A Complete Guide To Technical Trading Tactics, How To Profit Using Pivot Points, Candlesticks & Other Indicators phần 6 pps

up to the very last minute waiting for the 956 number to materialize, you would have been disappointed in this case. Overall, however, waiting for a nice setup pattern to develop and confirming the pivot point target num- bers is a great method to study. PICKING THE MARKET In addition to e-mini S&P 500 futures traded at the Chicago Mercantile Ex- change, the Chicago Board of Trade offers Dow Jones Industrial Average futures contracts. Launched in April 2002, the mini-sized Dow contract val- ued at $5 times the index has been picking up volume quickly although still well behind the e-mini S&P, now the second most actively traded U.S. fu- tures contract. Due to the general nature and volatility of the stock markets, these contracts reveal the increasing demand for smaller and electronically traded stock index contracts. As new contracts are introduced, you may be wondering how you can watch all these different markets? I don’t. I simply watch the ones where I have my trade alert signals set. By calculating the numbers and choosing 16 markets weekly, I narrow the field down. From those 16, I narrow the day- trading markets to the S&P, Dow, Nasdaq, and bonds, normally using 60- minute or 15-minute time periods for my studies. The weekly numbers keep me focused on an important target for the week, and the daily numbers keep me focused on chart patterns to see if a recognizable setup is occurring. By watching the hourly closing time period to see if a bullish candle pattern appears at an important level of support or a bearish candle pattern at an area of resistance, I am able to determine a trading plan with a higher degree of confidence. The 60-minute chart for the full-size Dow futures contract from late January 2002 (Figure 7.10) features several good examples of signals. In this case, using the data from January 24 (high 9855, low 9760, and close 9794), we calculated the S1 support for January 25 at 9751. During the sec- ond hour of trading on January 25, a bullish engulfing pattern formed and generated a strong buy signal. The opening of the third 60-minute period pro- vided an opportunity to go long near 9790, using a stop below the low of 9735. In fact, a stop could have been placed below 9750 to bring the risk down to $400 ($10 times 40 points). Within one hour the market advanced to 9860 and gave an opportunity to move stops up or get out of a long position near the R1 resistance number of 9846. Three hours later the price advanced to a high of 9895, generating an opportunity to liquidate the long position near the daily resistance R2 of 9898. The chart also points out why this analysis is not a precise science. With the S1 support target for the trading session at 9751, the actual low was Picking the Market 125 P-07_4218 2/24/04 2:37 PM Page 125 9735. That is 16 ticks of slippage, which equates to $160 on the $10 per tick contract. The 15-minute bond futures chart shown as Figure 7.11 is a P3T trade signal combining pivot point calculations with reliable candle patterns that also is an example of establishing risk factors or stop loss points that can help you attain a higher frequency of winning trades. At the very least, if you do your pivot point homework and watch the chart patterns at the close of each time period (15 minutes), then I believe you will not be selling the low of the range or buying the high of the range. When there are losers— and there will be—your loss amounts should not be as significant as they could be. If you sold bonds near the low of the day near 110 because you were convinced the market was headed down and held on to that position up to the 111-16 level, the high of the day, you would probably agree it would have paid to have the pivot point numbers at hand. If you had them, you would have seen that the low was near the targeted low based off the S2 support number of 110 even. You may not have gone long at 110 because of your bear- ish conviction, but if you had the numbers, knew how to identify important 126 DAY-TRADING, SWING TRADING: Acting on Analysis Bullish engulfing pattern R2- 9898 R1- 9846 Pivot point calculations derived from data from trading session on 1/24/02. High 9855, low 9760, close 9794. Buy signal FIGURE 7.10 Finding the range. (Source: FutureSource. Reprinted with permission.) P-07_4218 2/24/04 2:37 PM Page 126 candle formations, and practiced patience, you may have effectively gone short closer to 111-10. The shooting star followed by the dragonfly doji signaled a top was near. Once the bearish harami cross formed, that should have given you ample conviction to sell short with stops above 111-18. The obvious question