,
respectively) and the losses that follow. And, secondly, it is on the next "candle" that you can get confirmation of the
previous signal. It should be noted that the "rope" indicator considered in the example of Figure 2.89 and the average
(8) built on it were almost always below
zero, which indicated the strength of the bearish trend. Therefore, sell signals were preferable, and the purchase
had to be used only as a "scalping" of profits (closing previously opened profitable positions).
2.13.3. Rules for calculating and analyzing the Bullish-Bearish Indicator - GDP
BBI is understood as a combination of four prices - minimum, maximum, average and
current - of one trader (One BBI - OBBI) or several traders (actually BBI) for a certain fixed
period of time. Schematically, BBI will look like this:
To calculate OBBI, it is recommended to use quotes of this trader for the last 10-30
minutes.
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To calculate BBI, it is proposed to use the latest quotes of traders who updated them no later than
than five minutes ago.
Thus, one can note the difference in the principles of OBBI and BBI. OBBI is built on the basis of the dynamic change in the
quotes of one trader, and BBI is based on the dynamic change in the quotes of a group of traders.
For example.
OBBI.
For the sake of simplicity, let's assume that the trader's quotes are updated regularly once every two minutes, although in
practice such changes can occur at a jagged pace and are updated as often as once a minute, or less often.
Table 2.5
Time
Settlement quotes for the analysis period (20 minutes) Trader's last quote
changes
Serial number
OBBI
quotes
minimal
maximum
USD/DEM
quotation
quotation
average
quote
14:20
X
X
X
1.5048
X
14:22
X
X
X
1.5055
X
14:24
X
X
X
1.5053
X
14:26
X
X
X
1.5050
X
14:28
X
X
X
1.5050
X
14:30
X
X
X
1.5055
X
14:32
X
X
X
1.5058
X
14:34
X
X
X
1.5060
X
14:36
X
X
X
1.5065
X
14:38
X
X
X
1.5055
X
14:40
1.5048
1.5065
1.5055
1.5058
14:42
1.5050
1.5065
1.5056
1.5060
12
BBI.
Table 2.6
Trader
Average quote between change time
BID and ASK of the last quote
1
1.5050
14:30
2
1.5060
14:31
3
1.5060
14:32
4
1.5048
14:29
5
1.5045
14:26
6
1.5055
14:30
7
1.5047
14:30
8
1.5053
14:31
9
1.5038
14:15
10
1.5062
14:31
A comment
current quote
not taken into account
not taken into account
Total BBI: minimum quote - 1.5045; maximum quote -1.5062; average quote - 1.5054; the
current quote (the last modified one is accepted) is 1.5060.
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OBBI analysis rules.
These rules are conditional and are subject to application only after a comprehensive assessment. 1) If P1 >
PO, then the trend is up, otherwise - down, where P1 is the last quote of the
trader, PO is the penultimate quote of the trader. 2) If the average
quote is closer to the maximum on an upward trend, then this confirms the trend,
otherwise, it denies.
3) If the average quote is closer to the minimum on a downward trend, then this confirms the trend, otherwise it
denies it. 4) If
(CRO - MINO) > (CP1 - MIN1), where MINO and
MIN1 are the minimum quote, the previous and current ones, respectively, CRO and CP1 are
the average quote, the previous and current ones, respectively, then this confirms
the downward trend and refutes the upward trend. 5) If (MAXO SRO) > (MAX1 - ÿÿ1), where MAXO and MAX1 the maximum quote, respectively, the previous and current one, then this confirms the uptrend
and refutes the downtrend. 6) If (MAHO - MINO) > (MAX1 - MIN1),
then this confirms the weakening of the trend, the
opposite confirms the strengthening of the trend. Summing up all the above rules, you can get information about
the direction of movement of OBBI, its strength and the dynamics of this force.
BBI analysis rules.
These rules are conditional and are subject to application only after a comprehensive assessment. 1)
If P1 > LL, then the trend is up, otherwise it is down, where W is the
last quote, LL is the penultimate quote. 2) If
the average quote is closer to the maximum on an upward trend, then this confirms the trend,
otherwise, it denies.
3) If the average quote is closer to the minimum on a downward trend, then this confirms the trend, otherwise it
denies it.
Summing up all the above rules, you can get information about the direction
movement of the BBI, its strength and the dynamics of this force.
Let's look at the following practical example of calculating the above OBBI indicators and
BBI. On the example of USD/DEM for 27/12/96.
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Table 2.7
In the presented table, we can see the dynamics of quotations for 30 minutes of six banks, as
well as the total dynamics of quotations of these banks, considered through the BBI indicator. At
about 14:35, most banks preferred to sell dollars for marks, which was immediately reflected in
the BBI indicator - it began to give a "DOWN" signal. The rate from the moment of the first bearish
signal to the moment of the first bullish signal dropped from 1.5584 to 1.5578. In general, it can
be noted that the considered generalizing indicator BBI gives many signals and almost each of
them is accompanied by a corresponding subsequent movement of the rate. Banks' OBBIs are
more stable, but also quite confidently show the mood of these banks.
Graphically, the OBBI and BBI indicators described above will look like this. First, let's
consider the OBBI indicator, built on the basis of USD/DEM Harlow Buttler (London) quotes.
The OBBI
indicator can only take two values - "1" or "-1". A positive value of the indicator indicates that
the analyzed trader is currently buying, while a negative value indicates that the trader is selling.
Since these values are rather indicative, the average based on the indicator is mainly used for
analysis.
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Figure 2.90
In the USD/DEM hourly chart above, the circles mark the places of extreme values of the
average. These values are good signals for making deals. In general, the average is below zero
almost all the time. This suggests that Harlow Buttler predominantly sold. The purchase was
made sporadically. But the market still went up. Therefore, one should be warned against the
practical use of this indicator when analyzing only one trader. It will help you evaluate the market
as a whole if you analyze at least ten market makers in this way.
The main signals on the minute chart of the OBBI indicator are the direction of movement of
the averages built on the indicator, and their general position - above or below the zero line. In
general, the rules for analyzing the minute chart are identical with the analysis of the OBBI
indicator, carried out above on the hourly chart. You can also select an additional signal - the
density of the vertical lines of the indicator, reminiscent of a barcode. If their density decreases,
then the trend is expected to weaken. And vice versa, with an increase in the density of the
indicator lines, the trend strengthens.
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Figure 2.91.
And now let's look at the graphical analysis of the most interesting, in my opinion, BBI indicator. The
USD/
DEM quotes of 31 banks and brokerage houses are taken as the basis for calculating this indicator.
being market makers on the FOREX market. First,
let's analyze the hourly chart of the price and the indicator.
Figure 2.92
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The BBI indicator in the figure is built in the form of a histogram and is located under the price
chart. Based on the indicator values, the average is
calculated with the order of 8. Each indicator value greater than zero corresponds to a buy signal.
The higher this value, the stronger the given signal. Similarly, negative values of the indicator,
corresponding to the sale, are considered. Often the maximum peaks of the indicator precede the
subsequent bullish market movement, and the minimum bottoms - the bearish dynamics. But if
these tops follow each other in a row, then we can expect a weakening of the dynamics of the
current trend due to general market fatigue.
This rule can be compared to gap analysis. Graphically, the average
based on the BBI indicator resembles an oscillator. Hollow circles mark the places of purchase or sale, while the
direction of the operation. The closed circles mark the places where the deal was closed.
The main signals in the analysis of the BBI
indicator: - a reversal of the average, built on the basis of the indicator, from the extreme lines
("MIN" and "MAX") - marked with vertical dotted lines. If the average crossed the "MAX" line from
top to bottom, then this is a good sell signal. If the average crossed the "MIN" line from the bottom
up, then this is
a good buy signal; - the intersection of the average with the zero line. It is a confirmation for the
previous signal, or the main signal when the average reverses from the extreme lines without
crossing them - they are marked with vertical dashed lines. Weaker than the previous signal;
- the direction of movement of the average. The downward dynamics of the average corresponds
to the bearish trend. Upward dynamics of the average bullish trend; - the position of the average relative to zero. If the average is above zero, then look
for a buying opportunity. If below zero - try to sell.
Let's now look at the 30-minute chart of the price and indicator dynamics and check for
new time interval, as the above signals work.
Figure 2.93
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The last period of price movement, marked by a rectangle, is characterized by a large number of
alternating whipsaw crossings of the middle line). No signals are given here, since the average has
fluctuated around zero all this time, without moving far from it. In general, it can be noted that the
signals received when the middle extreme lines are crossed are of better quality than the signals
from crossing the zero line.
Figure 2.94.
The average on the five-minute chart is built with the order of 13. Here, the signals coming
from the intersection of the average, built on the indicator, with the zero line and extreme
lines are quite correct.
Figure 2.95
The 1-minute chart is similar in nature to the 5-minute chart. The indicator
average here is plotted with the order of 8.
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In conclusion of the BBI analysis, the following types of incoming signals can be given additionally: - the
average signal will be more reliable if it is confirmed by a similar movement of the BBI indicator itself; - Consider
the
intersection of two averages. The rules of analysis are the same as in the classical
analysis of the interaction of means.
2.14. Time dependencies in analysis and decision making 2.14.1. short,
medium and long positions
A short position is a deal concluded for a period of no more than three
hours. Short positions are usually held during sideways or sluggish trends, before
announcements of a fundamental nature, when playing on "rollbacks" of the course, as well as
when the general situation is unclear. In the latter case, when the situation is clarified, it is possible
to transfer the transaction to a longer-term position, or close it. In other cases, do not delay closing
positions, otherwise you risk losing money. Also, when opening a short position, do not count on
large returns. Oscillatory methods of technical analysis will be your main assistant when working
on short positions - use the rules for choosing the opening moment. The chances of success for
market makers are incommensurably greater than for small players, so do not be fooled by the
small gains received from such work. You run the risk of losing quickly everything that you earned
for a long time and with a large number of transactions.
An average position is considered to be a transaction concluded for a
period of three hours to a day. Middle positions are more stable for profit, although the decision
analysis for such a game is somewhat more complex. At the same time, the quality of work also
strongly depends on the ability to play a short-term game (to choose the right time to open and
close a position). When opening middle positions, not only technical analysis is performed, but
also carefully viewed - whether there will be any messages of a fundamental nature before the
closing time of the position, whether there is any closing of any regional market at the same time.
The number of transactions in the medium-term game is several times less than in the short-term
one, but this work is more stable and safe in terms of the quality of the analysis and your
confidence in your conclusions. The psychological factor of the game fades into the background.
But with all the external stability, be sure to keep an eye on the market, because it is able to
present any surprises at the most inopportune time. If you are playing a medium-term game based
on fundamentals, then also carefully monitor that technical analysis, at least, does not contradict your positions.
A long position is a transaction concluded for a period of more than one business
day. When working on long positions, no less important than technical analysis is fundamental
analysis. Professional large speculators use long-term work to increase open positions in the
direction of a long trend, while they certainly do not forget the shorter options for maintaining
positions. For smaller speculators, building up open positions is not affordable, and it does not
make any practical sense. After all, why bear, albeit short-term, but losses. This time is better to
either wait it out, or even
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use for additional profit. In any case, long positions can be used in the practical work of a trader, but
their share should not exceed 15% of the amount of collateral. Also, analysis for opening long positions
will help you with shorter work, namely:
- determine long-term levels of resistance and support; - a
strong long trend will warn you when working against it on short positions; - You will have psychological
confidence
when playing short positions in the direction of a long trend.
2.14.2. Geographic opening hours (USA, Europe, Japan). Differences and features
Most of the transactions on the FOREX market, both in terms of quantity and amount, are made on
the European market. With the end of the working day in London (around 19-00 Kyiv time), the volume
of transactions falls sharply. Quotation fluctuations, as a rule, also decrease. The market usually revives
when a new regional market leaves or enters the FOREX market, as well as in anticipation, during the
announcement and immediately after the announcement of news of a fundamental nature.
In futures and options derivatives exchange markets, most of the transactions are made during the
operation of the US markets, which are traditionally leaders in this area. When
leaving the market overnight, on weekends or holidays, many traders choose to close all or most of
their positions, thus setting the entire market in motion. Market makers often take advantage of this by
moving prices in such a way as to force exiting traders to trade at unfavorable prices. And price
movement is possible in any direction, even against the trend. You can use this as well as the game on
"kickbacks", but only after gaining sufficient experience in practical work. Otherwise, be prepared to
close trades open at such moments with minimal profit or even losses. In general, when closing any
market, and especially European, play by the rules of short positions. The active working week closes,
as a rule, at 21-00 on Friday, Kyiv time, along with the departure of the last Europeans from the market.
The US market is less liquid, so we can recommend that you close all your positions before 20-21 pm on
Friday.
When opening a new regional market, be prepared for an increase in the trend, because new traders
have joined the work. Although it is possible and vice versa - the suspension of the trend dynamics. It
should also be taken into account that Japan is starting a new working week (we do not consider
Australia and New Zealand due to the insignificance of these regions), so on Monday a new direction is
often set for price dynamics, which will last all week.
2.15. Theory of cycles 2.15.1.
Classical cycle theory
The basis of the classical theory of cycles was the assumption that everything around is subject to
cycles - birth, life and death, the change of seasons, the rotation of the planets and the movement of
comets, the moments of the autumn and spring
equinoxes, night and day, etc. In financial markets, we will also be able to see a certain order in the periodic shift.
ups and downs. None of you, of course, will not flash and
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the idea that a bullish or bearish trend will go on forever. Therefore, among traders, a desire began to
appear to calculate the dependence of the single-trend price dynamics on the duration of this movement.
Thus, they tried to find not only the patterns of price movement, but also to catch the corresponding tops
and bottoms of prices.
In general terms, market cycles are as follows.
Figure 2.96
A full cycle is a price movement from one bottom to another. There are
three main characteristics of any cycle - amplitude, period and phase. Amplitude is the wave height of
the cycle and is calculated as the difference between the high and low of one cycle. The magnitude of the
amplitude is measured in monetary terms or in points. The period of a wave is measured on a time scale
and is the length of a cycle from one low to the next low of one cycle. The phase of the cycle is the
difference between the two price waves 1 and 2. Knowing these three components of the cycle will allow
us to make an assumption about the future position of the top and bottom on the time and price scale.
For cycles, four basic principles are also noted - summation, harmonization, synchronization
and proportionality.
The summation principle is shown in the following figure.
Figure 2.97
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The summation principle works like a simple summation of two cyclic waves. Of these, the largest
the result of the summation is influenced by the largest cycle.
The principle of proportionality is to bring the period and amplitude of a short wave into line with
the period and amplitude of a longer cycle. So, if the identified period of a long cycle is 40 days, and
a short one - 20, then the amplitude of the short wave should be half the amplitude of the long wave
(40 / 20 = 2). Thus, a conditional correlation of the weights of different cycles according to their
duration is made. The principle of harmonization is
usually used when comparing two cycles. With its help, a shorter cycle is brought into a harmonious
state in relation to a longer cycle. Such harmonization is necessary for the principle of loop nesting
to work, when a short loop can be compared in length with a longer one. The principle of
synchronization
is designed to combine the key bottoms of pre-harmonized short and long waves. Subsequently,
these waves can be summed up and a general cycle can be obtained based on the two identified.
The principles of harmonization and synchronization will work as follows. Figure 2.98
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The classical theory identifies two more principles of cyclicality - the principles of variability and
ratings.
The principle of variability is the development of other cyclical principles - summation,
harmonization, synchronization and proportionality. He talks about the possibility of changing the
trends found and brings us closer to the real world.
