PART ONE Introduction to Active Trading
INTRODUCTORY SERIES PAGE
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PART ONE Introduction to Active Trading
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PART ONE Introduction to Active Trading
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TIM FUREY Founder & CEO, Tradeview Markets
Our mission is simple and straight forward yet exceptionally powerful - we never forget our traders are our clients.
PART ONE Introduction to Active Trading PART ONE: ...................................................... 6 What is active trading? .................................................... 7 Active Trading vs Abuy-and-hold Investing ........................ 8 The market collapse of 2008 ..................................................... 10 Mindset of the professional trader..............................................11 Becoming a prudent active trader ................... ..................... 12
PART TWO (Trading Concepts): ............... 13 Candlesticks .................................................................................. 14 Each candlestick tells a story ...................................................... 16 Time frames .................................................................................. 21 The three most widely used execution time frames for active trades ............................................................................................. 22 What is a pivotn ?......................................................................... 33 What is a trend ? .......................................................................... 35 What is an uptrend ? ................................................................... 36 What is a downtrend ? ................................................................ 39 What is a sideways/range trend ? .............................................. 42 What changes a trend ? ............................................................... 45 Challenged trend ......................................................................... 46 What is a broken trend ? ............................................................ 49 Short-term vs long-term trends ................................................. 54 Using moving averages ............................................................... 57 Here are a few things that you must keep in mind regarding the strength of the 200ema ............................................................... 62 Valume .......................................................................................... 65 Market pace ................................................................................. 67 Support and Resistance ............................................................... 70 Support equals resistance............................................................. 76 The mathematics .......................................................................... 78 What is a fibonacci sequence? .................................................... 80 Fibonacci arcs ............................................................................... 86 Fibonacci fans ............................................................................... 87 Fibonacci time zones ................................................................... 88
Head and shoulders top (reversal)............................................. 97 Cup with handle ( continuation).............................................. 102 Bull and bear flags ...................................................................... 106 Symmetrical triangle ................................................................. 109 Ascending triangle ..................................................................... 111 Double tops and bottoms .......................................................... 114 Gaps ............................................................................................ 116 Psychology .................................................................................. 120 Rhino Report .............................................................................. 131 How stocks react: emotion vs fundamentals........................... 132 Earnings season .......................................................................... 137 The aapl trade ............................................................................. 140 Trading GEO- politics the fed and earnings .......................... 142 Weekly equity roundup and what may be next ...................... 144 Weekly market analysis ............................................................. 146
PART THREE (Chart Patterns): .................. 90 Classic chart patterns .................................................................. 91 Head and shoulders bottom (reversal) ..................................... 92
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PART
INTRODUCTION
ACTIVE TRADING TO
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PART ONE Introduction to Active Trading
What is Active Trading?
Active trading is the practice of buying and selling securities with the intention of holding the securities for a short duration, typically for no more than one day. Active traders use technical analysis to take advantage of short term movements in prices in securities markets. Active traders use a host of indicators to make decisions. Active trading is considered one of the most speculative trading strategies and is not limited to professional day-traders. Active trading can be used by anyone who wants develop an approach for managing their own assets.
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PART ONE Introduction to Active Trading
Active Trading
VS
1. Opportunity in both Bull and Bear market cycles. 2. Flexibility to take other side of the trade if something changes.
Buy-and-Hold Investing 1. Realize an increase in principal ONLY during bull market cycles. 2. FLack of flexibility.
3. Less Risk exposure.
3. Exposed to high degree of risk.
4. Liquidity of assets is maintained.
4, Assets are usually tied up for long term.
5. Positions are entered based on high-probability setups.
5. It is exceptionally difficult to stock pick for long term holds.
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PART ONE Introduction to Active Trading
14000.00 13000.00
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12000.00 10952.84 10294.1707 10119.0864 10000.00 8876.64549 9000.00 8000.00 7000.00 6000.00
if you bought the DOW 10 years ago, you are right back where you started. Active traders have made money buying and selling along the way.
5000.00 4000.00 3000.00 4.000M 3.000M 2.000M 1.000M 475.32M 0
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PART ONE Introduction to Active Trading
The Market Collapse of 2008 The market collapse of 2008 was a perfect example of the merits of active trading vs. the inherent dangers of buyand-hold investing.
Active Traders
Buy-and-Hold Investors
Many traders had best years of career in 2008 Massive profits can be realized in times of fear and high volatility. Presented with buying opportunities of a lifetime after downside capitulation.
Investment portfolios were decimated during the financial crisis of 2008. In such market conditions Investor can only get out or lose money. Possibly forced to sell assets at rock-bottom prices to ensure personal liquidity.
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PART ONE Introduction to Active Trading
Mindset of the Professional Trader Professional traders do now follow the crowd, or act with irrational behavior. Pros are fearful when other become too greedy or exuberant. Pros are ready and able to strike hard when others become anxious and overly fearful. Professional traders always place an emphasis on managing risk above all else. Pros are ALWAYS prepared and disciplined for any eventuality that may occur. Pros build a plan for their trading day, and treat it like a business, to be managed accordingly. Pros prepare meticulously for each trading day. Pros execute efficiently and do not deviate from their strategy.
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Becoming a Prudent Active Trader coming a Successful Trader Tradeview Manual is designed to equip the trader with the tools needed for success. 1. 2. 3. 4. 5. 6. 7. 8.
Define your goals and then choose the style of trading that is compatible. Choose the platform and broker with whom you feel most comfortable with. Choose a methodology and then be consistent with its application. Choose a longer time frame for analysis and a shorter time frame for execution. Calculate expectancy, observing risk reward ratios and stop loss positions. Focus on your trades and learn to love small losses: DO NOT FEAR THEM Build POSITIVE feedback loops Perform comprehensive weekend analysis and LEARN from your mistakes
Becoming a profitable active trader takes time, but with this program you will build the foundation for success. PAGE 12 OF 275
PART
TRADING
CONCEPTS
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PART TWO Introduction to Active Trading
Candlesticks Understanding and applying the concepts of Candlesticks? Four pieces of data, gathered through the course of a security’s trading day, are used to create a candlestick chart: opening price, closing price, high, and low. The candle in a chart is white when the close for a day is higher than the open, and black when the close is lower than the open. The wicks, lines sticking out of either end of the candlestick, represent the range between the day’s high and low prices. The wick on top shows the day’s high, the wick on the bottom shows the day’s low.
Candlestick Chart Analysis and Trading Tips • If you’re examining or trading a candlestick pattern, keep these guidelines in mind before you decide what to do with your money, so you can make an informed decision: • Determine whether the market is trending up, trending down, or not trending at all. • If you put on a trade, be prepared to identify the point at which you take a loss, especially when you’re trading against the trend. • Try not to anticipate that a pattern is going to be created by trading before the formation is complete. • Use technical indicators to complement patterns. Indicators help to confirm your opinion of the market trend. • When putting real money into trading, don’t trade what you can’t afford to lose! PAGE 14 OF 275
PART TWO Introduction to Active Trading
Candlesticks upper shadow ( tail or wick)
upper shadow ( tail or wick)
High
High
low lower shadow ( tail or wick)
close
close
open
open low
lower shadow ( tail or wick) PAGE
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Each Candlestick Tells a Story The battle between the bulls and bears is constantly in motion. Each candlestick has its own story as to who is in control or taking control. Every individual bar represents a battle that was fought by two groups, the bulls and bears, the buyers and sellers. When the close is well above the open, the bulls win producing the color green. When the close is well above the open, the bears win, producing the color red. How much each side wins is determined by how much green or red they produce. In other words, the wider the distance between open and close, the greater the win.
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Candlesticks
High
High
low
low
bears win
buils win PAGE
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Bullish Candlesticks There are varying degrees of bullish candlesticks. The most bullish is the solid green bar at the left. All these different candlesticks give the speculator an edge as to what the story is when associated with other factors of the chart.
most bullish
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least bullish
neutral
PART TWO Introduction to Active Trading
Bearish Candlesticks There are varying degrees of bearish candlesticks. The most bearish is the solid red at the left. All of these candlesticks give the speculator an edge to what the story is when trying to say when associated with other factors of the chart.
most bearish
least bearish
neutral PAGE
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The 3 Non-Color Candles The 3 non color candlesticks are very important, and understanding them is crucial. Depending on where these type of candlesticks are found, it is very useful for being able to determine the next direction of the particular stock the trader is watching.
bears in control
bulls in control
All of the green was lost. The odds of the next bar being red are very high.
All of the red was lost. The odds of the next bar being green are very high.
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no control
THIS TYPE OF BAR, KNOWN AS A DOJI, SIGNALS INDECISION.neither bulls or bears are in control.
PART TWO Introduction to Active Trading
Time Frames We break down time frames into two sections: Execution and analytical time frames. Both types of time frames are used together at times, but depending on the type of trader you are, one will be used more than the other. Day traders will use the execution time frames more frequently to find set-ups. The longer-term trader, such as swing or investor type traders, will predominately use longer, analytical time frames for researching their potential setups. Tradeview traders use the 2 or 3 minute, 5 minute, and 10 minute chart time frames for the majority of their active trading. When trading the longer time frames, these shorter time frames can be used for entry and exit. PAGE
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The Three Most Widely Used Execution Time Frames for Active Traders 2 Minute Chart – This chart time frame is mostly used when the market is not producing clear signals on the 5-minute. It’s also useful if, and when, the entry and/or exit points are dictated by the 5-minute chart are too far away or unclear. Dropping down to the 2-minute chart of a finer entry, exit or stop will usually provide the best alternative. Drop down to a lower time frame is like looking into the DNA of the stock. This style is mostly used when trading larger priced stocks that tend to move more rapidly or have excessive short term moves. 5 Minute Chart – If there was only one time frame with which a trader had to use for day trading, this would be the one. The patterns we trade at Tradeview most frequently happen enough in the 5-minute window to keep us active, yet infrequently enough to prevent us from over-trading. Tradeview traders have quickly come to realize that to be a successful day trader, one must learn to master this time frame. 13 Minute Chart – While Tradeview traders do take trades on it from time to time, it’s mostly used as a gauge of the stock’s power. This time frame is used primarily for trend analysis and support and resistance reference points for the active trader. When trade set-ups are identified on this time frame, the smaller stop loss (this is based on the trader’s risk parameters). Trades on the 10-minute chart do tend to be the cleanest and most reliable. In a sense, for the professional trader earning a living via markets, this time frame would be considered the ‘core’.
