25 June, 2011

Lesson 6 (Lesson 6 How to Use the Relative Strength Index)

6/25/2011 01:03:00 PM

Lesson 6

How to Use the Relative Strength Index

One of the most useful tools employed by many technical commodity traders is a momentum oscillator which measures the velocity of directional price movement.
When prices move up very rapidly, at some point the commodity is considered overbought; when they move down very rapidly, the commodity is considered oversold at some point. In either case, a reaction or reversal is imminent. The slope of the momentum oscillator is directly proportional to the velocity of the move, and the distance traveled up or down by this oscillator is proportional to the magnitude of the move.
The momentum oscillator is usually characterized by a line on a chart drawn in two dimensions. The vertical axis represents magnitude or distance the indicator moves; the horizontal axis represents time. Such a momentum oscillator moves very rapidly at market turning points and then tends to slow down as the market continues the directional move. Suppose we are using closing prices to calculate the oscillator and the price is moving up daily by exactly the same increment from close to close. At some point, the oscillator begins to flatten out and eventually becomes a horizontal line. If the price begins to level out, the oscillator will begin to descend.

Plotting the oscillator

Let's look at this concept using a simple oscillator expressed in terms of the price today minus the price "x" number of days ago - let's say 10 days ago, for example.
The easiest way to illustrate the interaction between price movement and oscillator movement is to take a straight line price relationship and plot the oscillator points used on this relationship, as shown in this chart:
In our illustration, we begin on Day 10 when the closing price is 48.50. The price 10 days ago on Day 1 is 50.75. So with a 10-day oscillator, today's price of 48.50 subtracted from the price 10 days ago of 50.75 results in an oscillator value of - 2.25, which is plotted below the zero line. By following this procedure each day, we develop an oscillator curve.
The oscillator curve developed by using this hypothetical situation is very interesting. As the price moves down by the same increment each day between Days 10 and 14, the oscillator curve is a horizontal line. On Day 15, the price turns up by 25 points, yet the oscillator turns up by 50 points. The oscillator is going up twice as fast as the price. The oscillator continues this rate of movement until Day 23 when its value becomes constant, although the price continues to move up at the same rate.
On Day 29, another very interesting thing happens. The price levels out at 51.00, yet the oscillator begins to go down. If the price continues to move horizontally, the oscillator will continue to descend until the 10th day, at which time both the oscillator and the price will be moving horizontally
Note the interaction of the oscillator curve and the price curve. The oscillator appears to be one step ahead of the price. That's because the oscillator, in effect, is measuring the rate of change of price movement. Between Days 14 and 23, the oscillator shows the rate of price change is very fast because the direction of the price is changing from down to up. Once the price has bottomed out and started up, then the rate of change slows down because the increments of change are measured in one direction only.

Three problems

The oscillator can be an excellent technical tool for the trader who understands its inherent characteristics. However, there are three problems encountered in developing a meaningful oscillator:
1. Erratic movement within the general oscillator configuration. Suppose that 10 days ago the price moved limit down from the previous day.Now, suppose that today the price closed the same as yesterday. When you subtract the price 10 days ago from today's price, you get an erroneously high value for the oscillator today. To overcome this, there must be some way to dampen or smooth out the extreme points used to calculate the oscillator.
2. The second problem with oscillators is the scale to use on the horizontal axis. How high is high, and how low is low? The scale will change with each commodity. To overcome this problem, there must be some common denominator to apply to all commodities so the amplitude of the oscillator is relative and meaningful.
3. Calculating enormous amounts of data. This is the least of the three problems.
A solution to these three problems is incorporated in the indicator which we call the Relative Strength Index (RSI):
RSI = 100 - [100 / (1 + RS)]
RS = Average of 14 days' closes UP / Average of 14 days' closes DOWN
For the first calculation of the Relative Strength Index (RSI), we need closing prices for the previous 14 days. From then on, we need only the previous day's data. The initial RSI is calculated as follows:
  • Obain the sum of the UP closes for the previous 14 days and divide this sum by 14. This is the average UP close.
  • Obtain the sum of the DOWN closes for the previous 14 days and divide this sum by 14. This is the average DOWN close.
  • Divide the average UP close by the average DOWN close. This is the Relative Strength (RS).
  • Add 1.00 to the RS.
  • Divide the result obtained in Step 4 into 100.
  • Subtract the result obtained in Step 5 from 100. This is the first RSI.