is: Where would you rather be short from, the 110 level or the 111-08 area? Of course, you’d like the 111-08 level. As a day trader you may have bought the low near 110 and placed stops below 109-31 once you had confirmation of the morning star pattern. Here were two trade signals that were provided with candle chart for- mations at specific pivot point key numbers. Using effective risk manage- ment from proper stop loss order entry points is half the battle to consistent winning trades and wealth building. Here, too, was a great opportunity for a short position at the 111-08 to 111-12 level. By the close of the market’s open-outcry session, there wasn’t much profit in the trade. But, because bonds trade virtually 24 hours, hold- ing a short position overnight is manageable. Figure 7.12, a compressed 15- minute chart, shows the results of this trade and the effects that a shooting Picking the Market 127 Shooting star formation followed by dragonfly doji Daily R2 resistance 111 18/32 Daily S2 support 110 even Calculations based on data from 9/9/02. High was 111 08/32, low was 110 15/32, and close was 110 20/32. Bearish harami cross Variation morning star formation FIGURE 7.11 P3T trade in bonds. (Source: FutureSource. Reprinted with permission.) P-07_4218 2/24/04 2:37 PM Page 127 star, dragonfly doji, and a bearish harami cross combination can have. The market fell to a low of 109-27 in less than 24 hours. Once again, the hard part was deciding where to take a profit. If you don’t remember, here is a solution to that problem: Move your stops down! The double bottom formation was a good spot to identify for taking nearly 1 1 ⁄2 basis points or $1,500 out of the market. Let’s take on a more challenging situation, a 5-minute Dow futures chart with the price action on a day when an extraordinary event occurred (Fig- ure 7.13). That was November 6, 2002, the day that the Federal Reserve pol- icy-setting group, the Federal Open Market Committee, surprised the world with a 50-point decrease in the Fed funds rate, the first interest rate adjust- ment during 2002. Was that a catalyst to incite volatility? You bet! But the pivot point numbers still identified the potential range for that day. Taking the data from the prior day’s session (November 5, 2002, high of 8675, low of 8515, and close of 8648) placed the R2 resistance at 8771 and the S2 support at 8551, almost exactly on the high and low for the volatile trading day of November 6. 128 DAY-TRADING, SWING TRADING: Acting on Analysis FIGURE 7.12 P3T trade results. (Source: FutureSource. Reprinted with permission.) P-07_4218 2/24/04 2:37 PM Page 128 Take a look at the daily mini-sized Dow futures chart, starting with the actual low established at 7180 in October 2002 provided as Figure 7.14. Using data from the previous week ending October 4, 2002, the high was 7980; the low, 7450; and the close, 7550. That calculated out the S2 support at 7130, a small percentage margin of error. It was the bullish piercing pattern sup- ported by the next long white candle’s higher open that may have helped you catch a portion of that bottom price reversal. Now look at the last three candles. The first two formed a bearish harami. That actually concluded the week on November 29, 2002, and, of course, ended the month of November. Taking the weekly range for the week ending November 29, 2002, the high was 8962; the low, 8660; and the close, 8870. The pivot point calculation reveals 9001 as the R1 weekly resistance number. On December 2, a Monday, the high was 9040, again a small mar- gin of error of 39 Dow points. However, on that day, an extremely powerful doji candle formed. This particular doji, termed a long-legged doji or rick- shaw doji, had helped to confirm the prior week’s bearish harami formation as a sell signal. In addition, you had the weekly target resistance number of Picking the Market 129 Target support on Wednesday was 8551. Bullish piercing pattern Rickshaw doji Fed announcement Target resistance on Wednesday was 8771. FIGURE 7.13 On target on an amazing day. (Source: FutureSource. Reprinted with permission.) P-07_4218 2/24/04 2:37 PM Page 129 9001. That collection of indicators should have provided a wealth of sell sig- nals in developing a proper game plan. At the very least it would have kept you from buying the high. As the week finished and then continuing into the next week, the tar- geted S1 support was 8414. Again, that is based off the data collected from the week ending December 6—a high of 9040, low of 8485, and a close at 8657. If you were short, you may have earned nearly a 600-point decline for your trading account. The established low was 8441 on December 9 (Fig- ure 7.15). For the short-term or swing trader, action on the 15-minute