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2 Minute Chart
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150.50 150.353981 150.00 149.619602 149.1723378 149.41 149.00
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158.00 156.00 154.00 152.00 150.00 149.4894047 149.619602 149.41 148.00 146.00 144.00
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The Four Analytical Time Frames 55 Minute Chart – This time frame is almost never used for active trading, but is the most widely used time frame for the longer term trader. When it comes to finding major “inflection points” (areas of major significance which often lead to abrupt stoppages and sudden reversals during the day). Tradeview swing traders use the 55 minute time frame, much like the active trader uses the 10 minute one to find trends and measure strength. Daily Chart – This time frame is key in determining which stocks have upside biases and which have downside biases. Certain price patterns that form on the daily chart have a high probability of moving in a predetermined direction the following morning and the course of the next several days. The daily chart is one of the most widely used time frames by all types of traders. If you are an active trader or a longer term trader, this time frame should be referred to on a regular basis. Weekly Chart –This time frame is used for the longer term trader. Swing traders will use this time frame to try and understand the bigger picture. While thing can change in the market on a moment’s notice, this larger time frame can give the longer term trader to correct bias to able to stay with the longer term trend, without getting stopped out on small corrections that all stocks have in the course of a longer term move. Monthly Chart – This time frame is used in a similar fashion as the weekly chart, but the users of this time frame are looking for a greater period of time in the markets. If the monthly chart is intact, one will usually drop down to the weekly chart to look for the correct type of corrections to get clues of the month picture changing. Active and Swing traders do not normally refer to this time frame.
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55 Minute Chart
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158.00 156.00 154.00 152.00 150.407796 150.00 149.44 149.484743 148.00 146.00 144.00
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Daily Chart MA(8,C)e MA(8,C)e MA(8,C)e
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Weekly Chart MA(8,C)e MA(8,C)e MA(8,C)e
200.00 180.00 162.3400-91 170.00 158.773382 160.00 149.442072 149.50 140.00
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monthly chart MA(8,C)e MA(8,C)e MA(8,C)e
260.00 240.00 220.00 200.00 180.00 160.00 155.441545 161.727429 149.50 140.00 120.00 100.00 80.00 60.00 40.00
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PART TWO Introduction to Active Trading
Pivot Points in Forex Trading
Pivot point calculation is one of the most popular trading tools in technical analysis.
What are Pivot Points? Pivot point is the price at which the price fluctuation of a stock is expected to move into a different direction. If for example, a stock price is hiking up, the pivot point price indicates that once the price reaches that level the currency pair might start going down and vice versa.
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Pivot Point Trading
a) When the stock price may change the direction of movement. b) Possible constraints of support and resistance that creates plateaus for the currency pair prices. c) Tendency identification by comparing the present prices according to current day’s pivot point and also the prior day’s pivot points.
Support and Resistance Levels by Pivot Points
When calculating pivot points there are 3 expected value types and they are: 1) Pivot Point price: the price fluctuation of a stock is expected to change into a different direction. 2) Resistance levels: There are 3 resistance levels that coincide with the pivot point price. These levels could indicate the price levels at which a resistance plateau is expected; if the price is climbing up to those levels, it is expected that the price will start moving down again. 3) Support Levels: As with the resistance levels, there are 3 support level prices that indicates the levels of support to the downward price. For example, if the stock price is going down at these levels it is expected that the price could start hiking up.
Pivot points to check if it is up-tendency or down- tendency:
In trading, it is common to use pivot point calculations to find the support and resistance levels and also to recognize a possible point of change in the direction of the fluctuation for a trading or day session. Pivot points can be used also to estimate if a stock is having an uptrend or a downtrend. The Tradeview Market suite offers a Standard Pivots Calculator
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PART TWO Introduction to Active Trading
What is a Pivot?
A pivot is a point in the past where price action halted and reversed. PIVOT HIGH
LL
LL HL
HL
HL= Higher Low LL = Lower Low PIVOT LOW THE MORE BARS CREATING HIGHER LOWS OR LOWER HIGHS, THE STRONGER THE PIVOT PAGE
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WHAT IS A PIVOT? 41.70
Pivot high 41.62 41.578636
MA(8,C)e MA(8,C)e MA(8,C)e
41.50 41.40
Pivot low
41.293553
Pivot High
41.20 41.10
Pivot low
41.00 40.90 60.00 40.80
Pivot low
40.70
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What is a Trend? DEFINITION of ‘Trend’ The general direction of a market or of the price of an asset. Trends can vary in length from short, to intermediate, to long term. If you can identify a trend, it can be highly profitable, because you will be able to trade with the trend.
Technical Definition: A trend is defined by its past pivots. A minimum of to consecutive occurrences must be present to assume a trend is in place. For example, in order to be in and uptrend, a stock must make two consecutive higher pivot highs AND two higher pivot lows. Trend analysis also involves the use of moving averages. For example, a smooth rising 8ema above a smooth rising 21ema would suggest a current uptrend.
3 Types of Trends Uptrend Downtrend Sideways/Range Trend PAGE
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PART TWO Introduction to Active Trading
What is an Uptrend? An uptrend is made up of two or more consecutive higher pivot points AND to higher pivot lows..
HH
T3 TIP : THE STRONGEST UPTRENDS WILL BE: Price of Stock >r8ema>r21ema>flat 200ema
HH HL
HH
21ema
HL HL PAGE 36 OF 275
HH = hIGHER HIGH HL=HIGHER LOW
PART TWO Introduction to Active Trading
What is an Uptrend? 61.80 61.745199
HH HL
MA(8,C)e MA(8,C)e MA(8,C)e
5 MINUTE UPTREND....
61.652891 61.60
61.40
HH 61.20
HH
HL HL
HH
HH HH
61.00
HL
60.80 60.732801
HL HL
HL
60.60
HL Volume
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What is an Uptrend? HH
13 MINUTE UPTREND....
MA(8,C)e MA(8,C)e MA(8,C)e
65.20 65.10 65.07575 65.037653 65.00 64.953045 64.90 64.80
HH
64.70
HH
64.60 64.50
HL
64.409902 64.30 64.20
HL
64.10
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PART TWO Introduction to Active Trading
What is a Downtrend? A downtrend is made up of o two or more consecutive lower pivot lows AND lower pivot highs.
lh lh 21ema
lL T3 TIP: tHE STRONGEST downtrends WILL BE: Price of Stock < d8ema < d21ema < flat 200ema
lh
ll ll =lower low lh = lower high
ll PAGE
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What is a Downtrend? 137.00
MA(8,C)e MA(8,C)e MA(8,C)e
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lH
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lL
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lH lH
134.00
lL
5 MINUTE Downtrend....
133.50
lH
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lL lL
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lH
lL
132.00 131.85 131.623359 131.50
lL
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What is a Downtrend? MA(8,C)e MA(21,C)e MA(8,C)e
82.50
LH
82.00 81.50
LH
LL
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13 MINUTE downtrend....
LL
80.122338 80.00
LH
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LH
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LL
78.565889 78.50 78.249209 78.13 78.00
LL LL
77.50
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PART TWO Introduction to Active Trading
What is a Sideways/Range Trend? A sideways/range trend is made up of two consecutive equal pivot highs AND equal pivot lows
T3 TIP : A flat 21ema is a key indicator that the current trend is sideways
eQUAL highs
21ema
eQUAL LOWS PAGE 42 OF 275
PART TWO Introduction to Active Trading
What is a Sideways/Range Trend? eQUAL highs 39.50
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39.00 38.903143 38.50 38.00
eQUAL lows
37.50 37.00
55 MINUTE SIDEWAYS/RANGE TREND
36.50
( NOTE: FLAT 21EMA IN THE MIDDLE OF THE RANGE ).
36.00 35.50
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What is a Sideways/Range Trend? 40.10
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13 MINUTE sideways/range trend ( note: flat moving averages )
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What Changes a Trend? A change in tend occurs ONLY after two pivots fail to continue the pattern of its current trend. A change of trend can happen one of two ways: it s can be “challenged” or “broken.”
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Challenged Trend
A trend is challenged after one pivot fails to continue the pattern of its current trend.
Challenged Uptrend: A stock making a series of higher pivot highs and higher pivot lows fails to make a new higher pivot high and creates an equal high is now challenging the uptrend.
Challenged Downtrend: A stock making a series of lower pivot lows and lower pivot highs fails to make a new lower pivot low and creates and equal low is now challenging the downtrend.
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Challenged Uptrend
eQUAL highs “CHALLENGES” UPTREND
hH
MA(8,C)e MA(21,C)e MA(200,C)e
61.80 61.735456
61.70
hL
61.64367
61.60 61.50
HH
61.40
eQUAL high “challenges” uptrend
hH HH hH
61.30 61.20 61.10
hL
61.00
HL
60.90
hL HL
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Challenged Downtrend
MA(8,C)e MA(8,C)e MA(8,C)e 29.40
lH
29.20
LH 29.00
lL LH
28.80
lH lH
28.653829 28.60 28.49 28.431775 28.40
LL lL LL
eQUAL low “CHALLENGES” downtrend
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eQUAL low “CHALLENGES” downtrend 14:00
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PART TWO Introduction to Active Trading
What is a Broken Trend? Broken Uptrend: A stock making a series of higher pivot highs and higher pivot lows fails to make a higher pivot low by trading below the prior pivot low and creating a lower pivot low.
Broken Downtrend: A stock making a series of lower pivot lows and lower pivot highs fails to make a lower pivot high by trading above the prior pivot high and creating a higher pivot high.
Broken Sideways/Range Trend: A stock making a series of equal pivot highs and equal pivot lows fails to continue by creating either a higher pivot high or lower pivot low.