Smoothing effect

From this point on, it is necessary to use only the previous average UP close and the previous average DOWN close in calculating the next RSI.
This procedure incorporates the dampening or smoothing factor into the equation:
  • To obtain the next average UP close, multiply the previous average UP close by 13, add to this amount today's UP close (if any) and divide the total by 14.
Steps 3 to 6 are the same as for the initial RSI.
The RSI approach surmounts the three basic problems of oscillators:
  • Erroneous erratic movement is eliminated by the averaging technique. However, the RSI is amply responsive to price movement because an increase of the average UP close is automatically coordinated with a decrease in the average DOWN close and vice versa.
  • The question, "How high is high and how low is low?" is answered because the RSI value must always fall between 0 and 100. Therefore, the daily momentum of any number of commodities can be measured on the same scale for comparison to each other and to previous highs and lows within the same commodity.
  • The problem of having to keep up with mountains of previous data is also solved. After calculating the initial RSI, only the previous day's data is required for the next calculation.

Just one tool

The Relative Strength Index, used in conjunction with a bar chart, can provide a new dimension of interpretation for the chart reader. No single tool, method, or system is going to produce the right answers 100 of the time. However, the RSI can be a valuable input into this decision-making process.
Commodity Price Charts plots the 14-day RSI, updating the chart through Thursday of each week. Contrary to popular opinion, the choice of the number of market days used in calculating the RSI doesn't really matter because the smoothing nature of the exponential averages reduces the effect of the early days as more data is included.
To help you update the RSI values until the next issue of the charts arrives, we list the "up average" and "down average" as of Thursday on each RSI chart.

Simplified formula

The procedure outlined earlier for beginning and updating RSIs is from J. Welles Wilder's book and his 1978 Futures Magazine story, which made the RSI a popular technical tool. The following is a simpler and faster method of computing the RSI. The results are the same as Wilder's more complicated method.
To begin a new RSI, just list the changes for 14 consecutive trading days and total the changes. Divide these totals by 14, and you will have the new up and down average. Then proceed with this formula:
RSI = 100 x U / (U + D)
U = up average; D = down average.
The example below is for T-bills.
Date
Up
Down
1/28
+41