The principle of nominalization is based mainly on the principle of harmonization of cycles. There is so
called the nominal cyclic model, shown in table 2.8.
Table 2.8
Year
Month
A week
Day
18
9
54
18
77.94
9
38.97
19.48
9.74
68.2
4.97
34.1
17.0
8.5
4.3
This shows an 18-year cycle with a gradually decreasing period. The period is reduced in
compliance with the principle of proportionality - each shorter cycle is half the previous one.
Often in practical use, a modified nominal cyclic
model (see table 2.9).
Table 2.9
Year
Month
A week
Day
18
9
54
18
40
20
80
40
20
10
5
Very rarely, within one cycle, the price returns to the same level from which the cycle began.
As a rule, a dominant trend is distinguished when the bottoms grow on a bullish trend (as in an
upward channel), and fall on a bearish one (as in a bearish channel).
Within the dominant trend, there is the following cyclical pattern, shown in Figure 2.99.
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Figure 2.99
The classification of cycles presented above has the following time dependence:
- a long-term cycle has a period of two or more
years; - prevailing trend - one year
period; - primary cycle (aka medium-term trend) - period from 9 to 26
weeks; - trading cycle - 4
weeks; - the semi-primary cycle has a period that is average in duration between the primary
and
trading cycles; - alpha/beta cycle - 2 weeks.
In practice, the model described above can be represented as shown in Figure 2.100.
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Figure 2.100
It is also necessary to note one more rule for the construction and analysis of cycles - left
and right
translation. The right translation is that in the first phase of the cycle (upward) impulsive
the lines have a right slope with respect to the time axis.
Left translation occurs in the second (downward) phase of the cycle, when impulsive lines
have a left slope.
Graphically it will look like this.
Figure 2.101
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In practice, we often see similar situations of price dynamics. For example, on a monthly USD/DEM
chart, you can see both left and right translation of prices in the corresponding cycle periods.
Figure 2.102
The most interesting takeaway from applying right and left translation is the observation that in a bullish
trend, uptrends are slower than downtrends (trend pullbacks). On a bearish trend, the growth (rollback on
the trend) will occur faster than the fall. If you notice similar price dynamics, then you can more accurately
interpret the trend and watch it turn. The classical theory of cycles distinguishes the following
five phases of one cycle: - preliminary phase (introduction); - height; maturity; - saturation; - decline,
rollback.
Graphically,
the arrangement
of these phases will look as follows.
Figure 2.103
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For a bearish trend, this chart will look exactly the opposite. The preliminary
phase is characterized by minor price fluctuations relative to the average and
the beginning of an uncertain movement in the direction of the future trend.
At the end of the introduction phase, the growth phase begins. At this time, the first strong price
movement occurs in the direction of the developing
trend. The maturity phase continues with the rate of price growth gained in the previous phase of the cycle, although
perhaps even some acceleration of the trend.
Market saturation precedes a rollback and is characterized by nervous market movements around the
average with multidirectional short-term (compared to the total duration of the cycle) price dynamics.
Rollback is the
final phase of the cycle. As a rule, it lasts until the price reaches the level of a very long average (with
order from 34). Let's take a look at
the GBP/USD daily chart example.
Figure 2.104
2.15.2. Bell curve model
The model of price movement considered in this paragraph is used by financial and
technical analysts for over 30 years.
The basis for constructing this cyclical model was the consideration of three main determinants
market dynamics
rhythms: - long-term
trend; - medium-term
trend; - short-term
trend. The long-term trend according to this model lasts from 4 to 4.5 years. Of these, 28 months
plus/minus one month of duration continues the bullish phase of the cycle. The bearish phase lasts for
15 months plus/minus one month of duration. To identify a long-term trend, it is recommended to use
monthly charts. Long-term trends in their work are mainly used by investors who make real investments.
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The duration of the second cyclical wave - medium-term trend - 20 weeks plus/minus a
week of duration. Of these, 12 plus/minus weeks are bullish and 8 plus/minus weeks are
bearish. In general, it turns out that we see the medium-term trend twice a year. The bullish
phase of the medium-term trend coincides three to four times with the bullish phase of the longterm trend. The bearish phases of the medium-term and long-term trends coincide from one to
three times in a full cycle. Most traders prefer to enter into their trades during periods of
unidirectional dynamics of these two trends. To identify the medium-term trend, it is
recommended to use weekly charts. The results of the analysis of medium-term cycles are
important for traders who have significant investment resources for fairly long positions.
The third wave of the considered cycle is a short-term trend. A full short term cycle continues
for 39 days +/- day (based on 240 trading days in a calendar year). In one calendar year, we
can observe from 5 to 7 short-term trends. To identify a short-term trend, it is recommended to
use daily charts. The analysis of short-term trends is used in their work by both traders and
short-term speculators. The best position for making transactions is the coincidence of the
direction of price movement in the medium-term and short-term trends. Graphically, Bell's
curvilinear model will
look like this.
Figure 2.105
The circles mark the reversals of the long-term trend. At this time, there is a significant
consolidation of forces for a breakthrough in a new direction.
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Figure 2.106
Vertices were connected to build the cyclic Bell model. This is allowed in the analysis
currency market, but contradicts the general principles of building a model in the stock markets.
Here we see that the first bearish phase in a bullish trend (full cycle 1) is the second half of a long
cycle. For a bearish trend (full cycles 2 and 3), on the contrary, the first bearish phase is longer than the
second bullish one. For the incomplete cycle depicted on the right side of the figure, we can already say
that the bullish phase turned out to be longer than the bearish phase, so the full cycle can be called bullish.
Let's take a look at the full cycle #3 in order to identify short trends.
Figure 2.107
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The total duration of the long trend was 4 years 1 month. Of these, the bearish phase - 42
months, and bullish - 8.
The long duration of the first phase of the long trend was caused by a prolonged medium-term trend
at the beginning of the full cycle, the total length of which was 107 weeks (87 bearish and 20 bullish
weeks). The duration of other medium-term trends ranged from 37 to 7 weeks.
In general, short-term trends quite accurately described all the main price fluctuations around
medium-term trends. The number of short-term trends coinciding with the direction of the dynamics of
the long-term trend is three. On the rollback, two main short-term trends can be distinguished, as the
theory describes. Due to the insignificance of the second phase of the full cycle, short-term trends are
difficult to separate from medium-term ones.
I specifically considered here not the most textbook example of building cycles. There are no hard
and fast rules. Therefore, one cannot take on faith anyone's opinion about the analyzed object - it can
be too subjective. Check everything carefully for yourself. In the theory of cycles, it is important, at least
sometimes, to return to the analysis of the past again and again and look at the patterns you found
earlier in a new way. One of the best cures for subjectivism is the mirror rule. It lies in the fact that any
cycle must be visually confirmed not only from the usual point of view, but also from the exact opposite.
Reflected as if in a mirror. To do this is quite simple. Turn over the page with the applied cycles and
see if you now see these cycles. You can also look at the mirror image of the pattern with cycles.
The main problem of all cyclic theories is the ease of finding patterns in
the past, great doubts in the present and almost complete ignorance of the future.
Make hypotheses about cycles. If the market confirms them, then you can base your practical
actions on these hypotheses for a while. If not, then be prepared for such a turn of events. Remember,
if the theory is wrong, then it
is in your power to refuse to use it. Bell's curvilinear model can be used not only
to analyze price dynamics, but also to analyze fundamental factors. The greatest success in this
case can be achieved by analyzing the parameters of changes in inflation, interest rates and GDP.
2.15.3. Elliott Wave Theory
The wave theory was put forward by Ralph Nelson Elliott in the monograph "Wave
principle" published in 1938 by Charles Collins.
For the mathematical presentation of his theory, Elliott used the principle of Fibonacci numbers,
which we discussed in Section 2.11.2. At the same time, he showed the existence of 8 waves over
the 80-year period of analysis, 5 of which belong to the bullish trend (digital phase - in the figure of
waves 1-5) and 3 - belong to the bearish trend (letter phase - in the figure of waves A, B, C) .
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Figure 2.108
Here, waves 1, 3 and 5 (squared) are up waves of the main bullish move. The professional name for these
waves is momentum waves. Waves 2 and 4 are corrective
phases of waves 1 and 3 respectively. These are correction waves. Waves A, B, C - three corrective
waves of the main bullish trend. Of these, wave B is a correction of wave A, and waves A and C are impulse
waves. One of the three impulse waves is the longest and
consists of nine smaller waves. Usually such an extended wave is the middle, third wave of the impulse. The
duration of such a wave, as a rule, is 1.618 more than the duration of a regular impulse wave (this number is the
ratio of the Fibonacci numbers). Corrective wave C usually ends at level 4 of the impulse wave. The ratio of the
sizes of all waves to each other can take the values 0.382, 0.50,
0.618, 1.618.
Here you can calculate the ratios of both the heights and the duration of the waves.
It should be noted one of the basic principles of wave nesting - each wave of impulse
consists of five smaller waves, and each corrective wave consists of three waves.
The longest cycle according to Elliott theory is called the Great Supercycle, which consists of 8 waves of the
supercycle (similar to those shown in the figure), each of which consists of 8 waves of a smaller cycle. The waves
of a smaller cycle, in turn, are also divided into 8 waves of an even smaller cycle. This forms the Major, Intermediate,
Minute, Second and Subsecond
waves.
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The market cycle, which includes the three main cycles of the Elliott wave theory, will
look like this, as shown in Figure 2.109.
Figure 2.109
A full market cycle consists of two big waves, 8 medium waves and 34 small waves. Next come 144
very small waves, and so on. according to the Fibonacci series. A bull market
consists of one big wave, 5 medium waves and 21 small waves. If
continue this list, then the next number of waves will be 89, and so on.
A bear market consists of one big wave, 3 medium waves and 13 small waves. This
the list goes on with 55 very small waves, and so on.
As a rule, Elliott waves are very well visible in the past market and are poorly visible when analyzing the
future. Therefore, I want to warn you against the practical use of the Elliott wave theory without thorough
preparation. Although there are special analytical firms that base their forecasts only on the theory
described above. The practical successes of these firms are not disclosed, but according to some users of
analyzes of such firms, they
are not impressive.
It should also be noted that Elliott derived his theory on the basis of an analysis of the stock market. For
the currency market, Elliott waves can obviously have both their direct comparison and the opposite. This
will be expressed in the fact that 8 waves (5 bullish and 3 bearish), typical for stock market analysis, in the
currency market can have their opposite - 5 bearish and 3 bullish waves. This is due to the fact that any of
the currency quotes has both its direct designation and the opposite. For example, USD/DEM or DEM/
USD. Therefore, what looks like a bullish wave for USD/DEM to us will be a bearish wave for DEM/USD.
From this fact, we can draw the following conclusion: be doubly careful in the application of cyclical Elliott
waves in the foreign exchange market.
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And now let's look at the Elliott Wave Theory using the GBP/USD daily chart as an example.
Figure 2.110
Here we see that the third medium wave was the strongest in height and duration. The first medium wave
was the weakest. Perhaps it was the weakness of the first wave that predetermined a very strong movement
in the third. You can also notice the proportionality of the impulse waves and the correction waves that follow
them. The stronger the impulse wave, the stronger the correction wave, and vice versa.
Note the following rules for the proportions of building Elliott waves. These rules help to correctly determine
the moments of the beginning of the construction of waves and their duration. Wavelengths are measured
from high to low of the corresponding wave.
Table 2.10
Wave
Classic wave ratio
1
0.382 (or 0.5 or 0.618) wavelength 1
1.618 (or 0.618 or 2.618) wavelength
1 0.382 (or 0.5) wavelength
3 0.382 (or 0.5 or 0.618) wavelength
3 1.0 (or 0.618 or 0.5) wavelength
5 0.382 ( or 0.5) wavelength
A 1.618 (or 0.618 or 0.5) wavelength A
Actual relationship (by
example)
X
2
3
4
5
AB
WITH
0.561
2.911
0.518
0.682
1.140
0.423
0.496
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The above classical relations of waves among themselves are confirmed by the actual ones with an error of up to
10%. Such an error can be explained by the short-term influence of some technical or fundamental factors. In general,
these ratios are rather conditional.
An additional signal that reinforces the general conclusions will be the mutual proportionality of all
waves according to the ratios of Fibonacci numbers (0.382, 0.5, 0.618, etc.).
The result of the above analysis according to Elliott waves can be considered quite successful.
This can be seen from the figure below.
Figure 2.111
2.16. Stock market indicators 2.16.1. Index of new
high-low (NH-L)
The new high-low index is calculated as the difference between the number of stocks that made
new highs in a given period (eg, a month) and the number of stocks that made new lows in that same
period. It is quite
easy to calculate it manually from the data that are obligatory published in daily economic
newspapers and distributed on the Internet. In order of
importance, three types of NH-L signals can be distinguished: - Convergencedivergence of the indicator chart with stock price charts. Here, a convergence on a bearish trend
would mean a possible reversal, as well as a divergence on a bullish trend. If, at the same time, the
height of the second peak exceeds 100, then a trend reversal is unlikely and bullish trends in the
market are still strong. Likewise for the depth of the fall on a bearish convergence - if the new low
falls below -100, then the bearish trend is strong and unlikely to reverse. At the same time, the bullish
trend develops in the market faster than the bearish one, so buy faster and sell slower;
- the direction of the dynamics of the NH-L indicator. A rising index confirms a bullish trend, while
a falling index confirms a bearish trend. If the index falls on a bullish trend, then a price reversal is
possible. The growth of the index on a bearish trend also warns of a possible trend reversal. When
the indicator rises and the price is stable, a buy signal is given. If the indicator falls and the price does
not
change, this is a sell signal; - the position of the NH-L indicator relative to the middle (zero line). If NH-L is higher
zero lines, then the bulls control the market. If NH-L is located
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below the middle - bears dominate the market. If the indicator remains above the zero line for some
time, and then falls below it, this is a signal of a possible change in the bullish trend to bearish. The
situation is reversed when the indicator changes from bearish to bullish.
Analysts usually use the NH-L indicator, smoothed by moving averages with orders of 10 and
20. The intersection of a short average with an order of 10 of a longer one (order of 20) from below
gives a signal to buy. Crossing from top to bottom
is a sell signal. This indicator is good to use in markets with a large number of listed stocks. Avoid
"narrow" markets dominated by a few stocks.
2.16.2. Trader's Index (TRIN)
TRIN is a leading stock market index. It measures the degree of optimism of the dominant groups of
participants in the market and shows the possible moments of the change of major ups and downs.
The degree of extreme optimism corresponds to the market peaking (similar to the overbought zone of
oscillators). When the price drops to the extreme bottom, the degree of extreme pessimism (the market
oversold zone) begins to prevail in the
market. Formula for calculating the TRIN index:
TRIN can change dramatically from day to day. Therefore, it is recommended to smooth it with an
average with an order of 8 to 20. And for better visibility on the TRIN chart, it is better to build inversely
(directly opposite) with respect to the price chart. Then the tops of the chart (bottoms of the index) will show
the approaching peak on the price chart, and similarly, the bottoms of the chart (peaks of the index) price troughs.
A decrease in the TRIN average occurs when the volume of sales of rising stocks is disproportionately
large compared to their number and shows growing bullish optimism. If the average has exceeded the
extreme line (for a bull market - 0.65 or 0.70, for a bear market - 0.70 or 0.75), then you should prepare for
the market to be saturated with the previous price dynamics. Similarly, the crossing of the middle lower
extreme line (for a bull market -0.90 or 0.95, for a bear market - 1.00 or 1.05) signals a possible trend
reversal. If the average, built on the TRIN index, is in the range from 0.75 to 0.85, then this means the
market is indifferent to any particular trend. The TRIN index does not give purely mechanical signals.