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Broken Uptrend:
HH
MA(8,C)e MA(8,C)e MA(8,C)e
HH
“CHALLENGED” 32.20 32.15 32.123371 32.107222
HH
HL
HH HH
HL
HH
LOWER LOW “BREAKS” UPTREND
HL
HL LL
HL
LOWER low “BREAKS” UPTREND
32.00 31.95
HH
HL
32.10
HL
31.90 31.85 31.80 31.75 31.70
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“BROKEN” DOWNTREND
25.80
MA(8,C)e MA(21,C)e MA(200,C)e
higher high “breaks” downtrend
LH
25.433567 25.60
higher high “breaks” downtrend
LH LH
HH LL
25.20
LH
LL
LH
25.40
HH LH
LL
LL
25.00 24.801186 24.76 24.712476 24.60
LL
LL
Volume
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Broken Sideways/Range Trend:
higher high “breaks” sideways/ range trend
65.50
MA(8,C)e MA(8,C)e MA(8,C)e
65.40
65.30
“break” of sideways/range trend
65.20 65.18 65.149843 65.105665
65.00
64.90
64.80
Volume
500K
09:00
04/05/10
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12:00
14:00
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Broken Sideways/Range Trend:
MA(8,C)e MA(8,C)e MA(8,C)e 39.90
39.80 39.740403 39.70 39.600863
“break” of sideways/range trend
higher low “breaks” sideways/ range trend
39.539095 39.51 39.50
200K
Volume
152.58K 100K
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12:00
14:00
09:00
04/06/10
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Short-Term vs . Long-Term Trends Short-term trends will have on smaller time frames while long-term trends will happen on the bigger, analytical time frames.
note:
It is not unusual to see a daily trend (long-term) and a 5 minute trend (short-term) that are trending in opposite directions SHORT-TERM
3 Minute
5 Minute
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13 Minute
TRANSITION
55 Daily Minute
SHORT-TERM
Weekly
Monthly
A pivot is a point in the past where price action halted and reversed.
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moving average support
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moving average support
moving average support
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market pace
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market pace
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support and resistance
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support and resistence
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support and resistence
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support and resistence
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Support Equals Resistance Another principle of technical analysis stipulates that support can turn into resistance and vice versa. Once the price breaks below a support level, the broken support level can turn into resistance. The break of support signals that the forces of supply have overcome the forces of demand. Therefore, if the price returns to this level, there is likely to be an increase in supply, and hence resistance.
The other turn of the coin is resistance turning into support. As the price advances above resistance, it signals changes in supply and demand. The breakout above resistance proves that the forces of demand have overwhelmed the forces of supply. If the price returns to this level, there is likely to be an increase in demand and support will be found.
Support and Resistance Zones Because technical analysis is not an exact science, it is useful to create support and resistance zones. Each security has its own characteristics, and analysis should reflect the intricacies of the security. Sometimes, exact support and resistance levels are best, and, sometimes, zones work better. Generally, the tighter the range, the more exact the level. If the trading range spans less than 2 months and the price PAGE 76 OF 275
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range is relatively tight, then more exact support and resistance levels are best suited. If a trading range spans many months and the price range is relatively large, then it is best to use support and resistance zones. These are only meant as general guidelines, and each trading range should be judged on its own merits.
The Bottom Line Determining future levels of support can drastically improve the returns of a short-term investing strategy because it gives traders an accurate picture of what price levels should prop up the price of a given security in the event of a correction. Conversely, foreseeing a level of resistance can be advantageous because this is a price level that could potentially harm a long position because it signifies an area where investors have a high willingness to sell the security. As mentioned above, there are several different methods to choose when looking to identify support/resistance, but regardless of the method, the interpretation remains the same - it prevents the price of an underlying from moving in a certain direction.
Fibonacci Retracements Introduction Fibonacci Retracements are ratios used to identify potential reversal levels. These ratios are found in the Fibonacci sequence. The most popular Fibonacci Retracements are 61.8% and 38.2%. Note that 38.2% is often rounded to 38% and 61.8 is rounded to 62%. After an advance, chartists apply Fibonacci ratios to define retracement levels and forecast the extent of a correction or pullback. Fibonacci Retracements can also be applied after a decline to forecast the length of a counter trend bounce. These retracements can be combined with other indicators and price patterns to create an overall strategy. PAGE
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The Mathematics Mathematicians, scientists and naturalists have known this ratio for years. Itâ&#x20AC;&#x2122;s derived from something known as the Fibonacci sequence, named after its Italian founder, Leonardo Fibonacci (whose birth is assumed to be around 1175 AD and death around 1250 AD). Each term in this sequence is simply the sum of the two preceding terms (1, 1, 2, 3, 5, 8, 13, etc.).
But this sequence is not all that important; rather, it is the quotient of the adjacent terms that possesses an amazing proportion, roughly 1.618, or its inverse 0.618. This proportion is known by many names: the golden ratio, the golden mean, PHI and the divine proportion, among others. So, why is this number so important? Well, almost everything has dimensional properties that adhere to the ratio of 1.618, so it seems to have a fundamental function for the building blocks of nature.
The Sequence and Ratios Because technical analysis is not an exact science, it is useful to create support and resistance zones. Each security has its own characteristics, and analysis should reflect the intricacies of the security. Sometimes, exact support and resistance levels are best, and, sometimes, zones work better. Generally, the tighter the range, the more exact the level. If the trading range spans less than 2 months and the PAGE 78 OF 275
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price range is relatively tight, then This article is not designed to delve too deep into the mathematical properties behind the Fibonacci sequence and Golden Ratio. There are plenty of other sources for this detail. A few basics, however, will provide the necessary background for the most popular numbers. Leonardo Pisano Bogollo (1170-1250), an Italian mathematician from Pisa, is credited with introducing the Fibonacci sequence to the West. It is as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610â&#x20AC;Śâ&#x20AC;Ś The sequence extends to infinity and contains many unique mathematical properties. - Ratios of Fibonacci numbers occur everywhere in nature. - Eg. Branching of trees, arrangement of pine cones, the breeding of rabbits. - In trading, Fibonacci ratios represent psychological levels where stocks often meet support and resistance. We use these areas to potentially measure targets or identify reversal zones.
Alert Zones Retracement levels alert traders or investors of a potential trend reversal, resistance area or support area. Retracements are based on the prior move. A bounce is expected to retrace a portion of the prior decline, while a correction is expected to retrace a portion of the prior advance. Once a pullback starts, chartists can identify specific Fibonacci retracement levels for monitoring. As the correction approaches these retracements, chartists should become more alert for a potential bullish reversal.
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What is a Fibonacci Sequence? Fib Retracements This is used to identify and measure the strength or weakness of a move counter to the prevailing trend. The level or depth of retracement into a reference point of support or resistance will suggest the probability of moving through that point. The level or depth of retracement between the two most recent pivots will suggest the odds of that move being a continuation or failure of that prior move. The level of retracement gives the trader insights into longer time frames. The deeper the retracement, the more bullish/bearish the pattern is becoming on the longer time frames. Retracement Analysis is used to objectively recognize strength or weakness of the prevailing move. 100 percent and greater than 100 percent retracements that begin from a V top or bottom will have greater probabilities of reversing. 100 percent and greater than 100 percent retracements that begin from a base, M or W pattern will have greater probabilities of continuation. Areas of prior support or resistance are easily identifiable on the chart for you to see.
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support and resistence
MA(8,C)e MA(8,C)e MA(8,C)e
24.50 24.411
MA(8,C)e MA(8,C)e MA(8,C)e
29.80
24.00
0.250 0.382 0.500
29.60 29.468 29.40
23.50
THE 38.2% RETRACEMENT LEVEL ACTS AS SUPPORT
23.00
29.20
0.000 (29.60)
22.50
0.618
0.250 (28.887)
0.382 (28.796) 28.80 0.500 (28.715) 0.618 (28.633)
22.00
the 50% retracement level acts as support
21.50
28.60
1.000 1.000 (28.37)
21.00
Volume
04/05
10M
04/06
04/07
04/08
04/09
4.85M 0
04/12
29.00
28.40
Volume
11:00
12:00
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15:00
04/27/10
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11:00
12:00
PAGE
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13:00
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What is a Fibonacci Sequence? Fib Extensions Whereas retracement levels are used to forecast areas of support or resistance, extensions are used to evaluate target prices. In practice, most traders use extension levels in conjunction with other technical patterns to help determine the appropriate target prices. Most active traders use these extension levels when trying to determine profit areas. The extension is based on a predefined range where a stock expands in price. Extensions forecast or measure a certain distance after a shallow retracement occurs. Popular extension levels are 61.8 percent, 100 percent, 161.8 percent, 261.8 percent and 425 percent. These levels are automatically calculated and plotted by most charting programs.
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FIB EXTENSION EXAMPLE
45.00 150.09
39.76
1.000 145.00
35.00
0.382
0.618
30.00
140.00
135.00
25.00
1.618 20.00
1.000 0.618 0.000
130.00
0.000
15.00
125.00
10.00
120.00
5.00
Volume
Nov
100M 62.12M
Jan 2009
Mar
May
Jul
Sep
Nov
Jan 2010
Mar
May
0
115.00
Volume
15.11M 10M
22
01
Mar
08
15
22
29
05
Apr
12
19
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What is a Fibonacci Sequence? Fibonacci Retracements Fibonacci retracements use horizontal lines to indicate areas of support or resistance. They are calculated by first locating the high and low of the chart. Then five lines are drawn: the first at 100% (the high on the chart), the second at 61.8%, the third at 50%, the fourth at 38.2% and the last one at 0% (the low on the chart). After a significant price movement up or down, the new support and resistance levels are often at or near these lines. Take a look at the chart below, which illustrates some retracements:
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1.42821(100.00%)
1.44 1.41753
1.4
1.3744(61.80%)
1.38
1.3784 (61.80%)
1.36
1.3412(38.20%) 1.3412 (38.20%)
1.3206(23.60%) 1.3206 (23.60%)
1.34
1.32
1.3
1.28737(0%) 1.2874 (0.00%)
Nov
1.28
Dec
2011
Feb
Mar
Apr
May
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Fibonacci Arcs Finding the high and low of a chart is the first step to composing Fibonacci arcs. Then, with a compasslike movement, three curved lines are drawn at 38.2%, 50% and 61.8%, from the desired point. These lines anticipate the support and resistance levels, and areas of ranging. Take a look at the chart below.
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Fibonacci fans Fibonacci fans are composed of diagonal lines. After the high and low of the chart is located, an invisible vertical line is drawn though the rightmost point. This invisible line is then divided into 38.2%, 50% and 61.8%, and lines are drawn from the leftmost point through each of these points.