1/29

-2
2/1

-60
2/2

-7
2/3
+2

2/4
+1

2/5
+6

2/8

-26
2/9
+11

2/10
+14

2/11
0
0
2/12

-11
2/16
+28

2/17

-18
Total
103
124
1.03 / 14 = .074 = Up ave.
1.24 / 14 = .089 = Down ave.
RSI= 100 x (.074 /.163) = 45.39
To calculate the next day's RSI, multiply the up average (.074) by 13. Add the change for the day, if it is up. Divide the total by 14. Do the same for the new down average. Multiply the new down average (.089) by 13. Add the change for the day, if it is down. Divide total by 14.
Then, proceed with the formula:
RSI = 100 x U / (U + D)
For example, if T-Bills closed up 25 points the next day, calculate the new RSI as follows:
New Up ave. = .074(13) + .25/14 = .087
New Down ave. = .089(13) + 0/14 = .083
New RSI = 100 x .087 / (.087 + .083)
RSI = 51.2
Learning to use this index is a lot like learning to read a chart. The more you study the interaction between chart movement and the Relative Strength Index, the more revealing the RSI will become. If used properly, the RSI can be a very valuable tool in interpreting chart movement.
RSI points are plotted daily on a bar chart and, when connected, form the RSI line. Here are some things the index indicates as shown by examples from the following silver chart:
Tops and bottoms - These are often indicated when the index goes above 70 or below 30. The index will usually top out or bottom out before the actual market top or bottom, giving an indication a reversal or at least a significant reaction is imminent.
The major bottom of Aug. 15 was accompanied by an RSI value below 30. The major top of Nov. 9 was preceded by an RSI value above 70. The top made on Jan. 24 was preceded by an RSI value of less than 70. This would indicate this top is less significant than the previous one and either a higher top is in the making or the long-term uptrend is running out of steam.
Chart formations - The index will display graphic chart formations which may not be obvious on a corresponding bar chart. For instance, head-and-shoulders, tops or bottoms, pennants or triangles often show up on the index to indicate breakouts and buy and sell points.
A descending triangle was formed on the RSI chart during October and early November that is not evident on the bar chart. A breakout of this triangle indicates and intermediate move in the direction of the breakout. Note also the long-term coil on the RSI chart with the large number of support points.
Failure swings - Failure swings above 70 or below 30 are very strong indications of a market reversal.
After the RSI exceeded 70 during October, the immediate downswing carried to 65. When this low point of 65 was penetrated the following week, the failure swing was completed.
After the low of Aug. 15, the RSI shot up to 41. After two downswings, this point was penetrated on the upside on Aug. 26, completing the failure swing.
Support and resistance - Areas of support and resistance often show up clearly on the index before becoming apparent on the bar chart. Trendlines on the bar chart often show up as support lines on the RSI. The mid-November break penetrated the uptrend line on the bar chart at the same time as the support level on the RSI chart.
Divergence - Divergence between price action and the RSI is a very strong indicator of a market turning point and is the single most indicative characteristic of the Relative Strength Index. Divergence occurs when the RSI is increasing and price movement is either flat or decreasing. Conversely, divergence occurs when the RSI is decreasing and price movement is either flat or increasing. Divergence does not occur at every turning point.
On the silver chart, there was divergence between the bar chart and RSI at every major turning point. The top made in November was "warned" by the RSI exceeding 70, a failure swing and divergence with the RSI turning sideways while prices continued to climb higher.
Alright, it's that time again...
On this chart from the MarketClub member's area, a plot of the RSI is shown below the main price movement chart. Can you pick out the two potential reversals on the RSI indicator?

The answer is given here: Reveal the two reversals as indicated by the RSI


Lesson 6

Answer Page


Throughout May and into early June the RSI signaled an oversold condition, indicating a potential upward turn - which ended up occurring throughout June, July, and into early August.
From mid-September through early November it signaled an overbought condition, indicating a potential downswing - which occurred immediately afterward.

SOURCE :-MarketClub

 

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23 June, 2011

Lesson 5 (Lesson 5 Trending With Moving Averages)

6/23/2011 09:06:00 AM



Lesson 5

Trending With Moving Averages

Moving averages are one tool to help you detect a change in trend. They measure buying and selling pressures under the assumption that no commodity can sustain an uptrend or downtrend without consistent buying and selling pressure.
A moving average is an average of a number of consecutive prices updated as new prices become available. The moving average swallows temporary price aberrations but tells you when prices begin moving consistently in one direction.
Trading with moving averages will never position you in the market at precisely the right time. They are intended to help you take profits from the middle of the trend and hold losses to a minimum.
The risks and the magnitude are intrinsic to the speed of the moving averages. Professional traders lean toward the faster averages and portfolio managers generally prefer slower signaling moving average approaches.
Moving averages are a simple way to gauge the direction the tide is flowing in a commodity market. They are not always right, but they provide a wide variety of possible uses.

