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Technical Trading



83 replies to this topic

#1
alam

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    Important Rules of Technical Trading
    By John J. Murphy

    1. Map the Trends
    Study long-term charts. Begin a chart analysis with monthly and weekly charts spanning several years. A larger scale "map of the market" provides more visibility and a better long-term perspective on a market. Once the long-term has been established, then consult daily and intra-day charts. A short-term market view alone can often be deceptive. Even if you only trade the very short term, you will do better if you're trading in the same direction as the intermediate and longer term trends.


    2. Spot the Trend and Go With It
    Determine the trend and follow it. Market trends come in many sizes -- long-term, intermediate-term and short-term. First, determine which one you're going to trade and use the appropriate chart. Make sure you trade in the direction of that trend. Buy dips if the trend is up. Sell rallies if the trend is down. If you're trading the intermediate trend, use daily and weekly charts. If you're day trading, use daily and intra-day charts. But in each case, let the longer range chart determine the trend, and then use the shorter term chart for timing.


    3. Find the Low and High of It
    Find support and resistance levels. The best place to buy a market is near support levels. That support is usually a previous reaction low. The best place to sell a market is near resistance levels. Resistance is usually a previous peak. After a resistance peak has been broken, it will usually provide support on subsequent pullbacks. In other words, the old "high" becomes the new "low." In the same way, when a support level has been broken, it will usually produce selling on subsequent rallies -- the old "low" can become the new "high."


    4. Know How Far to Backtrack
    Measure percentage retracements. Market corrections up or down usually retrace a significant portion of the previous trend. You can measure the corrections in an existing trend in simple percentages. A fifty percent retracement of a prior trend is most common. A minimum retracement is usually one-third of the prior trend. The maximum retracement is usually two-thirds. Fibonacci retracements of 38% and 62% are also worth watching. During a pullback in an uptrend, therefore, initial buy points are in the 33-38% retracement area.


    5. Draw the Line
    Draw trend lines. Trend lines are one of the simplest and most effective charting tools. All you need is a straight edge and two points on the chart. Up trend lines are drawn along two successive lows. Down trend lines are drawn along two successive peaks. Prices will often pull back to trend lines before resuming their trend. The breaking of trend lines usually signals a change in trend. A valid trend line should be touched at least three times. The longer a trend line has been in effect, and the more times it has been tested, the more important it becomes.


    6. Follow that Average
    Follow moving averages. Moving averages provide objective buy and sell signals. They tell you if existing trend is still in motion and help confirm a trend change. Moving averages do not tell you in advance, however, that a trend change is imminent. A combination chart of two moving averages is the most popular way of finding trading signals. Some popular futures combinations are 4- and 9-day moving averages, 9- and 18-day, 5- and 20-day. Signals are given when the shorter average line crosses the longer. Price crossings above and below a 40-day moving average also provide good trading signals. Since moving average chart lines are trend-following indicators, they work best in a trending market.


    7. Learn the Turns
    Track oscillators. Oscillators help identify overbought and oversold markets. While moving averages offer confirmation of a market trend change, oscillators often help warn us in advance that a market has rallied or fallen too far and will soon turn. Two of the most popular are the Relative Strength Index (RSI) and Stochastics. They both work on a scale of 0 to 100. With the RSI, readings over 70 are overbought while readings below 30 are oversold. The overbought and oversold values for Stochastics are 80 and 20. Most traders use 14-days or weeks for stochastics and either 9 or 14 days or weeks for RSI. Oscillator divergences often warn of market turns. These tools work best in a trading market range. Weekly signals can be used as filters on daily signals. Daily signals can be used as filters for intra-day charts.


    8. Know the Warning Signs
    Trade MACD. The Moving Average Convergence Divergence (MACD) indicator (developed by Gerald Appel) combines a moving average crossover system with the overbought/oversold elements of an oscillator. A buy signal occurs when the faster line crosses above the slower and both lines are below zero. A sell signal takes place when the faster line crosses below the slower from above the zero line. Weekly signals take precedence over daily signals. An MACD histogram plots the difference between the two lines and gives even earlier warnings of trend changes. It's called a "histogram" because vertical bars are used to show the difference between the two lines on the chart.


    9. Trend or Not a Trend
    Use ADX. The Average Directional Movement Index (ADX) line helps determine whether a market is in a trending or a trading phase. It measures the degree of trend or direction in the market. A rising ADX line suggests the presence of a strong trend. A falling ADX line suggests the presence of a trading market and the absence of a trend. A rising ADX line favors moving averages; a falling ADX favors oscillators. By plotting the direction of the ADX line, the trader is able to determine which trading style and which set of indicators are most suitable for the current market environment.