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Fibonacci Time Zones Unlike the other Fibonacci methods, time zones are a series of vertical lines. They are composed by dividing a chart into segments with vertical lines spaced apart in increments that conform to the Fibonacci sequence (1, 1, 2, 3, 5, 8, 13, etc.). These lines indicate areas in which major price movement can be expected. Fibonacci retracements are often used to identify the end of a correction or a counter-trend bounce. Corrections and counter-trend bounces often retrace a portion of the prior move. While short 23.6% retracements do occur, the 38.2-61.8% covers the more possibilities (with 50% in the middle). This zone may seem big, but it is just a reversal alert zone. Other technical signals are needed to confirm a reversal. Reversals can be confirmed with candlesticks, momentum indicators, volume or chart patterns. In fact, the more confirming factors the more robust the signal.
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PATTERNS
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Classic Chart Patterns A chart pattern is a distinct formation on a stock chart that creates a trading signal, or a sign of future price movements. Chart patterns are a key element of technical analysis. Stocks are cyclical in nature and over time develop patterns that predict price movements. Traders use these patterns to identify current trends and trend reversals and to trigger buy and sell signals. There are two types of patterns within this area of technical analysis, reversal and continuation. A reversal pattern signals that a prior trend will reverse upon completion of the pattern. A continuation pattern, on the other hand, signals that a trend will continue once the pattern is complete. These patterns can be found over charts of any timeframe. In this section, we will review some of the more popular chart patterns.
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Head and Shoulders Bottom (Reversal) The Head and Shoulders Bottom, sometimes referred to as an Inverse Head and Shoulders, is a pattern that shares many common characteristics with its comparable partner, but relies more heavily on volume patterns for confirmation.
As a major reversal pattern, the Head and Shoulders Bottom forms after a downtrend, and its completion marks a change in trend. The pattern contains three successive troughs with the middle trough (head) being the deepest and the two outside troughs (shoulders) being shallower. Ideally, the two shoulders would be equal in height and width. The reaction highs in the middle of the pattern can be connected to form resistance, or a neckline. The price action forming both Head and Shoulders Top and Head and Shoulders Bottom patterns remains roughly the same, but reversed. The role of volume marks the biggest difference between the two. Generally speaking, volume plays a larger role in bottom formations than top formations. While an increase in volume on the neckline breakout for a Head and Shoulders Top is welcomed, it is absolutely PAGE 92 OF 275
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Head and Shoulders Bottom
NECKLINE
RIGHT SHOULDER
LEFT SHOULDER HEAD
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required for a bottom. We will look at each part of the pattern individually, keeping volume in mind, and then put the parts together with some examples.
1. Prior Trend:
It is important to establish the existence of a prior downtrend for this to be a reversal pattern. Without a prior downtrend to reverse, there cannot be a Head and Shoulders Bottom formation.
2. Left Shoulder:
While in a downtrend, the left shoulder forms a trough that marks a new reaction low in the current trend. After forming this trough, an advance ensues to complete the formation of the left shoulder (1). The high of the decline usually remains below any longer trend line, thus keeping the downtrend intact.
3. Head:
From the high of the left shoulder, a decline begins that exceeds the previous low and forms the low point of the head. After making a bottom, the high of the subsequent advance forms the second point of the neckline (2). The high of the advance sometimes breaks a downtrend line, which calls into question the robustness of the downtrend.
4. Right Shoulder:
The decline from the high of the head (neckline) begins to form the right shoulder. This low is always higher than the head, and it is usually in line with the low of the left shoulder. While symmetry is preferred, sometimes the shoulders can be out of whack, and the right shoulder will be higher, lower, wider, or narrower. When the advance from the low of the right shoulder breaks the neckline, the Head and Shoulders Bottom reversal is complete. PAGE 94 OF 275
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5. Neckline: The neckline forms by connecting reaction highs 1 and 2. Reaction High 1 marks the end of the left shoulder and the beginning of the head. Reaction High 2 marks the end of the head and the beginning of the right shoulder. Depending on the relationship between the two reaction highs, the neckline can slope up, slope down, or be horizontal. The slope of the neckline will affect the patternâ&#x20AC;&#x2122;s degree of bullishness: an upward slope is more bullish than a downward slope.
6. Volume: While volume plays an important role in the Head and Shoulders Top, it plays a crucial role in the Head and Shoulders Bottom. Without the proper expansion of volume, the validity of any breakout becomes suspect. Volume can be measured as an indicator (OBV, Chaikin Money Flow) or simply by analyzing the absolute levels associated with each peak and trough. Volume levels during the first half of the pattern are less important than in the second half. Volume on the decline of the left shoulder is usually pretty heavy and selling pressure quite intense. The intensity of selling can even continue during the decline that forms the low of the head. After this low, subsequent volume patterns should be watched carefully to look for expansion during the advances. The advance from the low of the head should show an increase in volume and/or better indicator readings, e.g., CMF > 0 or rise in OBV. After the reaction high forms the second neckline point, the right shoulderâ&#x20AC;&#x2122;s decline should be accompanied with light volume. It is normal to experience profittaking after an advance. Volume analysis helps distinguish between normal profit-taking and heavy selling pressure. With light volume on the pullback, indicators like CMF and OBV should remain PAGE
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strong. The most important moment for volume occurs on the advance from the low of the right shoulder. For a breakout to be considered valid, there needs to be an expansion of volume on the advance and during the breakout.
7. Neckline Break: The Head and Shoulders Bottom pattern is not complete, and the downtrend is not reversed until neckline resistance is broken. For a Head and Shoulders Bottom, this must occur in a convincing manner, with an expansion of volume.
8. Resistance Turned Support: Once resistance is broken, it is common for this same resistance level to turn into support. Often, the price will return to the resistance break, and offer a second chance to buy.resistance is broken. For a Head and Shoulders Bottom, this must occur in a convincing manner, with an expansion of volume.
9. Price Target: After breaking neckline resistance, the projected advance is found by measuring the distance from the neckline to the bottom of the head. This distance is then added to the neckline to reach a price target. Any price target should serve as a rough guide, and other factors should be considered, as well. These factors might include previous resistance levels, Fibonacci retracements or long-term moving averages.
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Head and Shoulders Top (Reversal) A Head and Shoulders reversal pattern forms after an uptrend, and its completion marks a trend reversal. The pattern contains three successive peaks with the middle peak (head) being the highest and the two outside peaks (shoulders) being low and roughly equal. The reaction lows of each peak can be connected to form support, or a neckline.
As its name implies, the Head and Shoulders reversal pattern is made up of a left shoulder, a head, a right shoulder, and a neckline. Other parts playing a role in the pattern are volume, the breakout, price target and support turned resistance. We will look at each part individually, and then put them together with some examples.
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Head and Shoulders TOP (REVERSAL)
HEAD
RIGHT SHOULDER LEFT SHOULDER PRICE RETURNS TO THE NECKLINE AFTER IT HAS BEEN BROKEN
NECKLINE
MINIMUM PRICE OBJECTIVE
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1. Prior Trend:
It is important to establish the existence of a prior uptrend for this to be a reversal pattern. Without a prior uptrend to reverse, there cannot be a Head and Shoulders reversal pattern (or any reversal pattern for that matter).
2. Left Shoulder:
While in an uptrend, the left shoulder forms a peak that marks the high point of the current trend. After making this peak, a decline ensues to complete the formation of the shoulder (1). The low of the decline usually remains above the trend line, keeping the uptrend intact.
3. Head:
From the low of the left shoulder, an advance begins that exceeds the previous high and marks the top of the head. After peaking, the low of the subsequent decline marks the second point of the neckline (2). The low of the decline usually breaks the uptrend line, putting the uptrend in jeopardy.
4. Right Shoulder:
The advance from the low of the head forms the right shoulder. This peak is lower than the head (a lower high) and usually in line with the high of the left shoulder. While symmetry is preferred, sometimes the shoulders can be out of whack. The decline from the peak of the right shoulder should break the neckline.
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5. Neckline: The neckline forms by connecting low points 1 and 2. Low point 1 marks the end of the left shoulder and the beginning of the head. Low point 2 marks the end of the head and the beginning of the right shoulder. Depending on the relationship between the two low points, the neckline can slope up, slope down or be horizontal. The slope of the neckline will affect the patternâ&#x20AC;&#x2122;s degree of bearishnessâ&#x20AC;&#x201D;a downward slope is more bearish than an upward slope. Sometimes more than one low point can be used to form the neckline.
6. Volume: As the Head and Shoulders pattern unfolds, volume plays an important role in confirmation. Volume can be measured as an indicator (OBV, Chaikin Money Flow) or simply by analyzing volume levels. Ideally, but not always, volume during the advance of the left shoulder should be higher than during the advance of the head. This decrease in volume and the new high of the head, together, serve as a warning sign. The next warning sign comes when volume increases on the decline from the peak of the head. Final confirmation comes when volume further increases during the decline of the right shoulder. selling pressure. With light volume on the pullback, indicators like CMF and OBV should remain
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7. Neckline Break: The head and shoulders pattern is not complete and the uptrend is not reversed until neckline support is broken. Ideally, this should also occur in a convincing manner, with an expansion in volume.
8. Support Turned Resistance: Once support is broken, it is common for this same support level to turn into resistance. Sometimes, but certainly not always, the price will return to the support break, and offer a second chance to sell.
9. Price Target: After breaking neckline support, the projected price decline is found by measuring the distance from the neckline to the top of the head. This distance is then subtracted from the neckline to reach a price target. Any price target should serve as a rough guide, and other factors should be considered as well. These factors might include previous support levels, Fibonacci retracements, or long-term moving averages.
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Cup with Handle (Continuation) The Cup with Handle is a bullish continuation pattern that marks a consolidation period followed by a breakout. It was developed by William Oâ&#x20AC;&#x2122;Neil and introduced in his 1988 book, How to Make Money in Stocks.
As its name implies, there are two parts to the pattern: the cup and the handle. The cup forms after an advance and looks like a bowl or rounding bottom. As the cup is completed, a trading range develops on the right hand side and the handle is formed. A subsequent breakout from the handleâ&#x20AC;&#x2122;s trading range signals a continuation of the prior advance.
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CUP WITH HANDLE
HUNDLE
CUP
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1. Trend:
To qualify as a continuation pattern, a prior trend should exist. Ideally, the trend should be a few months old and not too mature. The more mature the trend, the less chance that the pattern marks a continuation or the less upside potential.