Lag prices

Moving averages lag prices because of their makeup. You can make a moving average for any number of days you choose, but remember that the more days you average, the more sluggish the moving average becomes. Most commodity traders find a 3-day moving average alone is too volatile. However, 4-day and 5-day moving averages are common as short-term indicators.
To start a 4-day moving average, add the last four days' closing prices and divide by four, The next day, drop off the oldest price, add the new close, and divide by four again. The result is the new moving average. Use the same system for any moving average you might want to develop.
Moving averages give signals when different averages cross one an- other. For example, in using 4-day, 9-day and 18-day moving averages, a buy signal would be given when the 9-day average crosses the 18-day. However, to avoid false signals, the 4-day average should be higher than the 9-day.
Just the opposite is true for sell signals. To sell, the 4-day average must be below the 9-day. The sell signal is triggered when the 9-day average crosses the 18-day.
There are other conditions you might wish to place on your averages to avoid false signals. One possible requirement is to make the 4-day exceed the 9-day by a certain percentage before acting on the appropriate buy or sell signal.
The caveat to moving averages is that although they work well in trending markets, they may whipsaw you in a sideways, choppy market.
It helps to "tune" the moving averages to a particular market. A bit of brainwork is necessary to use a moving average. You can use the moving average studies on MarketClub streaming charts to find whether a fast or slow moving average is best for your trading style.
Some traders who use moving averages follow the slower moving average signals to initiate a position but a faster moving average to exit the trade, especially if substantial profits have been built up.
A linearly-weighted moving average also could help eliminate false signals. A 4-day linearly-weighted moving average multiplies the oldest price by four, the next oldest price by three, etc., and divides the total by 10.
This weighted average is more sensitive to recent prices than a standard average. The term, "linearly-weighted," comes from the fact that each day's contribution diminishes by one digit.
The rules for trading a weighted moving average are the same as using a combination of three moving averages. The weighted average must be above or below the other moving averages, or the signal is ignored.
A more sophisticated average is the exponential moving average, which is weighted nonlinearly by using a specific smoothing constant derived for each commodity to allocate the weight exponentially back over prior trading days.
However, it requires high mathematics and a computer to determine each optimum smoothing constant.
Now, let's put your new found Moving Averages knowledge to work; but first, a little side note...
The Commodity Futures Trading Commission has asked us to also advise you that trading futures and options is not without risk. While there is opportunity for incredible wealth building, there is also the risk of losing even more than you invested. Of course, that's not unlike most other businesses. But informed traders are the best traders! Opinions expressed by Market Spotlight authors are not those of INO.com.
Now... Can you identify the buy and sell points as indicated by the 4-day/9-day/18-day moving averages on this chart from the MarketClub member's area (Hint: there is one of each)?

You can see the answer here: Show the Moving Average buy and sell points


Lesson 5

Answer Page

During the week of October 10, the 4-day average and 9-day average both crossed above the 18-day average giving a buy signal. Also note that the 4-day average was above the 9-day average, giving further indication that this was not a 'false' signal.
During the week of November 14, both the 4 and 9-day average crossed below the 18-day average - with the 4-day average also moving below the 9-day average - giving a sell signal.
The charting tools in the MarketClub member's area let you quickly and easily plot both Simple Moving Averages and Exponential Moving Averages for whichever periods suit your trading needs best.

 SOURCE :-MarketClub

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22 June, 2011

Lesson 4 (Lesson 4 Picturing Technical Objectives)

6/22/2011 10:26:00 PM



Lesson 4

Picturing Technical Objectives


Lesson 4

Picturing Technical Objectives

When prices form pictures on charts, you can obtain realistic objectives for later moves. One of the most reliable chart formations is the head-and-shoulders top or bottom. This easily recognizable chart pattern signals a major turn in trend.
The main advantage of the head-and-shoulders pattern is it gives you a clear-cut objective of the price move after breaking out of the formation. Measure the price distance between the head and the neckline and add it to the price where the neckline is broken. This projects the minimum objective. Although the head-and-shoulders gives no time projection, it predicts a very strong trend in the future.
In most cases, a head-and-shoulders formation will be symmetrical, with the left and right shoulders equally developed. Although the neckline doesn't have to be horizontal, the most reliable formations stray only a little.
Flags and pennants are consolidation patterns which give objectives for further moves. As the formation develops, price action in an uptrending market will look like a flag flying from a flagpole as prices tend to form a parallelogram after a quick, steep upmove. Flags "fly at half-staff." The more vertical the flagpole, the better.
A price objective is obtained by measuring the flagpole and adding it to the breakout point of the formation. The flagpole should begin at the point from which it broke away from a previous congestion area, or from important support or resistance lines. Flags in a downtrending market look like they are defying gravity and slant upward.