Therefore, it must be used carefully, after passing through a
certain practice of use. I will note some of the standard TRIN signals: - buy when the index leaves the
oversold zone; - sell when the index leaves the
overbought area; - convergence in the bear market
and divergence in the bull market give a signal about the
possibility of a trend reversal. It is recommended to use the
TRIN index in combination with the NH-L indicator: - if TRIN has entered the oversold zone, but NH-L
reaches its new
low, then this is a signal that the bears are still in force and the bearish trend
is likely to continue. The combination of an overbought TRIN index and a new NH-L high works similarly;
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- if TRIN has entered the oversold zone, and there is a bearish convergence on NH-L, then
a buy signal is received. If TRIN has entered the overbought zone, and there is a bullish
divergence on NH-L, then a sell signal is given.
The TRIN index can be used both on daily charts and during the trading session.
2.16.3. Other stock market indicators
Rise-fall indicator (AD line). This
indicator is designed to assess the mass participation in
the trend. To calculate AD, subtract the number of shares that have fallen in price from the
number of shares that have risen in price. The difference is added to the previous AD value and
thus a cumulative AD line is built.
If a new bullish rally is accompanied by a rise in the AD line, it means that a large number of traded
stocks support this price movement. Similarly, the bearish trend is confirmed by a decrease in the AD line.
The bearish convergence of AD and prices eventually leads to a weakening and reversal of the trend. A
bullish divergence between the AD line and prices warns of the possibility of a bullish trend reversal. These
signals, according to experts, can anticipate the moment of reversal by weeks and even months. Although
this is more of a disadvantage than an advantage.
Short Selling Index (ST1X). This
index is a 21-day exponential moving average based on the Ad index:
McClellan Oscillator.
Represents the difference between two exponential moving averages
them (19-day and 39-day), built on the indices Ad and DC, where
This oscillator differs little from the Short Selling Index.
Buying/selling congestion indicator. This is the 10-day
exponential moving average from DDL. It also differs little from STIX.
Cumulative DDL Index It is
built by successive summation of DDI index values:
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For a better perception of the cumulative DDI index, it is recommended to build on it
stochastic.
Most active stock indicator (MAS). This is
the AD line calculated from the 15 most active stocks. MAS is a "big money" indicator. It shows what they
are inclined to at the moment - to bullish or bearish sentiment. If the MAS rises in a bull market, this confirms
the rise in
prices and means that the big money is supporting the trend. Similarly, the unidirectional trend dynamics and
MAS manifest themselves on a bearish trend.
Bear Market Convergence and Bull Market Divergence Warn of the Possibly Coming Soon
trend reversal.
2.17. Mechanical trading systems 2.17.1. Are common
principles
With the advent of personal computers, many traders appeared who wanted to bring the disparate rules of
technical analysis into a single trading system. The purpose of creating such systems was to determine buy and
sell signals without human intervention. This reduces the risk of psychological influence on the actions of the
trader and increases the stability of trading. The only drawback of these systems is the lack of intuition, the
meaning of which will be discussed below. Common to all mechanical trading systems (MTS) is the rigidity of
the established
trading rules and the unambiguity of the signals given. Today, there is enough specialized software - from
the simplest technical analysis programs, which are not mechanical trading systems in their essence, to neural
network packages that use not only technical analysis methods in their work. The latter can already be fully
attributed to the MTS. The most complex of these packages cost hundreds of thousands of dollars and help
traders not only make buying and selling decisions, but also control all the financial flows of their users. This
helps to use free funds more efficiently and redistribute assets, taking into account the reliability and profitability
of investments. Some technical analysis programs allow each trader to independently design and build a
mechanical trading system.
The effectiveness of MTS is assessed by the share of positive signals (which brought profit to the trader) in
the total number of signals given and the difference between profits and losses from its use. Admittedly, if the
proportion of positive signals consistently exceeds 60%, then such a system can be applied in practice. A
smaller share will inevitably lead you to ruin. Naturally, if the amount of losses from the use of MTS is greater
than the amount of profit, then it is impossible to work on such a system. But even if the excess of profit over
losses is insignificant, is it worth using this system.
Below we will consider the principles of the structure of some mechanical trading systems.
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2.17.2. Trading systems of Al.
Elder 1) "Three screens" system
The "triple screen" trading system takes its name from three screens in succession.
producing market tests.
The first screen defines the main trend. It does this based on the weekly chart of the MACDHistogram. If the histogram goes down, then consider only sell options. The sell signal will be
stronger if the MACD is below zero. When the histogram makes an upward movement, compared
to the previous one, buy. Buying will be more reliable when the MACD value is above zero.
According to the definition of the author of the trading system "three screens" Al. Elder, the
trend, defined on the first screen, is like a tide. And against the waves of the tide it is better not
to swim (remember - "the
trend is your friend"). The second screen determines the medium-term trend using oscillators.
Oscillators are stochastic, RSI and other indicators built on the daily chart. If the first screen
indicates a bull market and the oscillators are in the oversold zone, then this is a good signal to
buy. Conversely, on a weekly bearish trend with overbought oscillators, we consider the
possibility of selling. The oscillator signals on the second screen are market waves that can go
against the waves of the tide as well as along the waves. But the three-screen trading system
only considers market waves that do not conflict with tidal waves.
The third screen defines the short-term trend by recording price breakouts of the previous
day's highs or lows. If the price makes a new high compared to the previous day, the weekly
trend is rising, and the daily oscillators have fallen into the oversell zone, then a buy signal is
given. If the price makes a new low compared to the previous day, the weekly trend is decreasing,
and the daily oscillators have risen to the overbought zone, then it's time to give a sell order.
The third screen defines the "swell" of the market.
Thus, the first screen shows the direction of the tide, the second determines the wave
following the tide, and the third helps to enter into a trade at the moments when the price leaves
the direction of the tide. This last screen is also meant to protect traders from premature trades.
If you made a deal using the "three screens" trading system, but you do not receive a profit,
take a close look at the situation. It is possible that fundamental conditions have changed. In this
case, it is recommended to quickly exit the position until the situation clears up.
Cautious traders are advised to keep profitable positions open until the weekly trend reverses.
For aggressive traders, an additional opening of positions is possible with each new buy / sell
signal from the second screen until the trend reverses. It's like building a trading pyramid. Also,
the necessary conditions for MTS "three screens" is a
risk management system. The rule of thumb is to place protective stops to guard against
losses and to keep potential gains below the current day's high by a few pips if you have bought,
or up by the same few pips from the day's high if you have sold.
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Figure 2.112
2) "Ray of Elder" (Elderray). The Elder Ray is a development of the "three screens" system and uses the principles laid
down in it. The name of this trading system comes from an analogy with an x-ray (X-ray), penetrating
through the human body to study internal processes. So this system allows the trader to observe the
processes taking place under the outer shell of the market.
The Edzer beam is a system that is designed to measure the strength of bulls and bears at any
given time. To do this, it combines the primary qualities of the two main groups of indicators - trend
indicators and oscillators.
The calculation of the Edzer beam is based on four main
principles: - the price is an agreement on the value between three groups of traders - the seller,
the buyer and free traders; - moving
average is an average agreement on value; - the highest price is the
maximum strength of the bulls for the analyzed period; - the lowest price is
the maximum strength of the bears for the analyzed period.
The Edzer Ray consists of three horizontal panels, the first of which shows a price chart with an
exponential average built on it with an order of 13. When the average rises, this is a signal of a bullish
trend. A falling average gives a bearish trend signal. On the second chart, a bullish strength indicator
is plotted in the form of a histogram. The formula for calculating the strength of the bulls:
Bull Power = High - EMA,
where - High - the maximum price for the analyzed period of
time; - EMA - exponential average.
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When the price high is above the average, then the bullish strength indicator is above zero, which is a
confirmation of the bullish trend. Otherwise, the bulls are weak.
On the third chart, the strength of the bears is determined (also in the form of
a histogram): The strength of the
bears = Low - EMA, where - Low is the minimum price
for the analyzed period. If the low price is below the exponential average, then this is a signal of a strong
bearish trend. Otherwise, the strength of the bears is minimal.
The Elder beam combines the results of the analysis of three horizontal panels and produces five types
of
decisions Purchase period. The exponential moving average should be rising and the bearish strength
indicator should be below zero. The best time to buy is when the bearish strength indicator first dipped
below zero and then immediately rallied. If price tops are confirmed by new tops of the bullish strength
indicator, then this is a good confirmation of the bullish trend. A strong buy signal would be a bearish
convergence. Sale period. Sell when the average is
down and the bullish strength indicator is above zero. The bearish trend is confirmed by a parallel
decline in the bottoms of the price and the bearish strength indicator. A strong sell signal is a bullish
divergence.
Short Selling Period This is when the exponential moving average declines. But at the same time, the
bullish strength indicator should be above zero. It will be even better when the bullish strength indicator first
rises above zero and then falls again. Closing period of a short sale.
Close your short when the bears start to loosen their grip, as you can see from the bear strength
indicator. The main result of Elder's ray analysis is the determination of
the mainstream and its strength. Using the signals of this trading system can greatly facilitate your work
during the decision-making period. Below we'll look at one example of an Elder ray application on the USD/
DEM daily chart.
Figure 2.113
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Here we see that on a pronounced bullish trend, not a single MTS signal "Ray of Elder" deceived.
However, the need to use three windows is clearly exaggerated, since the first chart would be sufficient to
obtain similar signals (except, perhaps, for bullish divergence and bearish convergence signals). The
direction of movement of the average will tell us the strategy of work, and the approach of the price to the
average - the moment of concluding a deal.
2.17.3. Trading system "FOREX-94"
The trading system "FOREX-94" was created by specialists from Uralvneshtorgbank (Russia). She
bases her signals on the Market Rainbow indicator. The name is due to the fact that in a computer system
this indicator is implemented as a colored bar that becomes more and more red as the market approaches
an oversold state and more and more yellow as the market approaches an overbought state.
According to the description of the authors of the "market rainbow" indicator, it is a neural network, the
inputs of which automatically receive the conclusions of the most common and, as a result, the analysis
methods that have the greatest impact on market sentiment. These conclusions are weighted according
to a certain methodology, as a result of which the final indicator is formed - RNBW. The FOREX-94 system
contains neural network technologies designed to process information received from technical analysis
methods and price dynamics. The term "neural networks" is used to refer to a set of elements - neurons,
interconnected and exchanging signals. In this case, the neurons and the signals between them are
modeled by a computer. The simplest of neural networks - the so-called perceptron - receives as input a
set of those "Buy" or "Sell" signals that are generated by technical analysis methods. Comparing the set
of received signals with those sets that
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There were some in the past, and also given how the price behaved after that, the Perceptron produces some
generalized signal, which, as testing has shown, has always been more reliable than the signal of the best method of
technical analysis. Neural networks make decisions to buy or sell a product based on observing the price over a certain
period of time and comparing the exchange rate changes that occurred with changes that took place over an equivalent
period of time in the past. Before analyzing current price changes, the neural network is trained on historical material.
If the neural network makes
errors in predictions, then the corresponding situations are remembered so that similar errors are not made in the
future.
2.17.4. O/T trading system (Oscillator/Trend)
This MTS was developed by the author based on the desire to make it easier for a trader to make decisions about
buying / selling. Sufficient clarity and clarity of the given O/T signals allows you to get rid of the constant psychological
impact of the market on the trader. This frees up emotional, psychological and mental energy for a deeper analysis of
fundamental factors and identification of long-term trends.
The key principles on which the O / T system is built are the following assumptions: - if we see a trend, then it is
not a fact that this trend will continue; - on a strong trend, the first signal of the
oscillators will definitely be premature, so you need to wait for the second signal;
- in general, oscillator signals come less often, but they are stronger than the trend, although they are short-term; signals of
oscillators and trends are confirmed by the system only when they are simultaneously
admission at three time intervals;
- the purpose of O / T is to help in the short-term, most routine analysis and decision-making about buying / selling.
The process of analysis in the O/T trading system is as follows. First, the direction
of the current short-term trend is determined. It is important to remember here that most short-term trend signals
come late. Therefore, a simple linear extrapolation - now there was an increase, which means there will be an increase
later - will not work. To solve this problem, the method of moving averages and a special trend indicator "rope" are
used. Secondly, a qualification of the state of the market is made. The market can be in five different phases - bullish,
bearish, overbought, oversold, or uncertain. Oscillators (the program uses three indicators - RSI, Momentum,
Stochastic) will quite accurately determine the overbought and oversold conditions in the market.
The result of the mechanical trading system will be the following signals - "buy", "sell" and "O", corresponding to the
absence of direct signals. Each signal is assigned a probability of its execution. Although this value is rather conditional,
it carries information about the strength of the applied signal. Accordingly, a more cautious trader has the opportunity
to independently set the boundaries of the reaction to incoming signals. High signal strength values are rare, but they
are of better quality. An aggressive trader may try to act on
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each signal, which will inevitably reduce the quality of transactions, although this seems
not obvious.
To help the trader, the O/T system also shows the price movement target (TP). The TP is calculated
according to the normative values of the oscillators, corresponding to RSI and Stochastic 50, and 0 for
Momentum.
If a buy signal is given and the TP is higher than the current price, then buy with the position closed at the
TP level. If
on the buy signal the TP is lower than the current price, then you should buy at the price
closest to the CC.
If a sell signal is given and the TP is lower than the current price, then sell by closing the position at the TP
level. If the
TP is higher than the current price on the sell signal, it is recommended to make a deal
at a price as close as possible to the CC.
And now let's take a little look at how the calculation is made in MTS O /
T. Oscillator signals that determine the qualitative state of the market are considered decisive only if they
are received simultaneously from all three considered indicators at all time intervals (also three - 5.10 and 15
minutes). This reduces the risk of signal prematureness, its short duration and randomness.
The main purpose of trend indicator signals is to determine the current price dynamics during the absence of
oscillator signals. As a rule, on a strong price movement, trend signals will contradict the signals of oscillators.
The program provides for the priority of oscillator signals, as they are given after the price rises or falls by a
sufficient amount for the analyzed period of time. Practice shows that after the receipt of oscillator signals, the
trend movement either stops (usually for 15-30 minutes) or makes a "rollback". Buying / selling in the continuation
of the trend will be undesirable in this period. After some time, when the market gets used to the new price level,
the movement may continue, but it will be after, although it may not be at all.
The MTS O/T dialog box looks like this.
Table 2.11
PRICE TREND
RECOMMENDATI
ON
OSCILLATOR
13:27:07
FORCE GOAL B/S
TOTAL FORCE U/D
GMT
USD/DEM 1.6404
U.P.
38%
0
USD/CHF 1.4297
0
8%
USD/ JPY 118.86
0
15%
GBP/USD 1.6553
UP
GBP/DEM 2.7162
GBP/JPY 196.78
FORCE
54%
1.6406 BUY 38%
0
65%
1.4301
0
0%
0
48%
118.85
0
0%
77%
0
49%
1.6553 BUY 77% 2.7151 0
0
38%
0
30%
0
54%
0
41%
196.70
0
0%
GBP/CHF 2.3663
0
15%
0
52%
2.3666
0
0%
DEM/JPY 72.45
U.P.
38%
0
52%
72.45 BUY 38% 0.8716 0
DEM/CHF 0.8715
0
0%
0
55%
0%
0%
Here are nine course ratios - four main and five crosses.
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The two columns under the heading "TREND" display the results of the calculations of the O/T program trend direction and strength.
In the next three columns under the heading "OSCILLATOR" we see the results of the calculation
oscillators - the given signal (if any), its strength and the purpose of movement along the oscillator.