Dow chart during this period on December 6 should be of interest (Figure 7.16). Dur- ing the decline from the peak at 9040, the market did have some short-term correcting rallies. Using the prior day’s figures from December 5 for the pivot point calculations (high 8828, low 8605, and close 8640), R1 resistance is 8777 and S1 support is 8468. Using the numbers from the prior week ending November 29 listed previously, S-2 support is 8528.The daily and corre- 130 DAY-TRADING, SWING TRADING: Acting on Analysis Bullish piercing pattern Rickshaw doji Weekly target resistance was 9001. Weekly target support was 7130. FIGURE 7.14 Reaching for the targets. (Source: FutureSource. Reprinted with permission.) P-07_4218 2/24/04 2:37 PM Page 130 sponding weekly calculations, in addition to the bullish harami cross can- dle pattern, alerted a trader to a nearly 150-point Dow rally. This is another excellent example of how a textbook setup would help a trader identify an executable trade. SUMMING UP TRADING TIPS Here are some suggestions that may help you in day-trading or short-term swing trading: • I use all sessions for the high, low, and close for the markets that trade 24 hours a day. Some quote vendors split the data between night and day. I combine both sessions as one day because that’s what they are. Last night’s high applies to the next day session’s range, so I use that for my data in calculating the numbers. Summing Up Trading Tips 131 Weekly target support was 8414, nearly a 600-point DOW decline from the high of 12/02/02. FIGURE 7.15 Aftermath of doji top. (Source: FutureSource. Reprinted with permission.) P-07_4218 2/24/04 2:37 PM Page 131 • Tops take longer to form than bottoms so I will usually look for a sec- ond bearish candle formation at an important resistance number as a place to sell short. • There are five business days in every week and usually four weeks in every month. One day within a month will mark a high, one day will gen- erally mark a low, and the market will close somewhere between those points. That is what is called the range. The difference between a suc- cessful trader and a not so successful trader is the successful trader does not make a habit of buying the high of the range or selling the low of the range. When you are trading, at times it is hard to keep your emotions in check, so it is good to apply time and price logic in your thinking. • Technical analysis is considered by most professionals to be an art and not an exact science. As technicians, we look at indicators or we rely on price pattern recognition techniques to give us clues to help interpret or anticipate the price direction or price movement of a market. Using these pivot point techniques combined with a discretionary method such as charting and chart pattern recognition allows a trader to have freedom of decision making while incorporating the flexibility of a me- 132 DAY-TRADING, SWING TRADING: Acting on Analysis Daily support was 8468. Weekly support was 8528. Bullish harami cross FIGURE 7.16 Short-term bounce. (Source: FutureSource. Reprinted with permission.) P-07_4218 2/24/04 2:37 PM Page 132 chanical trading method with prescribed numbers. This precise method- ology will help eliminate and potentially solve the problem of trading on emotions and spur-of-the-moment hunches. • Candle charting helps me clearly visualize chart pattern signals, and pivot point analysis alerts me to the potential highs and lows of a given time period of a particular market. Including other forms of technical analysis such as stochastics, moving averages, MACD studies, volume, and open interest helps me to make a logical, informed trading deci- sion, where I can set my entry and exit points as well as define my risk parameters. • As a trader, if you are out of money and have no more capital to work with, you are out of business. The elements necessary for generating profits as a trader are identifying and then acting on good trade signals. More important, when you are wrong, know when to get out, and act ac- cordingly. These are the key elements for continuing to be a successful trader. • Using pivot point analysis in your trading plans can help you not only plan your trades but also help establish and pinpoint entry and exit points as your personal target trading techniques. Most traders who are not familiar with using pivot points become excited and amazed at its consistency in predicting support and resistance in different time frames and for most markets. • To stay on top of your technical analysis skills, I strongly recommend that all readers expand their knowledge and continue to learn new tech- niques as well as take a refresher course on the old ones. Summing Up Trading Tips 133 P-07_4218 2/24/04 2:37 PM Page 133 P-07_4218 2/24/04 2:37 PM Page 134 [...]