    10. Know the Confirming Signs
    Include volume and open interest. Volume and open interest are important confirming indicators in futures markets. Volume precedes price. It's important to ensure that heavier volume is taking place in the direction of the prevailing trend. In an uptrend, heavier volume should be seen on up days. Rising open interest confirms that new money is supporting the prevailing trend. Declining open interest is often a warning that the trend is near completion. A solid price uptrend should be accompanied by rising volume and rising open interest.

    Technical analysis is a skill that improves with experience and study. Always be a student and keep learning.


    #2
    dsr

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    View Postalam, on Jun 6 2006, 09:02 AM, said:

    Important Rules of Technical Trading
    By John J. Murphy

    1. Map the Trends
    Study long-term charts. Begin a chart analysis with monthly and weekly charts spanning several years. A larger scale "map of the market" provides more visibility and a better long-term perspective on a market. Once the long-term has been established, then consult daily and intra-day charts. A short-term market view alone can often be deceptive. Even if you only trade the very short term, you will do better if you're trading in the same direction as the intermediate and longer term trends.
    2. Spot the Trend and Go With It
    Determine the trend and follow it. Market trends come in many sizes -- long-term, intermediate-term and short-term. First, determine which one you're going to trade and use the appropriate chart. Make sure you trade in the direction of that trend. Buy dips if the trend is up. Sell rallies if the trend is down. If you're trading the intermediate trend, use daily and weekly charts. If you're day trading, use daily and intra-day charts. But in each case, let the longer range chart determine the trend, and then use the shorter term chart for timing.
    3. Find the Low and High of It
    Find support and resistance levels. The best place to buy a market is near support levels. That support is usually a previous reaction low. The best place to sell a market is near resistance levels. Resistance is usually a previous peak. After a resistance peak has been broken, it will usually provide support on subsequent pullbacks. In other words, the old "high" becomes the new "low." In the same way, when a support level has been broken, it will usually produce selling on subsequent rallies -- the old "low" can become the new "high."
    4. Know How Far to Backtrack
    Measure percentage retracements. Market corrections up or down usually retrace a significant portion of the previous trend. You can measure the corrections in an existing trend in simple percentages. A fifty percent retracement of a prior trend is most common. A minimum retracement is usually one-third of the prior trend. The maximum retracement is usually two-thirds. Fibonacci retracements of 38% and 62% are also worth watching. During a pullback in an uptrend, therefore, initial buy points are in the 33-38% retracement area.
    5. Draw the Line
    Draw trend lines. Trend lines are one of the simplest and most effective charting tools. All you need is a straight edge and two points on the chart. Up trend lines are drawn along two successive lows. Down trend lines are drawn along two successive peaks. Prices will often pull back to trend lines before resuming their trend. The breaking of trend lines usually signals a change in trend. A valid trend line should be touched at least three times. The longer a trend line has been in effect, and the more times it has been tested, the more important it becomes.
    6. Follow that Average
    Follow moving averages. Moving averages provide objective buy and sell signals. They tell you if existing trend is still in motion and help confirm a trend change. Moving averages do not tell you in advance, however, that a trend change is imminent. A combination chart of two moving averages is the most popular way of finding trading signals. Some popular futures combinations are 4- and 9-day moving averages, 9- and 18-day, 5- and 20-day. Signals are given when the shorter average line crosses the longer. Price crossings above and below a 40-day moving average also provide good trading signals. Since moving average chart lines are trend-following indicators, they work best in a trending market.
    7. Learn the Turns
    Track oscillators. Oscillators help identify overbought and oversold markets. While moving averages offer confirmation of a market trend change, oscillators often help warn us in advance that a market has rallied or fallen too far and will soon turn. Two of the most popular are the Relative Strength Index (RSI) and Stochastics. They both work on a scale of 0 to 100. With the RSI, readings over 70 are overbought while readings below 30 are oversold. The overbought and oversold values for Stochastics are 80 and 20. Most traders use 14-days or weeks for stochastics and either 9 or 14 days or weeks for RSI. Oscillator divergences often warn of market turns. These tools work best in a trading market range. Weekly signals can be used as filters on daily signals. Daily signals can be used as filters for intra-day charts.
    8. Know the Warning Signs
    Trade MACD. The Moving Average Convergence Divergence (MACD) indicator (developed by Gerald Appel) combines a moving average crossover system with the overbought/oversold elements of an oscillator. A buy signal occurs when the faster line crosses above the slower and both lines are below zero. A sell signal takes place when the faster line crosses below the slower from above the zero line. Weekly signals take precedence over daily signals. An MACD histogram plots the difference between the two lines and gives even earlier warnings of trend changes. It's called a "histogram" because vertical bars are used to show the difference between the two lines on the chart.
    9. Trend or Not a Trend
    Use ADX. The Average Directional Movement Index (ADX) line helps determine whether a market is in a trending or a trading phase. It measures the degree of trend or direction in the market. A rising ADX line suggests the presence of a strong trend. A falling ADX line suggests the presence of a trading market and the absence of a trend. A rising ADX line favors moving averages; a falling ADX favors oscillators. By plotting the direction of the ADX line, the trader is able to determine which trading style and which set of indicators are most suitable for the current market environment.
    10. Know the Confirming Signs
    Include volume and open interest. Volume and open interest are important confirming indicators in futures markets. Volume precedes price. It's important to ensure that heavier volume is taking place in the direction of the prevailing trend. In an uptrend, heavier volume should be seen on up days. Rising open interest confirms that new money is supporting the prevailing trend. Declining open interest is often a warning that the trend is near completion. A solid price uptrend should be accompanied by rising volume and rising open interest.