The final and most interesting will be the last two columns under the heading
"RECOMMENDATION" - buy or sell recommendations for the corresponding currency ("buy" or "sell") and strength,
probability of these recommendations. It should be noted that the submitted recommendations are checked for
compliance of the current exchange rate quotes with the value of the target of price movement along the oscillator.
Below the main table is the resulting row, showing the strongest and most likely to be executed out of many
recommendations. According to the results of the practical
test of MTS O/T, the following points can be noted: - oscillator signals are more reliable, therefore
they have priority over trend signals; - trend signals have the potential to be late, so their
use is recommended in
combined with CC, as described earlier;
- the success of oscillator signals ranges from 80 to 95 percent, depending on
the strength of a long daily trend;
- the probability of execution of trend signals, due to its frequency, ranges from 55 to 75 percent; - a signal
to buy (sell) given by the oscillator is accepted as a recommendation only if there is a negative (positive,
respectively) difference between the current price and the target of the price movement along the oscillator (as a
rule, it is taken from 10 to 20 points). This difference gives us reason to hope for a similar profit; - a signal to buy
(sell) given by the trend is accepted as a recommendation only
if there is a positive (negative, respectively) difference between the current price and the target of the price
movement along the oscillator. In the figures below you can see a graphical reproduction of the main parts
O/T programs - "trend strength", "price target", "oscillator strength".
Figure 2.114
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The "trend strength", as seen in the above figure, has been averaged with orders of 8 and 34.
The direction of the moving averages confidently shows the general direction of price movement,
as indicated by the arrows. The steeper the average declines or rises, the stronger the current
bearish (bullish, respectively) trend.
Figure 2.115
The "price target" chart has been moved to the price chart (thick solid line). The main purpose of this
chart is to determine the moments of conclusion of transactions, these are the moments of the most
risk-free entry into the market. However, the CC does not show the direction of the
transaction. Figure 2.116
The last graphical representation is the "oscillator strength" (in the figure - the upper graph),
calculated as the average of three oscillators over three time periods. The rules for analyzing this
indicator are similar to the rules
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oscillator analysis. The exit of the "oscillator strength" into the overbought/oversold zones corresponded
either to the suspension of the trend or its rollback. Each time, these were good enough signals to open
trades. It is recommended to close deals when the "oscillator strength" rolls back to the middle line (50).
Further, when the indicator moves from the middle, it is possible to make the next transactions.
The results of the program can be seen in the following figure, which displays the minute
USD/DEM dynamics.
Figure 2.117
Positive values in the OD system correspond to "BUY" signals, while negative values correspond
to "SELL" ones. A long-term position of O/T values above zero, accompanied by an increase in
the average (on the chart, the system is built with order 8), means a bullish trend. All this time the
purchase is preferred. The appearance of sell signals in this environment can only be caused by
oscillators. This will correspond to the fact that the current trend has entered the overbought zone
and it is time to make a short
sale. Similarly, one can consider the long-term position of O/T values below
zero. With the help of the average, you can see the increase in the strength of the trend and its
subsequent weakening. The strongest signals of a weakening trend are a bullish divergence and a
bearish convergence. In the following figure, we can see the USD/JPY one-minute bearish momentum.
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Figure 2.118
The five-minute USD/DEM chart shows characteristic overbought and oversold zones
prices.
Figure 2.119
In conclusion, it is worth noting that none of the best mechanical trading systems can
replace the human perception of the situation. Develop your own apparatus of thinking and
intuition. Programs are just a tool in the hands of a professional. How will you use this
tool is up to you.
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3. RISK MANAGEMENT SYSTEM
Do not consider yourself a market genius, even if this is true, because even a genius can wake up in the morning
"on the wrong foot" and do a lot of stupid things. And even if a genius is not insured against losses, then one must be
prepared for them. To do this, you will need to study the risk management system, which you will later change and
supplement with your own rules, but here we can only give you an approximate description of it.
Knowledge of the basics of technical and fundamental analysis only affects the percentage of successful transactions
in the total volume of transactions. But you can have an excellent result in terms of the ratio of successful and
unsuccessful trades and at the same time be constantly at a
loss. For example, if eight out of ten of your trades end in a profit and only two out of ten bring losses (80 percentage
of winning trades = 8/10 * 100%), then you can safely be considered a very good analyst. But at the same time, if you
make an average profit of 10 points per trade (total plus 80 points per 10 trades) and an average loss of 50 points (total
minus 100 points per 10 trades), then in general your activity cannot be considered otherwise than as unprofitable ,
despite the obvious analytical abilities. In this case, you can no longer be called a good trader. Since a good trader not
only knows how to analyze the market, but also manages his positions in such a way that the amount of profit always
outweighs the amount of losses.
By maintaining an equal ratio between the amount of profit and the amount of losses per one average trade (positive
and negative, respectively), you get the opportunity to work with money, and not to play. If you do not master this
element of trading, then even being an excellent analyst, you are doomed to ruin, since the speculative market is the
market of professional players, and everyone else is doomed.
3.1. Basic principles of the risk management system
The risk management system is characterized by the observance of the following principles.
1) The possible conclusion of five consecutive unsuccessful transactions should not knock you out of the saddle nor
psychologically or financially.
In material terms, the correct calculation will help you maintain stability in this situation.
Margin amounts for open positions.
When dealing with small amounts.
Small amounts are considered to be deposits that do not exceed 20,000 USD. Try not
to hold more than 50% of your capital as collateral for open positions at a time. Close at the slightest danger. But in
any case, it is better to work with such amounts on the futures exchange options market, or sooner or later you will go
bankrupt.
When working with averages. Average
amounts mean deposit amounts from 20,000 to 100,000 USD. Do not hold more than a
third of the total amount as collateral for open positions at the same time
deposit.
When dealing with large market amounts. Large
amounts are deposits over 100,000 USD. Here, the range of specific weight of
collateral that can be simultaneously held on open positions ranges from 30 to 5 percent.
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The specific amount of margin for open positions is at the intersection of your greed and caution.
The general rule for calculating collateral for open positions is that there must be a reserve for use in
unusual situations, as well as for the continuation of normal operations.
2) Weekly monitoring of your trading activity. To do this, three most
important coefficients are calculated: - coefficient
of profitable transactions (KtPr); - breakeven ratio (KtBU); - a general indicator
of the trader's activity.
The win rate determines your analytical skills and should not fall below 65%. A lower value of the
coefficient will practically be a guarantee of ruin. Calculation formula: KtPr = KP / KC, where KP is the
number of profitable trades for
the billing period; KS
- the total number of transactions for the billing period.
The break-even ratio is designed to show how effective your risk management system is and whether
you are losing more than you are winning. The coefficient value must be greater than zero. Calculation
formula: KtBu = SP / KP - (SU - S • KU) / KU,
where KU - the number of unprofitable
transactions for the billing period; SP - the amount of
profit received from profitable transactions; SU - the
amount of losses received from unprofitable
transactions; C - standard spread, for the exchange market, instead of the spread, the broker's
commission recalculated into points is applied.
The general indicator of a trader's activity is the resultant of the first two indicators. It shows the
overall success of the trader, consisting of his ability to analyze the market and make the right decisions
to open or close positions. It is calculated as follows:
KtRab \u003d KtPr • SP / KP - (1 - KtPr) • (SP / KP - KtBu). The value of
this coefficient must be greater than 1.
The above indicators for assessing the activity of a trader are considered not only in a static state at
a certain point in time, but also in dynamics. If the data of some indicator show a downward trend, then
it is urgent to understand the reasons for such deterioration and try to correct them before the trader's
activity does not bring significant losses.
3) Use the methods of insurance of spot and futures operations in the exchange options market.
This will increase your costs, but increase reliability. It is better not to earn
than to lose.
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3.2. Rules for setting stop and limit orders
1) General questions.
Stop orders are usually placed during the absence of the trader at the workplace and their main task is to save the
trader from ruin (execution of stop losses) or to provide additional profit (stop profit). In a fast moving market, place orders
at no fixed price that have an absolute chance
of being filled. If the market is sluggish, then place orders with the definition of the execution price, this will protect you
yourself from the unfavorable price of order execution.
It is better to refrain from placing stop losses, or you may find yourself in a situation where your order was filled and
you took a lot of losses, and by the time you arrived at work you could have closed the position at a better price, if not at
all without losses. In this case, if you are afraid of a price change that is unfavorable for you, it would be much better to
close this position while you are away from the market.
2) Stop profit (take profit). The
amount of take profit will depend on your calculation of the expected rate dynamics and your desire to make money on
one transaction. If you have already exceeded your earnings plan from this position, and the analysis says that it is too
early to stop, then close some of the positions. At the same time - do not revise your plans too often. Don't get carried
away.
3) Stop loss.
The size of the stop loss, firstly, depends on how much you are willing to lose on one transaction and, secondly, on
your calculation of the market situation. Please use the following rules:
- when making any exchange transaction, you cannot lose more than 2 percent of the amount of your
deposit. As soon as you have crossed this line - close the position;
- put a limit on the maximum amount of losses that you can afford to lose in one calendar month. As a rule, it is equal
to 6-8 percent of the deposit amount. If you have already crossed this milestone - stop operations in this month before the
start of the next.
The first part of these rules is important for setting a stop order. At the same time, it is possible
use the following formula (using the USD/DEM ratio as an example).
Your deposit amount is 50.000 USD. The
maximum percentage of losses per trade is 2 percent. In total, how
much we can lose in one trade is 50.000 * 2 / 100 = 1.000 USD. We bought 1.000.000 USD
against the mark at 1.5450. The cost of one pip in USD is 100
DEM / 1.5450 = 65 USD. The total number of points we can afford to lose
on this trade is -1.000 / 65 = 15. Thus, we will have to set the stop loss at -1.5450 + 0.0015 = 1.5465. If you are
not satisfied with such percentages, then calculate your own, but strictly observe them.
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3.3. Possible work
strategies Depending on the analyzed period and your preferences, three work
strategies are possible. The first strategy is to maintain open positions for a long time
(from several days to several months). This strategy is used by strategic investors and
semi-professional speculators. It is most effective in an emerging trend and least profitable
in sideways or sluggish trends. Requires mandatory insurance and appropriate work on
the futures exchange options market.
The second strategy is to work on medium-term trends with a duration of up to several days. This
strategy is also mainly used by semi-professional speculators. This strategy can take advantage of all
work strategies, on the one hand, it can be quite long-term, and on the other hand, it can be quite shortterm. It is also desirable to have insurance in the options market. The third work strategy is to open a
short-term position lasting from several minutes to several hours. It is used by professional players
who already know and "feel" the market quite well. The good news here is that by using this strategy,
you do not run the risk of unexpected messages and price changes while you were not in the market.
Negative - large indirect costs (commission, spread, communication services, etc.); greater risk of
adverse short-term price fluctuations; requires constant concentration, tension and control throughout
the working day.
To begin with, it is recommended that you use the second strategy of working with gradual
using the advantages of the first and last strategies in sluggish or sideways trends.
It should be noted that it is better to do nothing than to do something.
3.3.1. Rules for opening, maintaining and closing
positions Rules for opening
positions. 1) Open a position only if there is one main and at least one confirming
signals.
2) When opening, be sure to form in advance and write down on paper: the price at which you are ready to close for profit; - the price at
which you will close when you receive losses;
- Estimated time during which you are ready to maintain an open position. 3)
Cautiously and for short positions open against the trend. 4)
Cautiously and for short positions open in the absence of a definite trend (with a sideways trend).
Rules for maintaining positions and partial closing before the settlement time.
1) Support positions only if the analysis confirms the previous conclusions. 2) Partially
close:
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- upon receipt of losses in excess of the
estimated; - if the price has reached the calculated level for profit. 3) Wait: if you receive losses below the calculated
ones; - if the price remains at the same
level; - if the price has not reached the calculated level for making a profit.
Rules for closing positions.
Close positions in any case (subject to the above features of the work): - after the expiration of
the estimated time; - upon receipt
of the estimated profit; - upon receipt
of estimated losses; - when the
maximum profit is reached.
In conclusion, we note that both opening and closing a position is shooting at a moving target. Hitting
exactly the heart (the opening price you have chosen) is quite difficult, so be prepared to trade at a price
close to the "heart" area.
3.3.2. A little about averaging
Averaging is such a work strategy when you either made a mistake or simply made any deal (the first
one that came to your mind) and the price went against you, and you perform the same operation at a
more favorable price.
For
example. You bought $1 million against the mark at 1.5500 expecting to sell above 1.5510 for a 10
pips profit (1.5510 - 1.5500). But the price after a short
period of time went down and amounted to 1.5480, thus you incurred
a loss of 20 points (1.5480 - 1.5500).
You decide to buy another $1 million mark at this rate of 1.5480, expecting to sell $2 million now at
1.5495 and earn the same 10 pips profit (1.5495 - 1.5500 + 1.5495 - 1.5480). Thus, you averaged two
positions at the average rate of 1.5490 ((1.5500 + 1.5480) / 2) and you no longer need to wait for the
price to rise to 1.5510.
The main disadvantage of averaging is the fact that you do not know in advance what price the market
will go against you. But averaging requires each time (after the first) to invest twice the amount of
collateral from the previous one. But if you have a lot of money, you can afford to move 100, 200 or more
points. Although such moves in the market happen infrequently, it is still not the best strategy, especially
if you see that you have made a mistake in determining the direction of the trend.
Let's try to show this in the example above. Let's say when
the price reached 1.5495, we saw that we made a mistake and it will be possible to buy the dollar
against the mark cheaper. At this moment, you closed your position and let the rate have already fallen
to 1.5490, thus we suffered a loss of 10 points (1.5490 - 1.5500).
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Then the price fell to 1.5480 and we bought $2 million against the mark (bringing the total
transaction to the one in the example above) at that price.
When the rate reached 1.5495, we sold 2 million, having received 30 points of profit from this operation
(1.5495 - 1.5480 + 1.5495 - 1.5485).
The total result of the transaction was 20 points of profit (30 - 10), which is 10 points
more profitable than the previous trade with averaging similar in all its characteristics.
In doing so, we have also freed ourselves from the fear of a larger and more unexpected course change,
our position is stronger by at least 10 points.
People of three inclinations resort to averaging: - rich
traders; - stupid
traders; - rich stupid
traders.
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4. GAME PSYCHOLOGY
The psychology of human behavior is the key to understanding what is happening in the financial
markets. All ordinary, everyday feelings and aspirations appear in tough market battles like a chemical
solution on a litmus test. Feelings inherent in all of us - fear, greed, hope and others - in the fast
rhythm of exchange trading sometimes have a decisive influence on the behavior of a trader. Weak
and self-confident, greedy and slow, all these people are doomed to become victims of the market.
The influence of the market crowd can transform a losing trader into a winner, and a successful trader
into a loser. However, the latter happens much more frequently. Knowing your own abilities and
preferences, positive and negative qualities can help avoid ruin. If you add to this the ability to
adequately assess the psychological state and the corresponding behavior of the market crowd, then
success will be guaranteed to you.
After a short introduction, we can begin to consider the main points of the psychology of the
exchange game.
4.1. Greed
The driving force that makes you participate in the speculative financial markets is greed. If your
greed is insignificant, then
you will conclude few deals, missing out on many good ones.
moments. In this case, I recommend that you do another type of business, more calm.
If your greed has no limits and is infinitely great, then you will try to conclude as many deals as
possible, exposing yourself to the risk of unclear prospects. It is better to play in a casino, it will be
closer to you by nature and cheaper for your wallet.