2. Cup:
The cup should be “U” shaped and resemble a bowl or rounding bottom. A “V” shaped bottom would be considered too sharp of a reversal to qualify. The softer “U” shape ensures that the cup is a consolidation pattern with valid support at the bottom of the “U”. The perfect pattern would have equal highs on both sides of the cup, but this is not always the case.
3. Cup Depth:
Ideally, the depth of the cup should retrace 1/3 or less of the previous advance. However, with volatile markets and over-reactions, the retracement could range from 1/3 to 1/2. In extreme situations, the maximum retracement could be 2/3, which conforms with Dow Theory.
4. Handle:
After the high forms on the right side of the cup, there is a pullback that forms the handle. Sometimes this handle resembles a flag or pennant that slopes downward, other times it is just a short pullback. The handle represents the final consolidation/pullback before the big breakout and can retrace up to 1/3 of the cup’s advance, but usually not more. The smaller the retracement, the more bullish the formation and significant the breakout. Sometimes it is prudent to wait for a break above the resistance line established by the highs of the cup.
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5. Duration:
The cup can extend from 1 to 6 months, sometimes longer on weekly charts. The handle can be from 1 week to many weeks and ideally completes within 1-4 weeks.
6. Volume:
There should be a substantial increase in volume on the breakout above the handleâ&#x20AC;&#x2122;s resistance.
7. Target:
The projected advance after breakout can be estimated by measuring the distance from the right peak of the cup to the bottom of the cup. As with most chart patterns, it is more important to capture the essence of the pattern than the particulars. The cup is a bowl-shaped consolidation and the handle is a short pullback followed by a breakout with expanding volume. A cup retracement of 62% may not fit the pattern requirements, but a particular stockâ&#x20AC;&#x2122;s pattern may still capture the essence of the Cup with Handle.
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Bull and Bear Flags Flag patterns are the most basic continuation patterns. These patterns consist of two parts: a pole and a flag or pennant. The pole is formed by a sharp price increase or decrease. The flag or pennant forms after the move (the pole) in the form of prices consolidation. As you can see below, the flag portion of the pattern can take on different shapes.
A horizontal flag and pennant
A downward flag and pennant
An upward flag and pennant
A horizontal flag and pennant
A downward flag and pennant
An upward flag and pennant
T3 TIP: Bull and bear flags can take many shapes an forms. These are the most commonly seen patterns and are a favorite of T3Live traders. PAGE 106 OF 275
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Bull Flags Technical patterns may be found on any time frame. The higher the time frame, the more reliable the pattern.
Measured move pole
MA(8,C)e MA(8,C)e MA(8,C)e
70.25 69.929765
Flags forms on diminishing volume and retraces less than 25% of pole
Traders should look to acquire tier 1 or 2 near the bottom end of a bull flagâ&#x20AC;&#x2122;s consolidation and look to add tiers 3 and 4 on a breakout above prior highs.
69.50 69.147854 69.00 68.50 68.00 67.50
Volume returns on the breakout
A healthy flag will have Strong volume on the initial move Diminishing volume in the flag Increasing volume on the breakout to new highs Triangles are some of the most well-known chart patterns used in technical analysis. The three types of triangles, which vary in construct and implication, are the symmetrical triangle, ascending and descending triangle. These chart patterns are considered to last anywhere from a couple of weeks to several months.
71.00 70.50
67.00 66.50 66.00 65.50
Directional price move with volume (pole)
65.00 64.50
Volume
2M 1M
low volume in the flag 09:00
04/05/10
11:00
12:00
14:00
15:00
10:00
385.77K 0
04/06/10
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BEAR FLAGS
DAILY CHART BEAR FLAG
TARGET: BASED ON MEASURING THE INITIAL MOVE LOWER AND APPLYING THIS SAME DISTANCE FROM THE HIGHEST POINT IN THE BOUNCE OR CONSOLIDATION.
BEARISH 8 & 21 EMA CROSSOVER TRIGGERS RIGHT BEFORE THE STOCK BREAKS DOWN.
Volume
09:00
03/19/10
Volume
10:00
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BEAR FLAG
BEARISH 8 & 21 EMA CROSSOVER
11:00
03/18
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03/22
03/23
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Symmetrical Triangle A symmetrical triangle or wedge is a continuation patter that takes the form of a very tight range constriction. It is a series of higher lows and lower highs that meet to form a apex at which the price range is very tight. This is a continuation patter that offers very good risk to reward when entered properly. Wedge patterns generally precede an explosive move, the tighter it becomes the larger the subsequent move.
Volume should diminish as this pattern forms and should increase when the pattern breaks out or down. The aggressive entry would be to buy the lower trend line in an uptrend and to short the upper trend line in a down trend. The conservative trader would look to enter on a volume break of the price range Triangle formed by fluctuating prices.
Triangle formed by narrowing prices. PAGE
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Symmetrical Triangle As with all technical patterns, symmetrical triangles may be seen on a time frame and the most reliable on the higher time frames such as 60min, daily or weekly chart.
MA(8,C)e MA(8,C)e MA(8,C)e
moving averages converge or nest as stock consolidates near 200 ema
Volume should diminish as this pattern forms and should increase when the pattern breaks out or down. The aggressive entry would be to buy the lower trend line in an uptrend and to short the upper trend line in a down trend. The conservative trader would look to enter on a volume break of the price range.
Volume diminishes as the pattern forms but returns once the stock breaks out of the pattern.
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Ascending Triangle An ascending triangle is a continuation pattern that forms series of higher lows into a resistance area. They buying is resilient in this patter and steps up into a clearly defined resistance level. Once the buying and selling meet, a powerful move will follow. The aggressive trader will look to buy before the breakout against the lower rising trend line. The conservative trader will wait until overhead resistance is cleared and the breakout is confirmed. Remember, volume should accompany any healthy breakout. A descending triangle is just the opposite, as it is formed by a series of lower highs into a support area. The selling steps down into a clearly defined support level.
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Ascending Triangle As with all technical patterns, ascending triangles may be seen on any time frame and are most reliable on higher time frames such as 60min, daily or weekly chart.
MA(8,C)e MA(21,C)e MA(200,C)e 180.00 177.90 174.622245
Volume should diminish as this pattern forms and should increase when the pattern beaks out or down. The aggressive entry would be to buy the lower trend line on an uptrend and to short the upper trend line in a down trend. The conservative trader would look to enter on a volume break of the price range.
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Ascending Triangle (GS - GOLDMAN SACHS GROUP INC,60 ) Dynamic, 9:30-16:00
MA(8,C)e MA(21,C)e MA(200,C)e MA(200,C)e
Breakout occurs in this wide range bar with volume as the EMAâ&#x20AC;&#x2122;s confirm a bullish crossover clear level of resistance here.
T3 TIP: Notice how the ema es converger or nest as the stock consolidates. This is commonly seen before a large price movement.
Series of higher lows
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Double Tops and Bottoms This chart pattern is another well-known pattern that signals a trend reversal - it is considered to be one of the most reliable and is commonly used. These patterns are formed after a sustained trend and signal to chartists that the trend is about to reverse. The pattern is created when a price movement tests support or resistance levels twice and is unable to break through. This pattern is often used to signal intermediate and long-term trend reversals..
The prudent trader will pay close attention to the price action of this stock as it retests the prior low. A double bottom is confirmed once it makes a higher high and breaks above the neckline area shown in the diagram below. A double top is confirmed once it breaks down below the previous support near the neckline area. Keep in mind, the support and resistance points that form these patterns are prices areas, not exact prices. It is common to see a double bottom or top where the second leg of the pattern trades slightly through the prior low or high. Top #2 Top #2 Neckline Neckline Bottom #1 PAGE 114 OF 275
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DOUBLE TOPS AND BUTTOMS (RIMM - RESEARCH IN MOTION LTD, W) Dynamic, 0:00-24:00
(FXE - CURRENCYSHARES EURO TRUST: EURO.D) Dynamic, 0:00-24:00
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Gaps
Gaps occur because of underlying fundamental or technical factors. For example, if a companyâ&#x20AC;&#x2122;s earnings are much higher than expected, the companyâ&#x20AC;&#x2122;s stock may gap up the next day.
This means that the stock price opened higher than it closed the day before, thereby leaving a gap. In the forex market, it is not uncommon for a report to generate so much buzz that it widens the bid and ask spread to a point where a significant gap can be seen. Similarly, a stock breaking a new high in the current session may open higher in the next session, thus gapping up for technical reasons.
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Gaps can be classified into four groups: Breakaway gaps are those that occur at the end of a price pattern and signal the beginning of a new trend. Exhaustion gaps occur near the end of a price pattern and signal a final attempt to hit new highs or lows. Common gaps are those that cannot be placed in a price pattern - they simply represent an area where the price has “gapped.” Continuation gaps occur in the middle of a price pattern and signal a rush of buyers or sellers who share a common belief in the underlying stock’s future direction. When someone says that a gap has been “filled,” that means that the price has moved back to the original pre-gap level. These fills are quite common and occur because of the following: Irrational Exuberance: The initial spike may have been overly optimistic or pessimistic, therefore inviting a correction. Technical Resistance: When a price moves up or down sharply, it doesn’t leave behind any support or resistance.
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Price Pattern: Price patterns are used to classify gaps, and can tell you if a gap will be filled or not. Exhaustion gaps are typically the most likely to be filled because they signal the end of a price trend, while continuation and breakaway gaps are significantly less likely to be filled, since they are used to confirm the direction of the current trend. When gaps are filled within the same trading day on which they occur, this is referred to as fading. For example, letâ&#x20AC;&#x2122;s say a company announces great earnings per share for this quarter, and it gaps up at open (meaning it opened significantly higher than its previous close). Now letâ&#x20AC;&#x2122;s say that, as the day progresses, people realize that the cash flow statement shows some weaknesses, so they start selling. Eventually, the price hits yesterdayâ&#x20AC;&#x2122;s close, and the gap is filled. Many day traders use this strategy during earnings season or at other times when irrational exuberance is at a high.
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Psychology
Knowing How to Take a Loss Being able to take losses on trades is vitally important in becoming a successful trader. Most traders hate to take a loss, and that is the very thinking that will end your career. Taking losses is the biggest part of this business, and it is very necessary.