    Technical analysis is a skill that improves with experience and study. Always be a student and keep learning.




    Its Good Food for thought

    ADX is good to increase your confidence on your analysis. But there is a word of caution for ADX.

    An indicator used in technical analysis to determine the strength of a prevailing trend. The ADX is measured on a scale between 0 and 100. Readings below 20 are used to indicate a weak trend, while readings over 40 indicate a strong trend. [b]ADX is not used to determine the direction of a particular trend, but only to gauge its strength. [/b]

    Traders use a move above 20 to suggest the start of a new trend (either up or down) and a move below 40 to suggest that the current trend may be coming to an end. The ADX is a derivation of two separate indicators known as direction momentum indicators (+DI and -DI). Unlike the ADX, these direction momentum indicators can be used to gauge trend direction and are commonly plotted alongside the ADX.

    dsr

    #3
    Daba Khan

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    Aalm Bhai & DSR Bhai
    Great Info
    I salute both of U :)


    #4
    alam

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    Daba Sb,

    Salute John Murphy. All i did was cut and paste.
    Right now it is u who is gathering all the salutes for your original thinking. Me! I am just a copy cat:)

    Regards
    M.Alam

    View PostDaba Khan, on Jun 6 2006, 02:38 PM, said:

    Aalm Bhai & DSR Bhai
    Great Info
    I salute both of U :)


    #5
    dsr

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    Me too. Just copying and pasting

    #6
    waseem ul islam

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    An investor buys a share of stock by resorting to various approaches that validate his investment by reaping rich profits. Before investing, however, it is necessary for a value investor to study the financials of a business, so that the stock he buys at the company's intrinsic value promises a greater return at its liquidation value (the value of a company if all its assets were sold). A typical investor would buy growth stocks that have an upward trend, and seem likely to keep growing for a long time. Whereas, a technical investor (also known as a Quant) makes decisions based upon the psychology of the market and related factors, which involve much higher risk but may prove to be more profitable, or, can conversely result in much greater losses. The fundamental analysis of any business can depend on various factors: efficient market theory, value and growth, growth at a reasonable price and the quality of the business.

    [indent]1. Efficient market theory pertains to stocks being always correctly priced, as all the requisite information is available on the current price.
    2. The stock market sets up the price.
    3. Analysts decide upon the value of a company based on the potential for its growth.
    4. Price and value may not be equal, due to certain irrationalities governing the market.

    Value investors need to rely on certain stringent rules governing the nature of the stock which adhere to the following criteria:

    1. Earnings: company earnings are profits after taxes and interests.
    2. Earnings per share (EPS): the amount of recorded income (on per share basis) available to the company to pay dividends to stockholders, or to reinvest in itself.
    3. Price/Earnings Ratios (P/E) ratio (having a justified upper limit): If the company's stock is trading at $80 and its EPS is $8 per share, it has a multiple, or P/E of 10. This means that investors could expect a 10% cash flow return:
    $8/$80 = 1/10 = 1/(PE) = 0.10 = 10%
    If it's making $4 per share, it has a multiple of 20 (20 times $4 equals $80). In this case, an investor might receive a 5% return (in the same conditions);
    $4/$80 = 1/20 = 1/(P/E) = 0.05 = 5%
    However, a low P/E is not an untainted value indicator.
    4. Price/Sales Ratio (PSR): is the same as a P/E ratio, except that the stocks are divided by sales per share instead of earnings per share.
    5. Debt Ratio: percentage of debt a company has relative to the shareholder equity.
    6. Dividend yields above a certain absolute limit.
    7. Book value ratio: comparison of the market price against the book value of the stock per share.
    8. Market capitalization value: Complete total value of a company's outstanding shares (Market price per share Total number of shares outstanding).
    9. Equity Returns - ROE: Net income after taxes divided by owner's equity.
    10. Beta: comparison of volatility of the stock to that of the market.
    11. Institutional ownership: percentage of a firm's outstanding shares owned by certain institutions: insurance companies, mutual funds etc.
    [/indent]
    Learning to analyze one's stocks and thus reaping the desirable profit is in fact a continuous process, as no amount of market efficient theories can ever predict a flawless financial return system. Even though one invests judiciously by studying the market, the over-valuation or under-valuation of stocks can often be determined by market emotions.






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