In the first case, the trader's work will resemble the actions of a cowardly hare, carefully
peeking out from the bushes. In the second - the excitement of a reckless grunt in equestrian combat.
Greed should be cultivated not as a weed that grows spontaneously and anywhere, but as a truly
useful plant. This way you can keep your greed on a short leash. The most important thing is that it
does not interfere with your decision-making when concluding transactions. The result of the
action of greed will be the motivation to make deals. Two types of motivation
can be distinguished: - rational
motivation - usually present before the first entry into the market for a young trader, as well as in
the work of a professional trader. It is expressed in cold prudence when making decisions on the
conclusion of transactions;
- irrational motivation - expressed in the excitement of the player and is present in almost every
trader, however, some control their excitement, while others are slaves of emotions and are practically
doomed to lose.
You can identify whether you are gambling under the influence of greedy gambling or not using
the following signals. If a trader asks others: "What do you think about this?". If he tells others about
his open positions. If a trader does not have a work plan drawn up before making deals, all this
suggests that this person is most likely working under the influence of greed, and not reason. The
best cure for gambling is to draw up a plan for concluding transactions (financial activity plan).
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Let's consider possible examples of greed in the figure below.
Figure 4.1
This example is conditional. Sometimes the complete absence of greed "saves" from possible losses,
preventing transactions in uncertain situations.
4.2. Hope and Expectations
The next factor that encourages a trader to enter into transactions is the hope of making a profit.
Naturally, the meaning of almost any job is to earn money. However, when hope prevails over
calculation, you run the risk of overestimating your own capabilities when analyzing the situation and
turning a small "fly"-reality into an "elephant"-dream. Hope must be subordinate to both calculation and
greed. It is the huge hope that leads novice traders to ruin. A trader who lives in hope is doomed, like a
dinosaur, to extinction and leaving the arena of market battles.
Hope determines the behavior of a trader mainly in two cases: - at
the moment of entering the market. Only the hope of making a profit can make a person take a
specific action in the financial market; - at the moment
of receiving losses, when there is hope for a change in the situation for the better. Here hope goes
through three stages of its development and existence. At the first stage, when the losses are still
insignificant, hope is inevitable and can be justified to some extent (if you are confident in your actions
and act according to the previously adopted plan). At the second stage, with a further increase in losses,
hope rises to its peak. At this point, it is most difficult for a trader to separate his hope from the actual
actions of the market. The decision whether to close a losing position or leave everything as it is will
largely depend on how much the trader's mind controls his desires and how adequately he assesses the
situation. The third stage is characterized by critical losses, when hope already leaves the trader and
despair comes to replace it (a particularly strong manifestation of despair among weak and novice
traders). Most market players are familiar with that feeling of emptiness when it seems like the whole
world is working against you. But in fact, most of you don't even know you exist.
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therefore, the market's wickedness is greatly exaggerated. Although one cannot ignore the fact that the
main goal of any trader is to make a profit ... at the expense of another trader. A person who nevertheless
survived the last stage of the manifestation of hope can safely consider himself an accomplished trader. In
subsequent trading practice, the events of the third stage will make themselves felt in the form of fear.
On practical examples, the action of hope (expectation) will look like this. Until the moment
the transaction is concluded, the hope for profit will be adequate to greed. A more greedy trader
will try to enter the market, even if his hope of success is relatively low. A non-greedy trader will
wait until the moment when his hope of making a profit reaches a certain criterion, even if it is too
high. Thus, the hope until the moment of the transaction will correspond to the greed shown in
Figure 4.1. High greed corresponds to high expectations, small greed to low profit expectations.
Moderate greed will be supported by moderate hope, which seems to be the most reasonable
solution in the psychological games of consciousness. Look for measures in your desires and
actions.
A classic example of the result of great greed and its corresponding hope was described in
Alexander Pushkin's novel The Queen of Spades. The main character went crazy when he
"suddenly" lost everything he had, although before this successful game he doubled his capital twice.
When receiving losses, the hope for their avoidance or minimization will look like this:
as shown in figure 4.2.
Figure 4.2
4.3.
Fear Fear arises when you take losses. Some fear paralyzes and they cannot stop in
time and lose everything. For others, fear makes them move and make sometimes
mutually exclusive deals, which also usually only accelerates ruin.
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There is an old parable, according to which Alexander the Great selected people for his army in the
following way. A tiger or a lion was introduced into the same room as the subject. If the subject blushed, it
was considered that he had successfully passed the test. If the person passing the test turned pale, then
such a person was not taken into the army. From the point of view of psychology and physiology, this fact
can be explained as follows. In a moment of stress in some people, blood rushes to the head and they
blush, which, in turn, helps them find a way out of the current critical situation. In people who are opposite
to them by nature, the blood, on the contrary, departs from the head. At this moment, such people are not
able to adequately assess the situation, because they simply do not have enough blood (the nutrient
medium of
the brain). Shifting this parable in a modern way, from the point of view of market speculation, we can
draw the following conclusion. At a critical moment, it is better to try to do something than to sit back and
watch the dreams of a wonderful future evaporate along with the change in quotes. At the same time,
counter the convulsive actions of a nervous choleric with reasonable and systematic steps to get out of
the crisis, do not panic.
The most important thing is that the feeling of fear does not affect your mind and your actions. Be clear
according to the plan you drew up before opening a position (respectively, before fear arises).
Graphically, fear might look like this. Let's look at the example shown in Figure 4.2 above.
Figure 4.3
4.4. Psychoanalysis of a Trader's
Actions Before proceeding to consider the main part of this paragraph - psychoanalysis, I will give the
following example of the actions of most people. The player, trader or investor is offered two options:
- with a
100% chance of winning 85 thousand dollars; - or
with an 85 % chance of winning $100,000 and a 15 % chance of not winning
Nothing.
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The objective profitability of both options is the same - 85 thousand dollars. However, the vast
majority of people will choose the option with a 100% chance of winning $85,000, choose "bird in
hand". The first conclusion is that when a person wins, he is not disposed to take risks. In
the second
case, the player, trader or investor is also offered two options: - with a
100% probability of losing 85 thousand dollars; or 85% chance of losing $100,000 and 15% chance of not losing
Nothing.
Here, the objective unprofitability of both options is also the same - 85 thousand dollars. But in this case, most
people will choose the second option with a 15% chance of not losing anything, they will choose "pie in the sky." The
second conclusion is that when a person is threatened with losses, he is inclined to take risks. Summing up,
we can see
that we are afraid to take risks when there is no danger, but we also take risks.
hope when the danger is great.
The result of our psychological weaknesses in trading will be absolute losses. For example, as per the
above example:
- as a result of the purchase of some goods at some point, the first party (the buyer) received a profit of 85
thousand dollars. This party does not risk further and takes profit by selling this product to a third party. This
third party has an 85% chance of making $15,000 and a 15% chance of losing;
- the other side of the transaction (the seller) at the same time had a loss of 85 thousand
dollars. However, this side does not close the deal and hopes, at best, to remain on their own;
- in the future, the price, as expected, grew and provided a third party with an income of 15 thousand
dollars, and the second party (seller) - a similar loss;
- total result - the first party (the buyer) received an income of 85 thousand dollars, the second party
(seller) - a loss of 100 thousand dollars, and a third party - 15 thousand income.
There is, however, another scenario - a third party can lose 85 thousand dollars, according to a 15%
probability. However, in reality, the real loss of this person is much less due to the placement of a reasonable
stop-loss order, limiting the resulting losses. A legitimate question arises: "Who is this third party?". As a rule,
this is a
professional player or trader. He uses the fear of the
winning person to lose the income received and the hope of the losing person to win back. At the very last
moment, a professional, as it were, wedged between the first and second and, with a huge probability of
success (85%), takes his share, putting a relatively small amount at stake. By the way, it was this principle of
interaction between professional and non-professional players that was implemented in option contracts.
Thus, our weaknesses are literally rich food for professional players and traders.
Life confirms these theoretical fabrications. All the novice traders I know have won often and little, and lost
rarely and much. As a result, the total losses far exceeded the total profit, and it was difficult to call their
activity otherwise than "wrecking".
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After considering an example showing our weaknesses, we can move on to identifying these
weaknesses in specific traders. Knowing our own and other people's weaknesses can help us get rid
of them, or at least be safe. To this end, we will apply the psychoanalysis of the trader's actions.
According
to well-known statistics, about 80% of traders end their careers at the very beginning without
achieving any known positive results. And the vast majority of them (more than 90%) - and in general
"leave" with losses. As a result, it turns out that more than 70% (80% * 90%) of all traders are
potentially unprofitable. If you believe the theory of probability, then these numbers seem too large.
The theoretical value of "losing" traders cannot exceed 50%, even if we exclude traders with zero
performance. What is the reason for the significant discrepancy between theory and practice.
Most failed traders blame their losses on small amounts of deposits, the lack of high-quality
information in terms of speed and volume of information, and the malicious counterparties of brokers
who take a commission and / or spread. In part, these traders are right - the reasons listed above
clearly do not help to earn. However, the main cause of losses lies in ourselves - this is our "I", which
was shown in the introduction to this paragraph. Unfortunately, it is
possible to check the real qualities of this "I" without the help of a professional psychoanalyst only
in "combat" market conditions or in other extreme situations. For managers who manage traders and
private investors who themselves are traders in the financial markets, not knowing the "I" is the
most important risk factor. It's very hard to trust someone you don't know, even if it's you. Revealing
the real qualities of a person, his "I", under normal conditions, can take years. It is not for nothing that
they say that in order to recognize a person, one must "eat a pood of salt together." A manager and a
private investor do not have this time, so it remains either to seek help from a professional psychologist
or to release an "unknown" trader into the market, like an inexperienced matador to a bull in the arena.
At the same time, I strongly recommend that you protect yourself from significant losses, which are
mandatory in this case, using stop losses.
Before identifying the qualities of the "I" of a trader and correlating them with one of the main
psychotypes of the classification below, you need to know that it is almost impossible to change an
adult , because by the age of 5 the backbone of our "I" is formed. However, it is not only possible, but
also necessary, to cultivate or slightly correct the necessary qualities necessary for a trader. Therefore,
the main task of the psychoanalysis of the trader's actions is to identify mental deficiencies that can
lead to losses, and their correction. If the negative qualities of a trader cannot be corrected, then I
recommend excommunicating this person from trading until he has harmed neither you nor himself.
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Table 4.1
trader's lsnhotype active (aggressive) intellectual
trader Negative - gets tired quickly,
needs a long rest, reacts violently to
the appearance of messages
of a fundamental nature.
Positive - can quickly make
objective decisions, capable
of introspection. Recommendations
- to train endurance, at the
first signs of weakening of attention
- to have a rest.
intuitive
instinctive
passive trader .
Positive - "measure seven
times and cut one", perseverance
in achieving the goal.
Recommendations - speed up the
pace and calm down, be careful
about other people's recommendations,
trust yourself.
Negative - weak nerves,
prone to nervous breakdowns, needs
constant monitoring.
Positive - good perception of reality,
able to make decisions in conditions
of complete uncertainty.
Recommendations - relentless
control and treat everything
indifferently.
Negative - a strong experience of
failure, a tendency to accumulate
negative energy,
contemplation. Positive - does not
"climb into the bottle."
Recommendations - outdoor
activities, make deals more often,
discuss your actions with others, but make decisions
Negative - excessive
emotionality, strong
susceptibility to feelings of fear,
Negatively - suppressed
emotionality, stubbornness,
secrecy. Positive goodness in actions.
Recommendations - relax more
often, "leaving go away" (this
is about closing deals).
hopes, etc. Positive - can not get tired
for a long time, a developed sense
of fear. Recommendations - calm down
and take your time.
on one's own.
Let's see how to test a trader's ability to trade successfully. 1) Everyone is equal before opening
a position. Some are so sure of their rightness that they are ready to defend their opinion with "foam at the
mouth", others are "quiet" traders. They silently listen to someone else's opinion, but they will do everything in their
own way. Still others are ready to discuss anything and as much as they want and spend 24 hours a day in
conversations. The difference in the behavior of these traders, as a rule, does not have a strong influence on the
results of trading. Any of them is equally dangerous when working with "live"
money.
2) After some time (5-10 minutes for a short-term game or the next day for long-term positions) after opening a
position, it usually becomes clear whether the transaction was made correctly or erroneously. Moreover, it is
“correct” not only from the point of view of the direction of opening a position, but also the price and time of its
completion. Outcomes, as we know, can be only three - profit, loss or zero result. Of these, only the first carries
positive emotions, while the other two are charged with negative energy. Thus, after a short period of time, it is
possible to determine how a trader reacts when receiving positive and negative emotions - aggressively or
passively. I deliberately leave you with only two answers, since only so-called "analysts" can afford ambiguity in the
financial markets, not money managers. As a result, the following table can be filled in for a specific trader.
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Table 4.2
passive
The trader's reaction to the event is active (aggressive) when
making a profit when
making a loss when the
result is zero, the total
amount of reactions
The active reaction of the trader is the sharpness of movements and the mobility of opinion
about the open position. A passive reaction is manifested in the trader's prolonged inactivity, a
kind of fading, no matter what happens.
The result of filling in this table will be the definition of the first component of the psychotype
trader - active or passive type.
For obviously passive traders, it is possible to recommend the obligatory drawing up of plans
for opening, closing and maintaining positions, otherwise, due to their contemplation, they will
miss not only good moments when opening positions, but also when they are closed. Among
passive traders, there are often cases of averaging positions (strengthening already losing
trades in order to recoup). Similarly, but for a different reason, it is recommended to stick to
opening and closing positions for clearly aggressive traders. The last type of traders is prone to
ill-conceived, hasty actions, which can only do harm. Active traders tend to "reverse" (i.e. close
a position while opening a position in the opposite direction - buying after selling and vice versa).
Often there are mixed, active-passive types of traders. After gaining some experience, these
traders can be allowed some independence and deviation from previously accepted plans. 3)
Before opening and closing a position, be sure to find
out on the basis of what data or conclusions this transaction is made. If you do not receive
objective reasons and an intelligible answer corresponding to them, then you have an instinctively
or intuitively oriented trader in front of you. The instinctive trader is characterized by a significant
focus on the physical reasons for its implementation, references to previous experience and
market behavior. An intuitively oriented trader will not be able to say anything intelligible at all,
except for a reference to his premonitions. If the fact of making a deal is logically explained,
then this is an intellectual type trader. At first glance, the intellectual type of trader is preferable.
However, excessive rationality often serves as a cover for the fear of the unknown market, the
fear of making deals. In this regard, it is necessary to find out not only the reason for making a
particular transaction, but also to analyze the behavior of the trader during the full operation from beginning to end. As a result of determining the second component of the psychotype of a
trader, you can fill in the following table.
Table 4.3
Causes of Trader Behavior Intelligence
instinct
intuition
when opening a position
while maintaining a position
when a position is closed
total
After identifying the two main components of the trader's psychotype, the result obtained
must be correlated with Table 4.1. and build working relationships accordingly.
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4.5. The psychology of the crowd and the trader
The following risks are identified that an individual trader is exposed to when working on
mass speculative markets:
- decisions made by the crowd, as a rule, are made at the level of its most stupid
participant. Thus the decisions made by the crowd are not
intelligent; - rumors often control the crowd, and rumors tend not to be
justified; - it is surprising that many traders who earn 300,000 dollars a year listen to the opinion
of experts who earn 30,000 dollars a year; - a person
tends to succumb to the influence of the crowd and make collective, non-individual decisions.
Naturally, you can not go
against the crowd, since it is the crowd that forms the main market movement. But, on the other
hand, it is also impossible to follow the opinion of the crowd, since it is most likely erroneous.