There are two reasons losses are good. Firstly, they force you to change and learn from your mistakes. Secondly, and the most important one, is by taking small losses on trades that do not work out as you originally planned, you get to trade another day and your mental edge remains intact. Staying in the game is the one thing you must do, and small losses are the key to this. When you choose to let a losing trade continue to go against you, everything begins to break down. Your confidence gets rattled, then you begin to get emotional, then you start judging yourself and negativity takes over. Once you are at this point, itâ&#x20AC;&#x2122;s only a matter of time until that small loss becomes big, and you dig yourself a deep hole monetarily and emotionally. So, when in a losing trade, if you get an out, take it. The first stop is always the cheapest in a losing trade. Never give in to the temptation to let losers run. Take the first stop, admit to yourself you where wrong and move on. PAGE 120 OF 275
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Fear of Making Money The fear of losing money paralyzes many people. Those who are risk averse always limit their income potential because they are afraid of losing. These people arenâ&#x20AC;&#x2DC;t cut out to be traders at all. But there is another type of fear that can paralyze traders and limit their earning potential: the fear of making money. It may sound strange at first; who is afraid of making money? In reality, though, a lot of traders get to the point where there is a fear of being right. Losing can become an addiction. People become addicted to losing because they have self-defeating tendencies and an underlying lack of confidence. This lack of confidence can come from many things including past failures or losses. The important thing is to identify if you are suffering from a fear of making money, and here is how to do it. The first step is being prepared. It is impossible to have confidence if deep down you know you are not prepared. Once you are confident you have done your homework, ask yourself this: am I giving my ideas a chance to play out? Once l set myself a target and a stop, am I following them until the trade is no longer compelling? The key to winning consistently in the long-run is getting the most out of your good trades and losing as little as possible as your bad ones. It is a simple concept, but most people end up doing the opposite. Once you have put in the time to prepare, trust your ideas and give them room to work. Focus on the execution of the trade, not on the money. Each time the stock ticks up or down, donâ&#x20AC;&#x2122;t think about how much money you just gained or lost, just let the pattern play out. After several losses, many people will have the tendency to sell a winner too early simply because they are afraid it will then go against them. By jumping the gun and selling early, you never give yourself the chance to reach your full potential. Donâ&#x20AC;&#x2DC;t let the fear of making money limit your growth. Be prepared and give your ideas time to play out unless something drastic changes. PAGE
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Trading With a Bias Traders tend to be very decisive and self-assured individuals, traits that are crucial to their success. While confidence certainly breeds success, it can have negative consequences for trading, too. Donâ&#x20AC;&#x2122;t let stubbornness get the best of you. Stubbornness is a common side-effect of overconfidence, and it prevents many traders from reaching their full potential. Being stubborn entails doing something repeatedly even though evidence suggests it is not working. What most people fail to realize is that the markets are chaotic. You can do as much analysis as you want and understand everything is going on, but stocks are not always going to do what they should do. There are so many factors that affect a stockâ&#x20AC;&#x2122;s price that it is impossible to understand them all. Technical analysis works because it tracks stock movements based on the emotions of market participants. In the long-run, the only way to be successful and profitable is to confront your own stubbornness and not let it get the best of you. You must be brutally honest with yourself at all times: did I make a sound decision or a foolish one based on my own stubbornness? The most specific way stubbornness manifests itself is in refusing to set and follow targets and stop-losses. For each trade, you should set a target and stop-loss based on objective criteria and adhere to those levels. If you do not, you are doing yourself a disservice. You will hold losing trades until the pain becomes debilitating to your psyche as well as your trading account. You will let winners turn into losers because you get greedy. Stubborn traders can have some success, but it will not be sustainable. Stubbornness and a lack of discipline will always catch up to you in the long run.
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Knowing Yourself Knowing your identity as a trader is essential for success. What is it that you do well as a trader? What is it that you do poorly? At TVMarkets, we believe that every successful trader is aware of this identity. Are you a short-term trader who prefers to take quick trades and tightly manage risk, or are you a patient trader who likes to perform analysis and let your ideas play out on a longer timeframe? To make money in the markets, you don’t have to be a genius, you just have to be able to do one thing well on a consistent basis. Your individual approach to the markets defines your success. You will always make more money in your own trade ideas than on someone else’s. Once you know your identity, your trading career can take you as far as you are willing to push it. Don’t Be a Perfectionist While some of the world’s most successful people are perfectionists, having such a mentality will doom you to failure in trading. Trading is a probability game. Perfectionists will drive themselves mad trying to predict where each stock or the market is going, because with the market you will never always be right. The stock market is a chaotic place dictated by irrational human emotions. Success in trading, as in life, is a product of circumstance. You cannot control whether the market goes up or down. You cannot control whether volume is light or heavy.
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The only thing that you can expect to limit is your risk. You must simply limit your risk and let trades come to you. Be prepared for opportunities, do not chase them, and you will succeed. There are ways to avoid the pitfalls of perfectionism. Take pride in how you go through the process as well as the result. If you can enjoy the process, results will follow. Only set goals for yourself that are realistic. If you set unreasonable goals for yourself, you will only feel disappointment when you do not reach them. By establishing achievable goals, you will feel good about incremental results and gain the confidence necessary to continue growing. Your self-worth should not fluctuate with your performance. Those around you will not love you any more or less based on how much money you make trading, so why should you? Make peace with and learn from past losses and mistakes and move forward. If you are trying to be perfect, that usually means that you are hard-working and driven. That is a big part of the battle. So just loosen the reigns on yourself and understand that trading is a probability game, not one of right and wrong.
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Getting Out of a Slump Slumps are a natural part of anyoneâ&#x20AC;&#x2122;s trading career and should not be feared. Even the best traders are prone to getting in slumps, just like the best baseball batters are prone to go cold for periods of time. The traders who will have long and successful careers are those who are able to limit the damage during these difficult periods and make adjustments to get out of the rut. The first step is recognizing when you are not seeing things clearly or your approach is not working. If you make several bad trades in a row and/or have a few bad days in a row, take a step back. Get up from your desk or take a day or two to simply watch the markets. Second, cut down your size and reduce loss limits. Some talented traders make money 90% of the year, but lose all that money back during slumps. When youâ&#x20AC;&#x2122;re not trading well, do not let yourself get hurt badly. Huge losses when you are trading poorly not only dig a deep hole, but also damage your psyche and confidence. Third, only trade your A+ setups. You should always be selective, but when you are struggling place an extra emphasis on being patient. If you only focus on the best setups, you are more likely to again become positive. Fourth, set short-term goals. Do not focus on how much you are making, but rather focus on simply getting green again. Even if it is $20 a day, discipline yourself to be positive every day before later attempting to build yourself back up.
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Lastly, be realistic and honest with yourself. If you find yourself losing money, have the self-awareness to take it easy. It will take time to get out of a slump, so do not rush things and try to make everything you lost back. The biggest thing is to not fear a slump. Many people cannot get out of a tough stretch because they become crippled by getting into a hole. Slow yourself down during a slump but have faith in yourself that you will turn it around. If you can limit the bleeding during bad stretches of trading, you will easily be able to make that money back and more when you are on.
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Understanding Greed and Fear The most difficult part of becoming a consistent trader is not learning the tricks of the trade, but understanding the psychology of the craft. It is equally important to understand yourself as to understand the minds of others involved in the market. Most market participants are simple creatures. The majority of investors read the headlines and watch the nightly news, taking surface statements and news stories and turning them into trading ideas. What the majority of people donâ&#x20AC;&#x2122;t understand are the complex dynamics of the stock market. Famous investor Warren Buffett is the best-known for utilizing a seemingly counter-intuitive approach. When a stock or trade gets more crowded, it becomes increasingly dangerous for those involved. In the same way, opportunity increases dramatically as people scramble to dump an investment. The most successful investors, like Buffett, remain on an even keel. Instead of jumping into trades with the masses, they look for the hysteria and trade counter to it using proper timing indicators. When others become exuberant about a trade, you should always become fearful, if you are in a position that has made a large run, and it is beginning to dominate the headlines, you should become fearful and look to get out when volume reaches capitulation levels. The same applies at a bottom. When fear becomes rampant and pundits begin forecasting the doomsday scenario, you should see it is an opportunity to be greedy. As the market sold off last year, Buffett saw a buying opportunity of a lifetime. Fears of financial Armageddon dissipated, and those who kept a level head and got involved at lower levels have reaped rich rewards. If you bought leading stocks, your investment may have already tripled less than a year into the recovery.
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With that in mind, we look at the current market. A growing chorus of experts have begun forecasting the greatest bull market of all time, and on cue, new fears have brought renewed uncertainty. Although job losses were trimmed, the Dubai crisis shows there are still deep-lying problems in the world economy that have been covered up with the Band-Aid of stimulus money and loose monetary and fiscal policy, especially from the United States. The feeling is that the start of a new year may bring a dramatic shift in market sentiment and a reversal of market direction. We never trade with a bias, but another plunge is beginning to look like the path of least resistance.
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The Power of a Positive Mindset The markets are always evolving, and no two trading days are ever the same. That being said, there is always something you can learn from the previous day of trading. Right now, volatility and volume is returning to the market and greater opportunity is out there for traders to make money. The ones who are going to be able to exploit these opportunities are the one who remained steady during the less volatile stretch for the market. When things are not going well and stocks are not trading like you are accustomed to, you have to continue to be disciplined and learn from each of your mistakes. Losses are an inevitable part of trading, and you must face that fact if you have any chance of recovering from them. Many traders become paralyzed by losses, burdened by the negative emotions that come along with them. While it is impossible to be a robot, you must confront losses and ask yourself the question: what can I learn from this? For many, losses simply amount to a loss in confidence that has long lasting effects. Overall, the key is having a positive approach. Frame each loss positively, reflecting and looking forward rather than dwelling on the past. While it is important to learn from mistakes, it is even more important not to let them stop you from winning big when the market is good. When things are slow and you are not on your game, limit losses and learn a valuable lesson each day. Do not dig yourself a whole financially or emotionally when things are bad. Step it up when things get good and you can make your year in a short amount of time.