... get a weighted average that gives more significance to the most recent price action Exponential moving averages are calculated from complex formulas and have become the most common averages used today by many quote vendors, analysts, and traders as they also are weighted to give more importance to the latest data from current market conditions, and older data that becomes less important as time passes... research into price behavior and resulted in a true master technician George and his wife Carrie both are excellent teachers and truly care about their students These are people that you want to meet and learn from Lane’s stochastics indicator is a popular technical tool used to help determine whether a market is overbought, meaning that prices have advanced too far too soon and are due for a downside correction,... there are other techniques associated with using stochastics One is a trading pattern called bullish convergence, which is used in identifying market bottoms The market price itself makes a lower low than a previous low, but the underlying stochastic pattern makes a higher low, indicating that the low is a false bottom and can result in a price reversal Another signal is a trading pattern called bearish... trading above the moving average, you should be long • If the market is trading below the moving average, you should be short • When the market has been trading below a moving average and then breaks out above it, you have a buy signal Moving Averages 137 • When the market has been trading above a moving average and then breaks out below it, you have a sell signal • Buy or sell signals can also be generated... market tops The market price itself makes a higher high than a previous high, but the underlying stochastic pattern makes a lower high, indicating that the second high is a weak high and can result in a lower price reversal These patterns are similar to those of the MACD indicator Stochastics can be programmed for trading on a one-minute, daily, or monthly basis Short-term professional day traders and... analysis trading tools related by the use of mathematical formulas Let me emphasize up front what follows is not a comprehensive explanation of all the indicators available There are dozens of indicators, and some may be more valuable to you than those I describe However, these are the indicators I use most frequently in my analysis L MOVING AVERAGES A moving average is defined as dividing the sum of two or more... moving average calculations will generate fewer trade signals than shorter-term time period calculations will Different price points or averages of an average can be used For example, you can take the average on a closing basis, or you can include the high, low, or even the range of a given time period average in an average Here are the simplest rules for trading moving averages: • If the market is trading. .. pressure and signals a potential price reversal The same is true in an uptrend when prices make a higher high but MACD makes a lower high, indicating a potential change to lower prices The weekly S&P 500 cash index provides an example (Figure 8.5) Prices made a lower low in September than in the March/April time frame (A) , but the MACD made a higher high, which signaled the low was exhausted and was a false... 3-period moving average formed a dead cross, confirming that the bull trend had ended You can analyze the same silver chart to point out where silver prices might stop descending and find support (Figure 8.4) Recalling that a support or resistance level may act as a reversal point or a pausing point or fail and do nothing at all, here is how I analyzed this situation in making a recommendation to go long... recommendation was to sell near $31, using $31.49 as a stop I also suggested looking at buying September 28 put options (See more on the topic of options in Chapter 13.) My analysis of the potential for a rally to test and then fail at or near $31 was an accurate decision based solely on these methods of technical analysis The market did make a high the following week on Wednesday, June 11, at $31.15 and . bullish candle pattern appears at an important level of support or a bearish candle pattern at an area of resistance, I am able to determine a trading plan with a higher degree of confidence. The 60 -minute. from. Lane’s stochastics indicator is a popular technical tool used to help de- termine whether a market is overbought, meaning that prices have advanced too far too soon and are due for a downside. what follows is not a comprehensive explanation of all the indicators available. There are dozens of indicators, and some may be more valuable to you than those I describe. However, these are