Observing the actions of the market crowd, you need to determine whether you are present at a
rally of the winners (then these people are revolutionaries) or you are watching a gathering of the
vanquished (in this case, these are rebels). Naturally, no one wants to voluntarily go to the
"execution" if not a successful rebel. Therefore, it is vital to join the most likely successful
revolutionaries. The winners can be seen by the growing volume of transactions, by the upward
trend of the ADX indicator. Other indicators of technical analysis (MACD, RSI, etc.) make a sharp
unidirectional movement with the price dynamics. For the defeated, it's the other way around. And
here it is important for you to single out for yourself one very important and sometimes decisive rule:
"You must join the victors and betray the vanquished!"
4.6. Intuition
First, let's try to answer the question, what is intuition. In philosophy, there is the following
explanation of the concept of intuition. INTUITION is the ability of a person to penetrate into the
essence of things not through reasoning or logical thinking, but through instant unconscious insight.
If we accept this explanation of intuition as an axiom, then in relation to the topic of this book, we
can say that intuition is nothing more than the ability of a trader to work and "see the market not
with the
mind, but with the heart." Now suppose that a trader's perception of the market is a synthesis of the activities of t
the basic qualities of his body, mind and soul, the three "I" - Instinct, Intelligence and
Intuition. How do these qualities
manifest themselves? The instinct in a trader manifests itself on the material level. When a
person wants to eat, he gets food. At the same time, if the process of obtaining food is hampered
by the presence of a predator or other strong opposition, then a person either unites with people
interested in the same food (forming an organized crowd), or looks for another, more real opportunity
to satisfy the need for food. For a trader, it all looks like this. They are driven by the desire to earn
their daily bread (and even enough for caviar), for which it is necessary to conclude deals - to buy
and sell.
Any initial action of a trader is considered precisely as his desire to satisfy various material
interests. If, having performed any action, the trader suffered losses, then this is almost the same
as when, in the process of obtaining food, he came across an insurmountable obstacle and lost
either his left eye or his right leg. Any normal person will step back and
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He will try not to go into this place more than one. So will our average trader. At the moment, his
stop loss will be triggered. If the
trader has earned, and even quite easily, then this fact is equated to the discovery of good
forest land, in which there is a lot of fearless game. Naturally, the next time the trader will come to
the place that he already "knows well". This is how a kind of prototype of the trend behavior of the
market is seen, when a strong unidirectional price dynamics reinforces itself, as long as there are
forces (growing like a forest fire).
Thus, it can be noted that the action of instinct is manifested in the emergence of an
unconscious desire of the trader to make deals. At the same time, if possible, avoiding "bad
places" and often looking into "good lands".
The intelligence of a trader is manifested in his ability to logically comprehend what is happening
to him and to the reality around him and make the simplest and most profitable decision on this
basis. If the instinct acts unconsciously, using the generic memory (these are the advice of
teachers and a set of simple rules, which are enough in this book), then the intellect tries to
independently comprehend these tips and rules in accordance with its own worldview and changed
external conditions. It is the intellect that is called upon to help find a way out of a possible impasse
into which you can be driven simply by following the old rules. Intelligence can also provide its
own image of the financial markets and thus be much more successful in surviving in it.
Intuition. They say that intuition can only come with experience. Is it so? However, after all,
experience is only the result of the accumulation of knowledge and intelligence sufficiently
developed in this direction. Experience, of course, helps, but it is not enough to explain where
intuition comes from. There is a belief, usually confirmed, that beginners are lucky, but beginners
have no experience at all. Today, there are market analysis programs that are a set of simple
rules (technical analysis programs) and self-learning programs (using neural network solutions).
These types of programs are computer processing of all the experience of previous generations
of traders. At its core, any program is only a reflection of two qualities of a person - his instinct and
intelligence. To date, there are no programs that predict market behavior using an intuitive method.
If we cannot logically explain what intuition is (and this is precisely the reason for the failure to
create such programs), then can we apply it. I give an affirmative answer.
Let's again draw an analogy between the daily actions of a person and the actions of a trader
in the market. Suppose that we are faced with the task of determining whether it will rain today
and taking an umbrella with us on the road or not. Our instinct will tell us that since it was raining
yesterday, and we didn’t have an umbrella with us and we got wet, it’s better to take an umbrella.
Whether it rains today or not. The intellect will listen to the weather forecast and look at the sky whether there are rain clouds there or not. We can also calculate the probability that it will rain
while we are out in the open. The result will be the conclusion - to take an umbrella with you or
not. Agree, any, not even the most powerful personal computer will cope with such a task. Here
the probability of positive results will entirely depend on what decision rules we set and how
precise we are in defining the concept of result. But a computer solution will never be 100%
successful. Even today, chess programs cannot always beat individuals. Do these people calculate
scenarios better than a machine? May be.
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But the difference, most likely, lies in the presence of intuition among living chess players. Let's
go back to our umbrella example. You may not look outside and listen to the weather forecast, but
if you have developed intuition, you will determine much better whether to take an umbrella with
you today or not. In any person there are the beginnings of intuition, but not everyone uses it.
Namely, in application, it develops, and the point here is not in experience. Purposefully using
their abilities of sensory perception of reality, a trader can develop his intuition, which will be no
worse, and maybe much better than any of the best rules and the best program to suggest the right decisions.
How to check whether you have intuition or not. You can, by just looking at the subject of
research (for example, a price chart), try to imagine what will happen to it in the future and fix it on
paper. Naturally, any application of this in practice at first, until you are convinced of your ability
to intuitively perceive the market, is out of the question. It is advisable to conduct these experiments
regularly, in any mood and frame of mind. Only having received a positive result close to 80 %, it
will be possible to say that your intuition has earned. In all other cases, it is insufficient for practical
application. But, of course, even having a highly developed intuition, one cannot operate in the
market using only it. It's the same as walking on the edge of a cliff blindfolded. This is at least very
tiring and, at the maximum, you can lose everything. In conclusion, I will give the example of
George Soros - one of the most
successful financiers of our time. His approach to applying intuition is as follows. He puts
forward a hypothesis and tests it with his real actions in the market (of course, without risking large
sums). If the hypothesis is confirmed, then it can be applied as a working one. Otherwise, it is
necessary to check why there was a discrepancy between the reality and the hypothesis. It is
possible that this is only a temporary deviation and the hypothesis is generally correct. Only after
testing the hypothesis can large-scale operations in this direction be started.
4.7. Psychology of perception (gestures
and facial expressions) After reading one heading of this paragraph, a natural question arises:
"Do we need this?" But let's not jump to conclusions. Consider one example given in Robert
Slater's book
Soros. August 26, 1992. 08:26. British Lord Chancellor of the Exchequer Norman Lamont answers
journalists' questions about the possible devaluation of the pound sterling and, accordingly, the
country's withdrawal from the
Common Currency System (EMS). Brief description of that moment. Since 1987, the leading
European currencies have been pegged to the German mark. For example, a pound was equated to
2.95 marks. In 1992, it became clear that many currencies were overvalued (among them the pound)
against stronger currencies (the German mark, the Dutch guilder and the French franc). The
depression in the British economy gave little reason to hope that Britain would be able to maintain
such a high exchange rate of the pound against the German mark for a long time. Currency
speculators have smelled the smell of fresh blood. They decided that England would have to leave
the EBU. By that date, the rate settled at 2.795 marks per pound, which was close to the maximum
allowable mark of 2.78 marks. In case of breaking through this course, Great Britain
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would have to leave the EMU and devalue the pound. This measure would revive the country's economy,
but led to the resignation of the government. The latter was what the Lord Chancellor feared. Therefore,
he took all measures to contain the situation. But was Norman Lamont sure that he would succeed.
When he answered questions from reporters on that momentous day, Katherine Charlton (a specialist
in voice and pronunciation) noted that: "This person has deep doubts." "The chancellor's secret was
betrayed by the frequency of blinking. According to Charlton, most people blink 6-8 times per minute. And
Lamont blinked 64 times in 45 seconds! As a rule, when people tell the truth or what they really think, their
eyes are calm and motionless. Body language, blinking frequency, and a tendency not to answer
questions. All the signs are there. The speculators have sensed the government's weakness."*
The rate did not fall immediately, only on September 17th. On what the UK will call "Black Wednesday",
the exchange rate fell to 2.71 marks, free-falling to a record low of 2.40 marks. In the figure below, you
can see all the vicissitudes of that time.
Figure 4.4
Careful observation of the speeches of responsible officials on key issues of domestic and foreign
policy allows one to judge how sincere they are. Do they themselves believe what they say? I will not list
all the gestures and describe
the facial expressions of the speaker. There is a special literature for this. It is important that you, if
possible, do not lose sight of this kind of analysis, which is the analysis of the actions of those persons
who determine the main directions of the development of the economy.
Here we will briefly dwell on only some hand gestures. However, at the same time, I note that what is
described below is considered only from the business side of life, in no way referring to personal life. The
gestures below can be observed among politicians, senior administrators, journalists, analysts and
commentators. Observing them, of course, will not give one hundred percent certainty whether you
understood their gestures correctly or not, but this is information that sometimes speaks more than words.
Each of the described gestures must
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must be considered only in the context of the situation, since the same gesture in different situations can be
interpreted differently.
1) Talking about grandiose plans. If his hands are pointing their fingers inward, then be careful. This is how
unconscious vanity or daydreams manifest themselves. I’ll also note here
that if you are talking with a trader subordinate to you or yourself with someone and the hands of the
speaker (the trader or you, respectively) are pointing their fingers outward, then you are dealing with a subject
who only demonstrates reasonableness. *
2) If the speaker's hands are pointing down, then this person is afraid. True, what is he afraid of, we
we cannot recognize by this gesture alone.
3) If the hands are hidden, then this person is internally insecure.
4) A person with splayed fingers is more likely to be convinced of some idea or
in fact, than one who keeps his fingers mostly closed.
5) The speaker's hands are directed with their palms towards themselves. This means that the person is
hiding something and not telling. 6) The swearing-in president, according to custom, raises his hand. If, at
the same time, the fingers of the raised hand are bent inward, then this indicates a desire to switch everything
to yourself. If the fingers are bent outward, then such a person is a great opportunist, subject to the influence
of others. Straight fingers indicate a balance between these tendencies.
7) Hands folded behind the back speak of the humility of a person at the moment, if the hands
stacked in front, then such a person asks that everything be over quickly.
8) A person who swings strongly during a conversation, as a rule, does not believe in what he himself says.
We can often observe this in the oriental bazaars. 9) If the
listening person plays with a paper clip, pencil, glass or other object,
then this indicates his disinterest in the conversation. 10)
If the speaker's thumb is pointing up, then this indicates that he is confident in his words and filled with the
desire to put them into practice. The position of the thumb down indicates that all is lost. Although sometimes
the same position of the thumb also signals a general antipathy towards the object of their words. Two thumbs
pointing up speak of the manic penetrating power of a person who often does not know what he is doing. 11)
Index finger pointing up shows a hidden threat or a deep inner conviction. It can also
symbolize the ability to believe. An index finger pointing downwards clearly indicates a lesion. 12) If
someone during the discussion raised his finger to his mouth, then this means that this person realized
that said something wrong.
The gestures listed above are empirical observations of many generations. It is always necessary to
remember that there can be exceptions to any rule.
4.8. Market memory
The market is
inertial. Why does the effect of price inertia arise in financial markets in relation to the previous one?
movement? I will try to explain this fact by referring to the psychology of human memory.
* Robert Slater. Soros: The Life, Activities and Business Secrets of the World's Greatest Investor. - Kharkov: Folio, 1996.p.251.
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As shown by modern research in the field of human memory, a person daily "loses" up to 25 percent
of the information received earlier. Here, information is understood not so much as the actual acquisition
of any knowledge, but as psychological experiences associated with the acquisition of this knowledge.
As applied to financial markets, the above statement will look like
in the following way.
If there was a strong rise in prices in the market on Monday, a trader on that day will naturally
remember the full amount of information related to the price increase and be impressed by this increase.
On Tuesday,
about 75% of the psychological experiences of yesterday will remain in the trader's memory.
day, and the specific content that caused the price increase.
On Wednesday, the percentage of memory of Monday events will decrease to 50%, on Thursday - to 25%, and on Friday
- will leave only a slight trace of memories.
In reality, the percentage of forgetting may vary depending on the events of subsequent days. If prices
continue to rise on Tuesday in our example, then Monday's impressions will only intensify, and on
Wednesday, the rise of Monday and Tuesday will remain a pretty bright event in the trader's memory.
The percentage of memory here will be more than 75%. If,
on the contrary, prices fall on Tuesday, then the events of Monday will lose their value by Wednesday.
weight more than 50%.
Thus, it is necessary to consider the memory of the trader in one continuous chain of events, where
the latest events will be given more weight. This will remind us of calculating the exponential average.
What conclusion can we
draw from the above. Since on the second and third days (Tuesday and
Wednesday in our example) the trader remembers most of the events of the first day, this memory will
leave a significant imprint on his actions on these days. Few would dare to sell in a strong bull market
unless there is a good reason to do so. But after a strong movement, the fear of selling will affect for
several more days, gradually weakening its grip.
In the real world, it often happens that Friday's strong move continues into Monday, sometimes taking
over the first half of Tuesday. Strong price changes on Tuesday/Wednesday weaken towards Thursday/
Friday. Knowing this and understanding the reasons for such behavior of the market, you can avoid hasty
actions and stop in time from continuing to work with the trend.
Human memory has a remarkable property - to forget.
The inertia of the market leads to one important conclusion - you will understand the market much
better if you learn to look at it from the point of view of the average trader. And the average trader bases
his actions to a large extent on the previous actions of the market.
By the way, one of the fundamental principles of technical analysis is based precisely on the fact of
market inertia - the principle of market trend. The selfreinforcing process of price movement is also a product of market inertia.
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4.9. Some Laws of the Market
The law of
probability. It consists in the fact that sooner or later the price will go down (or up). Based on this
assumptions work all oscillators.
The law of
chance. You never know what might happen the next moment, so always be prepared for anything
- both unexpectedly big money and losses. Therefore, all your calculations on the market are adjusted
for possible accidents.
Sod's Law.
You could calculate everything perfectly and get seemingly 100% confirmations, but just when you
made a deal, someone changed the rules of the game. Never forget this possibility. Get ready to
change the rules of
the game.
The law of
optimism. It consists in the fact that a person tends to exaggerate his chances of
winning. This exaggeration will push you to make deals on the most, at times, unthinkable, and for sure
the first prices offered to you.
Fear yourself, your biggest enemy is yourself.
Law of time. It
can be formulated as follows: "The amount of
time that you are out of the market is directly proportional to the strength of your desire to make a
trade." It looks like this the longer you stay "square", the more you are inclined to make a transaction and the less you are
picky about opening prices. A large proportion of losses occur precisely for this reason. The only cure
for this is patience.
Dare to wait.
The law of cause and
effect. If you observe any movement, then try to find the reason that caused it. Without understanding
the reasons that move the course in one direction or another, it is highly recommended not to make any
transactions.
There is no movement without a cause.
4.10. Recommendations of experienced traders (set of some
rules) Do not work against
the trend. If you want to do something - wash the windows (meaning - one desire is
not enough). Work only in a good mood.
Think twice before making a deal. Dare to wait.
You are afraid
of a person in yourself (sick, weak, impatient, greedy, timid, etc.). Do not be
greedy, it is better to have a tit in your hands than a crane
in the sky. Do not regret the unearned.
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Be prepared for losses. Even if you are a genius, you are doomed to fail
sometimes. Don't let small losses turn into ruinous ones. Stay vigilant when things
are going well.