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Control Your Emotions When trading coaches tell you, “Don’t be emotional,” it’s kind of like saying “Don’t screw up.” Humans are emotional beings, and trying to completely eliminate them is impossible. Emotions are the result of survival instincts etched in our brains since the beginning of human evolution. The key to trading is being very self-aware, and understanding when emotions are hindering sound judgment. It is ok to feel some emotions, as long as they do not get in the way. For example, when volatility is high, it is natural to feel some anxiety and nervousness. When a trade goes against you, it is natural to feel disappointment. When you have a big day, it is natural to feel jubilation. The important thing is that you understand when emotions become involved, and evaluate whether they are playing a part in subsequent decisions. Do not carry emotions from previous trades over into the proceeding ones.
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PART THREE Introduction to Active Trading Graduated from The Marist College School of Business with a Bachelor’s Degree in Finance and a minor in International Marketing. His education was mainly focused on the fundamental and statistical dynamics of the US and International equity market, his passion from the very start. Mr.Venezia found his way to Wall Street in 1993 where he was hired by Prudential Securities in New York City as a financial advisor. While working side by side by one of the firm’s top producers, Michael completed all the mandatory classes and necessary benchmarks that allowed Michael to go out on his own. After spending two years at Prudential, Mr.Venezia was recruited by a proprietary trading firm known as Schonfeld Securities. After realizing that the volumes and interest in the US equity markets were exploding he was hired, starting off trading 100 shares and $10k in “buying power”.
Michael Venezia
Head of the equities and trading division
Over his 17 years at Schonfeld Securities, a firm that was rotating more daily volume in the NYSE and NASDAQ markets than any other in the world, Michael was consistently a top producer, in the firm that employed over 2000 traders. Over which time it is estimated that Mr.Venezia put over $3 billion to work and was one of the firm’s primary mentors of traders, both novice and experienced. Michael then wanted to branch out and put his International skills to work and teamed up with a former colleague from Schonfeld, CEO and Founder of Tradeview Markets (TVMarkets), Tim Furey. With TVMarkets extensive product platforms, pricing structure, customer service and worldwide contacts, Mr. Venezia signed on as the head of the equities and trading division. PAGE
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How Stocks React: Emotion vs. Fundamentals
There have been two stocks in the news recently that have reacted entirely differently when it comes to their fundamental news and how these two particular stocks have reacted on an â&#x20AC;&#x153;emotionalâ&#x20AC;? level if you will. The two examples I will use here are the stocks Digital Ally, (DGLY:Nasdaq) and Whiting Petroleum, (NYSE:WLL). Both stocks that have traded well, in both instances, demonstrating good volume, range and price action; not to mention fundamental and/or material news that we look for as traders at Tradeview Markets and two stocks that should be familiar to all. Lets take DGLY as the first example. A company that makes digital video imaging and storage products for use in law enforcement and security applications or plainly put, cops wearing digital cameras that are made by Digital Ally. In the middle of last year, August specifically, during the Ferguson riots in Missouri, DGLY was trading below $5 a share and trading roughly 200k shares a day at best. Except for those believers that the PAGE 132 OF 275
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apocalypse is coming sooner than later, DGLY was hardly a screaming endorsement for an investment and certainty not a stock to trade. Then the riots hit with cops in Ferguson either getting killed or targeted in tense racial relations. Unfortunate, but then then frenzy started and Wall Street, as usual, looked for a way to profit and surmised that DGLY would be the next TASR…look that chart up. DGLY went parabolic, demonstrated by the chart below, going from $5 to $35 in almost two weeks and trading 10mm, 20mm and sometimes even 30mm shares traded, keeping in mind that 250k shares was once a big day. For those fundamentalists, DGLY which back in 2008 almost hit $100 a share, there were questions about earnings and fundamentals to which DGLY wasn’t even making money but as we know when stock trades, the price reflected is not “where it’s been but where it’s going.” After making a high of $35, DGLY “corrected” and a month later was bouncing between $10-$20 before settling back in the $10-$15 range…significantly off the high. DGLY made that huge move because traders and investors were driven by emotion (albeit ALOT short covering as well with 3mm shares outstanding) but it is what is and a stock at that time that had to be traded. Now…DGLY had earnings March 23, and as demonstrated by the chart, reacted well on the open and keeping in mind that all Indexes, International included, are at all-time or multi-year highs, DGLY posted a PROFIT of $.05 cents a share compared with a LOSS of $.50 cents a share during the same quarter last year. Revenue soared to 55% in the “strongest three-month period in the last twelve quarters.” DGLY traded near a high of $16 early in the session before fading or selling off nicely to close at $14 and closing up 12% for the day but hardly a good close for a stock that was up almost 25% on the day. Also PAGE
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to note that DGLY traded almost 5mm shares on the day. My point will be in my conclusion… dglyNow lets take Whiting Petroleum as the second example of how a stock reacts to fundamental news vs an emotional reaction to material news. WLL, as demonstrated by the name, is an oil and gas company in the news laden Permian Basin and Rocky Mountain area of the US and to no surprise has been down precipitously with the decline in crude oil; off from a year high of $92 and as of the close of 3/24 is trading at $31. As demonstrated on chart, on 3/9, WLL was up 12% pre-open with material news saying that they, WLL, were looking for a buyer with STO and XOM as possible suitors. I took note of this for many reasons and the first being that any stock in any sector with material news that lifts a stock 12% is a stock on my radar and I also used this news as a gauge for some type of “floor” in crude oil so I took special notice to see how the stocks in the group that trades with WLL (SWN/MUR/NFX) reacted as well or if this was a onetime rumor or sector anomaly. So that day, WLL hit a high of $40 and closed slightly above $38. Once again hardly a solid rumor based upon WLL’s price action and also of the price action of those in the sector. Also noting that after the $40 high on 3/9, WLL a few days later hit a low of $34.50 and back to the price where this all started. That’s how WLL acted on an emotional level. A stock that was $90 a year ago can’t sustain a rally even on a buyout rumor, which may or may not come to fruition but even on short covering alone one would have to admit that the price action was poor. Now on 3/24, Whiting had fundamental news announcing a secondary, pricing 35mm shares at $30 a share in order to pursue asset sales and to most experts this says WLL has given up on reported efforts to sell the company. PAGE 134 OF 275
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WLL was down 20% on the day on obviously tremendous volume staying near the $30 offering price. My guess here is with the depressed price of crude oil coupled with WLL’s plan to get leaner and meaner I would have to say that WLL will have a hangover for some time. My point here with these two examples is that these are two stocks that reacted entirely differently to both fundamental news and how they reacted in an emotional way. DGLY remember reported a profit and had its best quarter in 12. Wouldn’t one think that DGLY would’ve reacted, certainly not in the same parabolic fashion, in a more positive manner and thus had funds/investors take note of a company turning the corner again and actually showing something? Also, as traders keeping in mind that DGLY “has it in it” and is actually capable of making big % moves, it wasn’t to be on a day when it should have…only trading 5mm on a day when it should’ve “had its day”. DGLY went up 6 fold on high tensions and emotional sentiment during the Ferguson riots and then corrected. DGLY should’ve done the reverse, making that huge move with better fundamentals but after their #’s came out, DGLY could only muster an 11% gain. Emotions brought the stock up to $30 and best quarter in 12 landed the stock at $14. Either way…have to trade it on its day. Whiting on the other hand did the reverse. When WLL said it was putting itself up for sale, the stock, as mentioned above, hit a high of $40 and was up 11% on the day, noting a weak close as well and that was on a rumor and if I can say an emotional one in hindsight. Going to WLL’s fundamental news of the secondary pricing and asset sale, WLL was down 20% on the day and thus wiping out any technical or pricing gains that came with the sale rumor.
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DGLY and WLL reacted completely different in the price action of emotional trading as opposed to concrete fundamental news. Many stocks react in a different way but I may note that those stocks like DGLY that have small floats tend to act way more volatile when in play. In conclusion, I have to admit that earlier on in my career, when the trading was better, there were more times than I would like to admit when I traded a stock and had no idea what they did. I asked questions later so one can say I contribute(d) to the occasional frenzy. On the other hand I also admit that Iâ&#x20AC;&#x2122;m not smart enough to disseminate most earnings reports or conference calls (I do try) but with these two stocks, DGLY and WLL, in order to be successful and take advantage of these two very tradable situations, one has to remember the action and reaction of these or any stocks on any particular day whether there is material news or not.
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Earnings Season How to Trade It and What to Look For With the earnings announcement of AA (Alcoa) this past Monday, the first quarter of earnings season 2015 has officially started for the US equity markets. So here are some thoughts past and present of how I trade leading up to, during and after earnings announcements.
Before I start I would like to state that I NEVER take a stock into earnings and can’t remember the last time I did, but let me also say that I USED to take a position in a stock coming out with earnings from time to time and to be quite honest I usually took the “shot”, and it was a shot, when I was either having a very good month or was just treading water and wanted to force something or create a catalyst in my P&L.
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Either way, this is not the way you want to make money and we all know it. Do I really want to be bailed out when I’m treading water by gambling if AAPL will beat/miss etc? Might work and if it does will pay pretty well but too often investor’s trade options or the underlying stock itself in hopes that they will make money in reaction to an earnings report, but bottom line it’s the wrong way to trade intelligently.
the right way The right way to focus on an earnings play is to take into account the stocks volatility, its current trend as well as the current market conditions. I also take into account how the correlating stock’s group has been acting and whether the stock in question is a leader, the “best of breed” or a laggard. And most of all has there been volume and range leading up to the earnings release? More times than not the current stock price of a company about to report can provide clues with respect to future action. Has the stock been advancing/declining into the numbers? Has the company preannounced or issued any guidance leading up to their report or has there been any material news since the last earnings report or even so, is there still play or hangover from the last earnings report? An extra amount of homework has to be done with this style of play. Look at how a company has done against earnings estimates historically and not surprisingly the biggest moves in the market come from stocks that beat or miss numbers by a wide margin. Trading earnings reports are especially difficult because there is little reaction time and it’s tough to formulate a much necessary trading plan which is why better traders make money trading earnings releases. We are able to read between the lines and I find the less experienced traders that do make money are usually lucky (no offense) and often get in bad habits because they become too cavalier when trading earnings releases. PAGE 138 OF 275
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In closing, I really believe that there are different disciplines to apply when trading an earnings release and in particular an active earnings day. I find more times than not, and I am guilty from time to time, that traders focus more on their losers more than winners, often selling their winners (which usually keep on going) and holding their losers (which by traders law, usually get worse). Also, there is so much action that many traders trade a basket of stocks to see what sticks and what doesn’t which takes away from why things are working and therefore not really being able to sink their teeth into a solid money making position. I always say that there is always another trade and I say this especially during earnings season. You aren’t going to be able to catch everything and when traders see a position that works that they wished to enter, they pound the table in disgust because they missed “the one” and lose focus. The right way is to split the day in two and do your homework during the lunchtime session. See which stocks have volume, range and are showing relative strength. Note which stocks close near the high and how the corresponding group acted. This is pertinent for many reasons. First, stocks, especially earnings plays, stay “hot” or in rotation for a couple of days and thus have good volatility and more price forgiveness. Secondly, earnings plays that close strong with range and volume usually have some form of follow thru into the next session. And lastly, like stated above, stocks performance leading up to, during and after numbers is a great indication for future price movements. We are not analysts so trade the reaction and let the stocks tell you what to do.