If you have lost several times in a row, rest for a while. Rejoice in losses and grieve in
profits (within reason).
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5. SOME INTERESTING POINTS OF PRACTICAL WORK
5.1. Interaction of dependent currencies
Wherever there is a close correlation of one traded instrument with another, you can
apply the rules set out in this paragraph.
This applies, for example, to the high correlation of the Swiss franc and the German mark in the foreign
exchange market, the mutual influence of different shares of the same industry in the stock market, and some
similarity in the dynamics of stock indices of different countries in the
futures and options markets. Here we will consider the interaction of two exchange rates - USD/DEM
and USD/CHF. Figure 5.1
The figure above shows that each increase in one of the currencies found a corresponding reflection in the
dynamics of the other. The basis for practical application may be some discrepancy in the time of the beginning
of a particular movement in different currencies. If one of the currencies has already begun to rise, and the other
has not, then there is a high degree of confidence that the dependent second currency will also rise. The same
thing happens when the trend stops or when the rate falls. Such a discrepancy, as a rule, does not last too long.
Franc/Mark
interaction, for example, is characterized by a one to five minute lag of one of the currencies from the other.
Therefore, it is recommended to apply the rules of analysis discussed here for working in short positions. The
leader of the movement can change depending on the situation, so do not tune in to the fact that one of the
currencies is always the leader, and the other is dependent. It is useful in such cases to monitor the DEM/CHF
cross rate.
Let's look at an example of such an interaction between the mark and the franc. For example, let's take
minute chart, which most accurately describes the behavior of the dependent currency.
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Figure 5.2
The first step in the analysis of interdependent currencies is to determine the leading and
driven.
In this example, almost all the time the leading currency was the Swiss franc (top chart in the
figure), the leading one was the German mark. The mark lagged behind the dynamics of the franc
by an average of 1 minute. This is quite enough to complete the transaction. If you are going to
buy the mark, then it should be on the reversal of the franc when it makes another high. If you
decide to sell the brand, then we can advise you to make a deal in a minute (shift time) after the
franc reverses from the bottom up. Thus, it is possible to derive the main rule for the analysis of
interdependent currencies - follow the movement of the leading currency and copy it after a certain
time by transactions with the slave one.
5.2. Interaction of Spot Rates and Futures Prices
The correlation between the spot market and the futures market for a single commodity is nearly 100
percent. This is due to the fact that the difference between these markets lies mainly in the standard delivery
times of the purchased goods. Instead of an exchange and brokerage commission on futures in the spot
market, we lose the spread. There is another difference in the functioning of the futures market and the spot
market. Futures are developed mostly in the USA, therefore, large volumes in this market segment are present
precisely with the opening of the main US stock exchanges. For the spot market, the largest market volumes
fall on European markets. But this difference is more likely to affect the number of transactions and less on the price.
Price dynamics in the spot market should be confirmed by changes in futures prices. If this is not the case, then simply a
temporary shift is possible, and prices will still restore parity. Or this price movement on the spot market was random and
short-lived, which will lead to a “rollback” in the future.
Since the spot market is more dynamic when Europe is operating, the futures prices at that time will be dependent on the
spot market prices. On the contrary, in the US market, when the European markets close, the palm in terms of activity will
belong to futures.
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Figure 5.3
In this figure, we see the dynamics of the USD/DEM spot price on top, and the DEM/USD
futures quotes for the same period of time below. The main visible difference in the analysis of
futures prices and the spot market is the direct opposite of futures and spot prices. This is due
precisely to the strong Americanization of the futures market, when the second currency in any
exchange rate ratio is the US dollar. That is, on the "European" spot market they trade in the
dollar (the only exception is the pound sterling), and on the "American" futures market - in all
other currencies, except for the dollar.
5.3. Strategy of working on strong price
movements I ask you to pay your special attention to this point, since most traders go
bankrupt precisely in strong price movements when the classic methods of analysis and trading
do not work. Most of the theory and practical skills are nullified by the inept actions of a trader
when he gets into the maelstrom of strong price changes. It should also be noted that the special
techniques described below can be applied even in such "undeveloped" markets as the financial
markets of Russia and Ukraine. A
strong movement is understood as the passage by the price in one direction of more than
0.3% in 15 minutes. For exchange rates, this value varies from 40 to 60 points, depending on the type of exchan
First, we will theoretically analyze all the main stages of a strong price movement.
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Figure 5.4
1. The first period corresponds to a flat. An accurate definition of the reasons for the
occurrence of a flat can also explain the possible reasons for the subsequent price movement.
As a rule, the publication of fundamental data can lead to subsequent strong movements, if the
data is expected, then a period of short-term price stabilization in a narrow corridor necessarily
occurs before them. If the data is unexpected, then the strength of the subsequent movement
will depend on the direction and strength of the previous trend. In a bull or bear market,
fundamental data that helps this trend amplifies the previous price movement, and data that
conflicts with the main trend either leads to a short-term reversal or stabilization (also shortterm). Also, strong price movements occur when pulling back from powerful support and
resistance levels after long unsuccessful attempts to pass them. This can be explained by the
corresponding weakening of buyers (sellers) after numerous attempts to break through the
resistance (support) level. This creates a gradual preponderance of one side of market traders
over others, the accumulation of which up to a certain limit leads to an explosive fall or rise in
prices. However, if these levels are passed, there is also a strong price movement, since
immediately after the resistance and support levels there is a band for placing stop losses and
take profits. The execution of the corresponding orders leads to the appearance of a huge mass
of funds on the market, strengthening buyers (sellers) in the event of a "breakdown" of the
resistance line (support).
2. The first strong price movement. Must be accompanied by appropriate actions of the
trader. - if you were open and the market went against you, then you should close without
waiting for the passage to the resistance or support level. It should be borne in mind that the
closest level can be passed literally in one breath, so be guided in closing by the next support
or resistance level after the nearest one. Don't be afraid to close with losses and never average;
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2. At the time of the message itself, when interest rates were raised by 0.25%, as the market expected, there
was an additional message about the statement of the British Minister of Finance about empowering the Bank of
England with additional powers. The market viewed this news as positive for the pound sterling, resulting in a
sharp rise in the pound against the US dollar. The passage of a strong resistance level at 1.6200 gave a buy
signal. 3. The first period of price stabilization near 1.6300. There is a consolidation
of buyers with the aim of subsequent movement - to a powerful resistance level of 1.6400. Selling is prohibited,
buying is made at the first hint of an upward movement.
4. The second period of growth of the pound - reached the maximum level of 1.6440. Should be closed before
open buy positions.
5. Rollback to 1.6360, although the nearest support level is 1.6380. Such a significant rollback can be
explained by the excessive, much higher than 1.6400, the previous rate increase. During this period, it is
recommended to make two short trades - first, selling from the upper pullback level, and then buying at the bottom.
6. The last, third upward movement of the pound. At the same time, the previous powerful resistance level of
1.6400 was reached. Here it is recommended to close the purchase and trade from levels until a new strong
trend appears.
Figure 5.6
1. The stabilization of the rate was explained by numerous and lengthy attempts to break through the
powerful support level of GBP/USD at 1.6300. It should be noted that the exit from the convergent triangle
is a signal for a possibly strong price movement.
2. The exit from the triangle with the simultaneous breaking of the average meant the emerging strong
bullish trend. At this time, only purchase was recommended.
3. Minor pullback. If you haven't bought it yet, you should try to do so now. A strong pullback after the first
move means the possibility of a weak second one.
main movement.
4. Second growth. Insignificant due to excessive growth in the first phase of the movement. Necessary
always correlate the rise and fall in order to determine
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- if you were open in the direction of a strong movement, then do not rush to
close; - if you were not open either in the direction of the movement or against it, then you can
try to get into the movement, but at prices different from the resistance or
support levels. 3. The period of the first price stabilization. As a rule, it is accompanied by a
very slight rollback. During this period, it is recommended to everyone who has not yet embarked
on the movement to do so. The emergence of stabilization is explained by purely technical and
psychological factors. Oscillators on super-short charts (up to 5 minutes) can move to the middle,
and
this will be enough to make a trade with the trend. 4. Second rise/fall in price. Continues until
the next powerful resistance or support level. It is recommended to wait until this level is reached.
During this period of growth / fall, speculators who did not have time to buy / sell earlier are
included.
Therefore, the second movement may be stronger than the first. 5. Stabilization period. It is
accompanied by a stronger price rollback than after the first movement. It is necessary to close all
previously opened positions on the movement. It is possible to sell short on a bullish trend and
buy on a bearish one. There is a purely technical movement, which can be determined using
oscillators. The
move target is an average, typically in the order of 21 on an 8-minute chart. 6. Post-strong
movement. Another attempt by the price to pass through the next powerful level of resistance or
support. The probability of its passage should be assessed in each specific case separately, while
carefully analyzing the daily and 12-hour charts of price dynamics. At this time, you can work on
oscillators. An additional factor that can confirm the stabilization and even reversal of the trend
after the last phase of the price movement is a bullish divergence on a strong increase or a bearish convergence o
Now let's look at some practical examples.
Figure 5.5
1. Waiting period for a fundamental event - reports of an interest rate hike in the
UK. The GBP/USD rate ranges from 1.6180 to 1.6200.
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lyat the most probable size of the subsequent price movement. If the second main move is stronger
than the first, then the third is also likely to be strong. If the second movement is weaker than the first,
then the third is also expected to be weak. We buy with a growth target of 1.6400 - a powerful resistance
level. After revealing the fact that the price growth has stopped and cannot pass through 1.6400, there
is an opportunity for a short sale.
5. The period of the second rollback, as a result of which a lower price value is reached than during
the first rollback. This is a signal of weakness in the bullish trend. Therefore, the last phase of growth,
we can also look for a moment for a short sale. Selling and buying are made according to the signals
of the
oscillators. 6. The last phase of growth, characterized by a weaker price movement (in terms of duration and angle
slope) Here we work on oscillators.
Figure 5.7
1. The slight depreciation of the pound sterling against the US dollar is explained by
purely technical reasons.
2. The market received the final results of the elections to the British Parliament, according to which
the Labor Party won, which, however, everyone expected. The reaction of the market to this message
was unexpected - there was a sharp decline. The passage of 1.6200 meant a strong downward
movement, when it was only necessary to sell
3. Short-term stabilization of the pound from 1.6120 to 1.6140. At this time, you need to look for
moments to
sell. 4. The second strong drop in the rate after the passage of 1.6120. The pound went up to
1.6005, although it found the strongest resistance at the level of 1.6030. Only
sales are made. 5. Rollback to 1.6120. The strength of the rollback is such that the second downward
movement is almost nullified. This indicates the weakness of the bearish trend and prepares us for a
long purchase.
We work with oscillators. 6. Last "bearish" rate. So weak that it confirms the possible subsequent
growth of the pound sterling.
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The main rules for concluding transactions when opening positions on a strong price movement
are:
- in a bull market, buy at the next strong resistance level or below
him by 10-15 points;
- in the "bear" market, sell when the next strong support level is passed or higher by 10-15
points; - in the "bull"
market, sell not below the resistance level, at least - three points below the level; - in the
"bear"
market, buy no higher than the support level, maximum - three points higher than the level;
analysis for the purpose of concluding transactions is mainly recommended to be carried out on short
time intervals - up to 2-minute charts. Following
these rules can save you the headache of waiting for the movement you want.
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CONCLUSION
We looked at technical and fundamental analysis, as well as a risk management system and a bit of game
psychology. Now it will be better if you try all this in practice. A month or two of work on gaming accounts,
without money, and a few months with little money. You can be called a trader only if you work with real
money for at least a year.
All of the above is not a fixed theory. The world is changing, and approaches to its study are also
changing, so it is up to you how to apply and dispose of the acquired knowledge.
In conclusion, I would like to return to the question posed to you in the Introduction: how do you feel about
this type of activity - as to work, play or as a means of earning money.
Practice shows that only people who treat trading as a job become professionals and achieve practical
success. Therefore, if you decide to do this out of nothing to do or out of a thirst for "easy" money, then forget
about trading, play better in a casino - it will be cheaper and calmer for you.
I hope that you will be able to apply the knowledge acquired after reading this book not only in the practical
activities of "scoring" money, but also in everyday life. Every second a person is faced with the need to
choose - to do this (means "yes") or otherwise ("no"), or do nothing at all (remain "square"). A lot depends on
each specific act, not only now, but also in the future.
Therefore, careful preparation and planning of your actions is the key to your success.
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GLOSSARY
ASK An offer for a bank or broker to sell (purchase for you) a certain currency at a
specified price.
BEAR MARKET bearish Bear market. When the price goes down, the market is said to be bearish and traders who
expecting prices to fall are called bears.
BID
An offer for a bank or broker to buy (for you - sale) a certain currency at a specified price.
BROKER
A person employed by a brokerage firm who trades (buys or sells)
on behalf of and at the expense of other people and receives commissions for their work.
BULL MARKET bullish When the price rises, the market is said to be bullish and traders who play
to increase prices are called "bulls".
CREDIT LINE See GEARING.
DEALER
A person who works in a bank and does the same job as a broker. The dealer, however, does not only
work for the bank's customers, but also for the bank itself.
DOWNTREND
price highs or lows.
FOREIGN EXCHANGE MARKET - FOREX
An over-the-counter structure through which it is possible to buy and sell currencies at an
agreed exchange rate on a specified date. For most FX contracts (about 90% of the total market)
there is no physical delivery of currencies.
FORWARD CONTRACT
A contract opened by two parties who agree on future deliveries of a specified currency and for
an amount at the price of the agreement. Standard forward periods: 1-2-3 weeks; 1-2 months; 18
and 24 months.
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HIGH
The highest price paid during the trading period.
GEARING (FX-line)
Leverage provided by a brokerage firm or bank. For interbank dealing, the standard level of leverage is
20-50 times. For brokerage firms, the leverage varies from 20 to 100.
IMM
International Money Market of the Chicago Mercantile Exchange (IMM). The world's largest market for
foreign currencies and futures trading of Eurodollar and Eurocurrencies.
INTERVENTION
Participation of the Central Bank in the process of controlling prices in the foreign exchange market.
LIQUID MARKET
A market where transactions are numerous and easy. A large number of buyers and
sellers, always ready to trade, make the market liquid.
LONG
A broker who bought a currency and expects the price to rise in the long run. "Long"
broker, long position.
LOW
The lowest price paid during the trading period.
MARGIN
The amount of a trader's deposit with a brokerage firm or bank that covers the risk of loss from a
transaction.
MARGIN CALL
A call from a brokerage firm or bank to a trader to add funds to a margin account to cover losses from
adverse price movements.
OFFER
See "ASK".
OFFSET
Compensation for leaving an existing position. Brokers who play long positions
they say - to liquidate the position, playing on short positions - to cover.
OPEN INTEREST
Futures contracts that have not yet been paid. Open interest is equal to the total number of long
or short positions, but not combinations thereof.
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OVERBOUGHT
Period used to express an opinion that prices have risen too high and too
quickly, hence there will be a price drop. Literally, the market is overbought.
OVERSOLD
Similar to "overbought", except that the price falls too low and too fast and,
there will probably be a pullback in prices up. Literally - the market is oversold.
PIP
The price used in the currency market is equal to one point. See TICK.
PAPER TRADING
Trading in securities other than real money trading.
POSITION
An open contract indicating interest in the market, long or short.
QUOTATION
Actual bid or ask price.
RALLY
Price movement up.
RESISTANCE
A resistance line drawn with at least two high prices.
SHORT
A person who buys a currency and plays a short position. short position,
"short" trader.