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The AAPL Trade
Yesterday the AAPL Watch “event” if you will, started at 1pm EST time with the launch of the much anticipated Apple Watch concluding with Tim Cook’s presentation somewhere around 2pm EST. Keeping in mind that the broader markets had a slow and precipitous selloff on Friday, albeit with the jobs number being released with a general concern of sooner than expected rising interest rates. AAPL rallied into the news to be up over $2 on the day, stopping short of $130 before “selling the news” and pulling back some $4 to go slightly negative and then closing positive on the day with good volume. The markets, for the day it seemed, discounted Friday’s action, at least by media standards, leaving the question for traders and investors is what to do with AAPL. We will give a traders point of view and for now we view it as a “no play”. Any other stock, take PANW (arguably a similar chart), which had a decent range with material news that yes, had good volatility and volume, would be considered a no play because AAPL finished positive on the day with traders taking profits and not the shorts not taking PAGE 140 OF 275
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command. Of course any stock, AAPL included, that had range, volume and good price action will most likely be a decent trading stocks because it’s in play but the time for us to look at AAPL as a short is to forgo trying to pick the top because for those traders that have been attempting to do so have probably been getting scalped to death and hopefully on small share size. The trade for us and what we want to see is AAPL down 3-5% on the day and maybe even more. We will give away the trade on trying to pick the top and capitalize on bigger share size when and if AAPL does have that big down day with 2-3X volume and then will we start to leg into a good short position keeping in mind that the trend of the market(s) are cooperating which as of Tuesday morning the inside day from last Friday seems to be following thru. We aren’t analysts and aren’t here to predict if the AAPL Watch will indeed propel the stock higher but as a fund manager put it yesterday, he didn’t know he needed to have 1000 songs in his pocket when I-Pod was announced either. So whether it is AAPL or any similar acting stock and/or indices, if and will AAPL does have its big down day, we will let the stock rest and then look to take a position if the above criteria is warranted. As of the opening trade, Monday am, with the Nasdaq down over 1.2%, AAPL is down $1-$2 or so; hardly an endorsement to start a short position at this point but if market stays weak and AAPL starts to crack and closes weak with good volume then we will address.
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Trading Geo-politics,
The Fed And Earnings
With the recent fallout from the SNB announcement, the Greek elections, the January 28 Fed statement and now with over 70% of the US companies have reported earnings, the major indices have been range bound with very good volatility and, in our opinion, this leads to a great deal of uncertainty. When we see stocks like (NASDAQ:MSFT), (NYSE:CAT) and (NYSE:PG) — add (NYSE:BABA) and (NASDAQ:QCOM) — trade lower for a myriad of reasons (arguably the strong $), and it seems that sentiment is leaning toward a bearish stance. There will be your individual winners like the (NASDAQ:AAPL)’s and (NYSE:BA)’s of PAGE 142 OF 275
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the world, but with a very weak energy sector and gold showing a nice base off the lows, we see further rotation thru various sectors and with that, we stand by our fundamentals and play relative strength as compared to the market, keeping in mind that the longer we are range bound the more likely something is to “give way”. The current holding pattern we are in combined with the collapse in oil prices are a continued cause for concern and with this quarter’s corporate earnings now being digested in a negative way (negative news seems more punishing than we have seen is some time) we see more negative price action in the broader markets. We understand that a pause is necessary and healthy considering the run the indices have had, but we are traders and simply digest the news and react to what the market is telling us. When looking at reactions the markets have had to geo-political news (CHF fallout/ECB Decision/Greek Elections) on those days or subsequent days after the S&P 500 has taken that news and broken to out near 6-month lows. AAPL and BA helped buoy a strong open yesterday (1/29) as the Fed Decision was digested in a negative way — or was the Fed news just another reason to apply additional selling pressure or continued profit taking after a momentous run? We look at this from a different perspective and, of course, some may beg to differ but as of right now, which stocks or groups look more attractive — oil or gold, or taking a position in the S&P 500? Granted it will probably take more time for the oil sector to show better longer returns than the S&P, but we are looking at the rotation throughout the various sectors and will continue to play upon points of weakness. There has been good volatility and we take a ‘less-is-more’ approach until earnings season ends, so after we trade our earnings plays and focus on the stocks that have range, volume and good price action, we will identify the trend and, based upon the above criteria, will stick to our disciplines and add to our winners, cutting our losers and trade the way that got us here. PAGE
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Weekly Equity Roundup…
and What May be Next
The US markets continue to digest an influx of data in the economic, geo-political and earnings arenas leading to continued volatility not only in the broader markets but on an individual stock basis as well. While analysts and traders try to find a definitive trend in the indices, for us as TradeviewMarkets this is an ideal time for our traders to apply one of our main principles: identifying stocks that display relative strength and relative weakness. Now that the majority of US companies have reported earnings and the ever-“import” jobs number at the beginning of the month is out, we look for stocks that have settled, if you will. Stocks that have gapped up or down and have continued that trend while trading with good range and price action. That is what we do. We will leave it to the “pros” to disseminate any non-farm payroll data or potential effects from a Greek hangover or ECB decision. For us, we let stocks tell us what to do by the actions/movement in the markets and futures. PAGE 144 OF 275
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After crude oil has had the biggest two-week bounce in the last 17 years (some 20%) and with many stocks having 5-10% moves (CAT, BABA, QCOM, CMG, AMZN, LNKD, GPRO, GILD to name a few) this is a time to capitalize on core positions and get rid of losing positions. We can’t stress this enough. All too many times traders sell their winning positions to book a profit against their losing positions, only to see the losers get worse (a loser is usually a loser and we all know it) and the winning positions more times than not turn out to be even bigger winners than the very profits one took in that very stock. With that being said, the indices (by indices we mean INDU/NASDAQ/RUSSELL 2000) are close to all time highs but as one can see from the daily chart of the SPY’S we are in a range and the longer we are in a range with this volatility, the more likely something is to give way. The market is without a leader now. Stocks and groups are rotating between oils, pharma-bio-tech/financials/ and those that are sensitive to the moves in the Dollar. We see some clients trying to pick a market direction instead of playing ANY financial instrument against the moves. If you want to pick a market direction and play the moves, than trade futures. But think this way, suppose the futures have a 10 handle rally intra-day (not lunchtime) and you have MSFT for example, or a stock “in play” that is weak on the day and hasn’t participated in the rally. Wouldn’t your edge here be to short MSFT instead of shorting the SPY’s etc. instead of trying to pick a spot in the market? In conclusion, for this upcoming week we keep in mind that many stocks have gaps in their charts, mostly on fundamental news but what we have our eye on is the way the markets react to news. Here is where your homework comes into play. Was Friday’s late selloff in the market a product of the jobs number when traders took this as a buy the rumor- sell the news event or was it from negative news out of Greece? We don’t know the answer but like many traders and analysts there is uncertainty. So it is till yet to be seen if corporate earnings will lead the way with very little economic news due out for some time or if there are geo-political hangovers abroad. PAGE
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Weekly Market Analysis: How profit taking or correction? After Friday’s US Jobs Report, with the broad indices having a slow and steady decline from fear of higher interest rates in the near future, we question whether this reaction was profit taking or the change of trend, or as many say, a correction. Let’s lead up to Friday’s report for a second. Keep in mind the Dow/Nasdaq/ and S&P were up between 5-7% in the month of February alone, with the Nasdaq breaking the key technical/psychological 5000 level. If Friday never happened, and it did, and I will address further, traders would still be on the fence if that was the top. What else could possibly happen to propel the market higher or even consolidate at best? Was this the ultimate buy the rumor and sell the news? From my experience and what our traders practice is that it is not uncommon for indices to pull back from major milestones. I will say this as I have said before, that one day does not make a reversal or change in trend and that comes from a contra-trading background.
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The sign I am looking for now is more volatility and a tug of war if you will at these levels. What Friday told me is that, after the run we’ve had, major funds and institutions which are heavily invested in ETFs and Index Funds took profits slowly and steadily. Anytime after a big run, and a steady one with power, when there is a real fear of sooner than expected rising interest rates, a lot of the funds, etc. take profits. By what I’ve seen and been told by those I find credible, then Friday was understandable. Let’s go to this morning, Monday before the open. This is where we stand and what happened. XOM upgraded at Goldman Sachs. General Motors (GM) announces a $5 billion share buyback. Whiting Petroleum (WLL) has put itself up for sale (up 12%). There was a major REIT deal with Simon Property bidding for rival mall owner Macerich…for $16 billion. Not forgetting that today is the launch of the AAPL Watch. By no means will the AAPL launch stop funds from selling due to rising rates but it may be an excuse to sell. The point we are making at Tradeview is that Friday’s selloff will still have to work its way through the market with the Dow trying to test 18K again and the Nasdaq some 60 points off the 5,000 mark. The way our traders are trading is not to avoid a major pitfall when “trading” at these levels, and that is to NEVER let trades turn into investments. When we have a position we are down in, if you don’t want to buy more at a lower level instead of waiting for it to come back to you, then sell it. Of course we look to buy into weakness and sell into strength but when a market turns and starts to drift lower, the positions can get away from you very easily. As said above, we would like some more volatility to leg into positions. Aside from a market commentary or opinion(s) there has been tremendous opportunity in individual names. We have been trading the following actively and some can be seen on our webcasts at TVMarkets: LL… EYES…GENE…WTW…JOY…TSLA and GLD to name a few. All stocks with great RANGE, VOLUME and PRICE ACTION.. PAGE
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