OVERNIGHT (VOL/NEXT)
Overnight - occurs when a trade does not end with the spot expiration date, but rolls over to the next day.
SPREAD
The difference between the buy and sell price (between bid and ask).
SPOT CONTRACT
A contract between two parties who agree to the immediate transfer of a specific currency for an amount
at a negotiated price. In SPOT FX, settlements are made between two bank accounts on the settlement day
(usually 2 banking days from the date of the contract).
SPOT RATE
The interest rate during the period of the spot rate for the mutual exchange between two currencies.
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SQUARE A person who is neither long nor short with no open contracts. Literally - "square".
STOP
ORDERS An order that becomes a market order when the price reaches the level specified
in this order. These orders are often placed with the intent to limit losses (stop loss) or are used
to make a profit (stop profit).
SUPPORT
A support line built at at least two minimum prices.
SWAP In the international banking foreign exchange market, a contract entered into by two
parties in order to convert an amount of money in one currency into an amount of money in
another currency at specified intervals or under otherwise specified conditions. It usually occurs
when an open spot position is rolled over overnight to the next trading day.
TICK
The minimum allowed price fluctuation up or down. Same as point.
TICK VOLUME
The number of trades for the specified time period.
TRADER
A person who works for himself or for a company as a speculator. Common name for brokers and dealers.
TRADING RANGE
When the price is between the support and resistance levels.
TECHNICAL TERMS
BAR
CHART A graphical representation of price business activity. Max and min are indicated by
the top and bottom of the vertical line. Closing is indicated by a short horizontal bar (bar) located
to the right of the vertical line. Openings are marked with a short horizontal line to the left of the
vertical line. Price is marked on the vertical axis, time - on the horizontal axis.
BLOW OFFS Change top (top) or bottom (bottom). Blow-offs occur after a long movement. Prices,
with a very large range, move sharply and quickly in the direction of the previous trend. If the
market changes after such activity, these are blow-offs.
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BREAKOUT
Breaking resistance or support levels.
CONFIRMATION
A situation where more than one indicator confirms the analysis of another.
CONSOLIDATION
Same as congestion zone. Consolidation implies that the previous trend should resume.
CONGESTION ZONE OR BAND
The period of horizontal price change in a relatively narrow corridor.
CONTINUATION PATTERNS
A structure whose presence serves to continue the previous trend, such as flag.
CROSSOVER
When the fastest indicator crosses above (bullish crossover) or below (bearish crossover) a slower
indicator. For example, if the 5-day MA (moving average) crosses below the 13-day MA, this is a
bearish crossover.
DIVERGENCE
Divergence. When relative technical indicators fall, confirming price action. For example, if the
price has reached a new peak, but the stochastic lines have not, then this is a negative divergence
(sometimes convergence) and bearish. If the price made a new low and the stochastic lines did not,
this is a positive divergence and bullish.
DOUBLE BOTTOM
The price curve displayed the letter W, in which the price fell twice and stopped at (or near)
the same bottoms.
DOUBLE TOP
The price curve repeated the shape of the letter M, in which the price rose twice and stopped at (or
near) the same tops.
ELLIOTTWAVE
Price movement analysis and forecasting system based on the works of Elliott. The main theory is
based on the fact that the price has 5 waves directed towards the main trend, followed by 3 waves corrective.
FIBONACCI
Italian mathematician who formulated a series of numbers based on the addition of previous ones.
two numbers. The Fibonacci ratio is used in technical analysis, including 38%, 50%, 62%.
FLAG OR PENNANT
A long formation involving a sharp price move following a short one.
consolidation zone. These are continuation patterns.
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FILLING IN THE GAP
When the next price after the gap is in the empty interval between the prices formed by the gap.
GAP
Occurs when the high price of the previous day is lower than the low price of the current day, or vice
versa.
HISTORICAL VOLATILITY
Calculations that provide an expected price level over time. This
based on the change in the price underlying the contracts.
IMPLIED VOLATILITY
Forecast of the market for future inconsistent levels.
INTRA-DAY
Any period shorter than daily. Thus, a 60-minute intra-day chart
based on the top. Lows, opens and closes are based on hourly data.
MOMENTUM
Price movement speed. The difference between the current and previous prices.
NECKLINE
Literally - the line of the neck. A line connecting the bottoms of the head in Head & Shoulders or the tops
in an inverted H&S. A move below the neckline after the top of the H&S shows the market is bearish, a move
above the neckline in an inverted H&S shows the market is bullish.
OSCILLATOR
Momentum, RSI, Stochastic lines that fluctuate around the zero line (or between 0 and 100%).
The Oscillator can help measure overbought/oversold levels, show negative and positive divergence and
can be used to measure the speed of price movement.
PROTECTIVE STOP
This involves limiting losses if the market moves against your position. If your stop
the level is reached, your position is automatically closed at the prevailing price.
RALLY
Price movement up.
REACTION
The price moves in the opposite direction of the prevailing trend.
RELATIVE STRENGTH INDEX (RSI)
RSI is equal to the ratio of the top closes to the bottom closes over a given period of time.
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RESISTANCE
LEVEL The level at which sellers hope to enter the game.
RETRACEMENT
The reaction of the price to the previous movement for the period, expressed as a percentage. The most
common retracement levels are 38%, 50%, 62%.
REVERSAL SESSION
When a new high (or low) moves the price and the market closes higher (or lower)
previous closure.
SELLING CLIMAX
When the price moves sharply down after a long rejection. If the market turns back
from this plummet - it's seen as a selling climax.
SELL/OFF Price movement down.
SIMPLE MOVING AVERAGE
A price data smoothing method in which prices are added together and then averaged. As soon as new
price data is added, the old data is omitted.
STOCHASTIC
An indicator that measures the relative closing positions of prices as it compares price fluctuations
for the selected period. Commonly used are %K (unsmoothed) and %D (smoothed).
SUPPORT LEVEL
The level at which buyers hope to enter the game. Price support.
TIME FILTER
Prices stay above or below a certain price zone for a certain period of time, confirming that an important
technical zone has been broken.
TRADING RANGE
When the price is placed between the levels of horizontal support and horizontal resistance.
TREND
A certain price movement in one direction or another. The trend can be up or down.
TREND REVERSALS
It is a reverse indicator. This is a deceptive period. A more suitable and accurate period is a trend
change indicator. It is understood that the previous trend must change. But this does not mean that the
price is going to turn in the opposite direction.
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TRENDLINE
A line that connects a series of highest peaks and lowest lows. At the very least, it is necessary to
draw a trend line for two points. This is checked more frequently. The more checks, the more accurate
the trend.
UPTREND
The market is pointing up.
V BOTTOM OR
TOP When price suddenly turns into a V-shaped pattern for a low or
inverted V for top.
VOLUME
The total number of trading contracts for the given period.
STOCK MARKET TERMS
ASSETS Physical
or intangible items of value to a company or individual.
SHARES
(Stock) A general term used to refer to ordinary as well as preferred shares.
Share capital, authorized capital, authorized capital (Owners' Equity) The total amount of claims
of holders of ordinary and preferred shares on the assets of the company in accordance with the
balance sheet, as well as the documented amount of claims of owners on the assets of a partner
or a company of a different organizational and legal form (not a joint-stock company ). See Equity.
Annuity A series of
equal cash payments or receipts occurring annually for a specified number of years.
BALANCE (Balance
Sheet) Financial reporting document reflecting the value of assets, liabilities and equity as of a
certain point in time.
Book Value The value of an asset or
liability in the financial statements of a company or private
faces.
ACCOUNTING (Balance) PROFIT (Accounting Earnings) The difference between sales
revenue and expenses for the reporting period, reflected in the financial statements in
accordance with generally accepted accounting principles - Generally Accepted Accounting Principles (GAAP).
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Warrant A financial
instrument that gives investors the opportunity to purchase additional
shares at a certain price. Usually used for a new issue of securities.
AFTER TAX VALUE Net sales, net costs or net investments after adjusting for the effective
income tax rate.
OTC MARKET (Over-the-Counter Market, OTC) A
market network of dealers who sell and buy securities, enabling electronic transactions in
securities that are not listed on formally registered stock exchanges.
REVENUE (Sales,
Revenue) A record of the sale of goods or services in accordance with accepted accounting rules.
Net Sales The total sales revenue for
a given period of time, adjusted for markups, discounts, benefits, value of returned goods,
i.e. the difference between income and expenses (including tax).
CASH FLOW (cash flow) (Cash How) The inflow
or outflow of capital as a result of activities over a certain period.
deflation A decrease
in the general (average) price level. See inflation.
INCOME
(Yield) The level of profitability that is created by cash inflows and outflows,
caused by investment over a certain period.
LIFE CYCLE (Economic Life) The
period during which an ongoing or future investment project is expected to generate
economic returns, regardless of the physical life of the assets concerned.
COSTS, COST (Cost) Any
expenses incurred during the reporting period and reflected along with sales revenue
for the same period.
Shareholders' Equity The balance sheet residual
value of all shareholders' claims.
CONSUMER PRICE INDEX An index compiled by the US government that reflects what
happened during
the period of change in prices for a certain group of goods and services purchased
by consumers; characterizes the rate of inflation
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INFLATION An increase in the overall level
prices.
Securities and Exchange Commission (SEC) A regulatory body created by the federal
government to oversee the stock market.
CONVERTIBLE SECURITY (Convertible Security) Financial instrument: a security that, at
the request of the holder, can be exchanged for other securities or assets, according to a
predetermined conversion rate.
Creditworthiness The ability of a company
or individual to raise debt capital in the future
way to service your debt.
Cumulative Preferred Stock A type of preferred stock whose prospectus states
that dividends due but not paid are cumulative and will subsequently be paid in full
before dividends on common stock can be declared.
Coupon Rate The interest rate on
a bond's coupon, as opposed to the bond's yield rate,
which is the ratio of the coupon rate to the market value of the bond.
JUNK BONDS Bonds issued by a
corporation whose investment is more risky than
normal level.
PRICE-to-Earnings Ratio (P/E) The ratio of a share's price to earnings per share earned by
a company over the past 12 months; approximates the amount that investors are willing to
pay for $ 1 of the company's profit.
PAR VALUE, PAR VALUE The value indicated on the
security by the issuer, as opposed to the market value of the security
paper. The issuing company is obliged to redeem the bonds at face value on time.
BOND (Bond) A
financial instrument, which is a form of long-term debt of a company, placed among investors;
There are many types of bonds.
COMMON SHARES (Common Stock, Common Shares) Securities, indicating that their holder
is a co-owner of a corporation and has the right to claim assets remaining after
satisfaction of the claims of the parties enjoying priority.
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OPTION (Option)
A contract that gives the person who enters into it the opportunity to sell or buy assets, such as
securities, at a predetermined price, but does not oblige him to make such a transaction.
PROFIT AND LOSS REPORT (income statement, income statement) (Income Statement,
Operating Statement, Profit and Loss Statement) A financial document that reflects revenue
(income), related expenses and expenses for a certain period of time, as well as net profit.
Purchasing Power Parity The condition in which the conversion of funds from one currency to
another does not cause a change in the purchasing power of these funds.
PORTFOLIO A set of
various investment projects undertaken by an individual or company.
PROFIT (Earnings, Income, Net Income, Profit, Net Profit) The difference between reported
income and all direct expenses for a given period, reported under generally accepted
accounting principles.
Preferred Stock A special category of stock,
usually with a predetermined dividend level, whose holders' claims on the profits or assets of
the company take precedence over those of ordinary shareholders.
MARKET "SPOT" (Spot
Market) A market in which prices for securities or goods are determined immediately upon
transactions; cash market.
MARKET VALUE (market price) (Market Value) Market price of assets; a price
established in a free market where there are many buyers and sellers, such as a stock exchange.
OWNERS' EQUITY (Owners' Equity, Net Worth, Shareholders' Equity) The reported
(particularly on the balance sheet) share of ownership to which holders of ordinary and
preferred shares of a corporation may claim. Also defined as the total value of assets minus
the total debt (liability).
Spread The
difference between the price received by an issuer for issued securities and the price paid by
an investor for those securities. Equal to the sum of the sales discount plus management and
placement fees.
CURRENT DIVIDEND YIELD The current return on shareholders' investments in dividends
received over a specified period of time; calculated by dividing the sum of divi
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per share per share to the average market price of the share at the current moment. See Yield.
HEDGING (Hedge) The
policy of neutralizing the risk of investments by using mutually canceling contracts, as a result of
which potential gains and losses are offset.
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Application BASIC
JAPANESE CANDLE COMBINATIONS
A. Combinations of Japanese candlesticks, confirming the reversal of the "bearish" trend.
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B. Combinations of Japanese candlesticks confirming a bullish trend reversal.
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B. Combinations of Japanese candlesticks, confirming the continuation of the trend.
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LIST OF USED AND RECOMMENDED
LITERATURE
1. Alchemy of Finance. George Soros
2. Money, Banks and Monetary Policy. Edwin J. Dolan 3. History of the
World Economy (1945-1990). Hermann Van der Bee 4. How to do
business in Europe. Wolfgang Hoyer 5. Soros: The
Life, Activities and Business Secrets of the World's Greatest Investor. Robert Slater. 6. Soros on Soros
(Ahead of change). George Soros 7. Theory and Practice of
Currency Dealing. D.Yu.Piskulov 8. Technical Analysis of
Commodity and Financial Markets. Anna Erlich 9. Securities and the Stock
Market. Ya.M. Mirkin
10. Beyond Candlesticks, Steve
Nison 11. Computer Analysis of the Futures Market, LeBeau &
Lucas 12. Design, Testing and Optimization of Trading Systems, Robert
Pardo 13. Elliott Wave as Applied to Foreign Exchange Markets, Robert
Balan 14. Encyclopedia of Technical Market Indicators, Colby &
Meyers 15. Fibonacci for Traders, Robert
Fischer 16. Fractal Market Analysis,
Edgar Peters 17. Futures Fundamental Analysis,
Jack Schwager 18. How to Make Profits in
Commodities, WDGann 19. Intennarket Technical
Analysis, John J. Murphy 20. International Financial
Markets, J. Orlin Grabbe 21. Market
Momentum, Martin Pring 22. Mathematics of Technical
Analysis, Clifford Sherry 23. MESA &
Market Cycles, John Ehlers 24. Momentum, Direction
and Divergence, William Blau 25. New
Market Wizards , Jack Schwager 26. Options as a
Strategic Investment, L.McMillan 27. Point
& Figure Charting, Carroll Aby 28. Portfolio
Managment Formulas, Ralph Vince 29. Psihology of
Technical Analysis, Tony Plummer 30. Quantitative Trading
and Money Managment, Fred Gehm
31. Reminescences of a Stock Operator 32.
Technical Analysis Explained, Martin Pring 33.
Technical Analysis from A to Z, Steven Achelis 34.
Technical Analysis of Stock Trends, Edwards & Magee 35.
Technical Analysis of the Futures
Market, John J. Murphy 36. The Bond Market, Christina
Ray 37. The Elements of Successful Trading, Robert
Rotella 38. Trading Currency CrossRates, Klopfenstein & Stein 39. Trading for a Living, Alexander
Elder 40. Trading in the Global Currency Markets, Cornelius Luca 41 Trading on the Edge, Ed.Dr. G.DeboeckTrading the Fundame
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Eric L. NAYMAN
Small Trader's
Encyclopedia
Technical editor I. S. Chumak Proofreader E. A. Mikhalets
Format 70x108 1/16. Office printing. office paper. No. 1. Headset "Time". Conv. oven l. 20.65. Uch. -ed. l. 21.2. Circulation 3000
copy. Zach. 9-432
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