Continuation patterns

A pennant also starts with a nearly vertical price rise or fall. But, instead of having equal move reactions in the consolidation phase like a flag, pennant reactions gradually decrease to form short uptrend and downtrend lines from the flagpole.
The same measuring tools used in flags are used in pennants. Add the length of the flagpole to the breakout point to get the minimum objective. Remember, flags and pennants are usually continuation patterns in an overall trend which resumes after the breakout of the consolidation area.
Also, the coil formation, or symmetrical triangle, appears while prices trade in continually narrower ranges, forming uptrend and downtrend lines. This pattern doesn't tell you much about the direction of the next move. After breaking one of the trendlines, the objective is found by adding the width of the coil's base to the breakout point.

Springing from coils

The formation gets its name from the way prices contract and suddenly spring out of this pattern like a tight coil spring. One caution about this formation: It's best if prices break out of the formation while halfway to three-quarters of the way to the triangle's apex. If prices reach the apex, a strong move in either direction is less likely.
Ascending and descending triangles are similar to coils but are much better at predicting the direction prices will take. Prices should break to the flat side of the triangle.
Price objectives from ascending and descending triangles can be obtained two ways. The easiest is to add the length of the left side of the triangle to the triangle's flat side.
Another method of projecting price is to draw a line parallel to the sloping line from the beginning of the triangle. Expect prices to rise or fall out of the triangle formation until they reach this parallel line.
 

More objectives

In the lesson on trends, we mentioned double and triple tops and bottoms. These formations also provide us with objectives. Once a double bottom is completed, prices should rise at least as far as the distance from the bottom of the "W" to the breakout point.
A double bottom is confirmed when prices close above the center of the "W" formation. This is referred to as the breakout. The difference from the bottom of the formation to the top gives a price objective. Targets for price declines from double tops are figured the same way.
Often, prices will retest the breakout point after completing the formation. After a double top is completed, prices may briefly rebound to test the resistance, which is the same point where the original double top was completed.
I know, it all sounds a bit complicated right? I promise you though, if you put a little practice and effort into learning how to spot these patterns, it will pay off in spades for you.
Time to take that first step...
Can you locate the Flag and Pennant formations in this chart from the MarketClub member's area (Hint: there is one of each)?

You'll find the answer here: Reveal the Flag and Pennant formations


Lesson 4

Answer Page


The flag and pennant formations both held true, achieving - and exceeding - their price objectives. The flag's pole was about 0.6 points tall and, once the flag formation was complete the price rose about 1.1 points from the breakout point. The pennant's pole was about 1.5 points tall, and the price rose about 1.75 points from the breakout point.
As I said, learning to spot these patterns may seem a bit tricky. But, as you can see, the results are WELL worth the time and effort...
...and MarketClub's trendline tool allows you to easily highlight, measure, and confirm any formations you happen to spot.

 

 SOURCE :- MarketClub

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21 June, 2011

Lesson 3 (Technical Price Objectives)

6/21/2011 09:24:00 AM

Technical Price Objectives

Traders who believe in price charts make them work.
Chartists try to find repetitive price patterns which have a high degree of accuracy and usually are self-fulfilling. Gaps and specific formations frequently meet these criteria.
Gaps are one of the most easily recognizable technical indicators. A gap is simply an empty spot formed on a chart when price lines don't overlap the previous day's price action. Sometimes market psychology changes overnight or over a weekend. That change in psychology forces prices to open and stay above or below the previous day's range.

Time-tested rule

'Gaps are filled' is another time-tested rule of the market. That is why gaps become future price objectives. Quite often, prices retreat to fill a gap in a bull market before continuing the move. Likewise, prices often rally in a bear market to fill gaps.

Gaps may serve one of three purposes. They are used to spot the beginning of a move, to measure a move and to signal the end. There are four different kinds of gaps: common or temporary, breakaway, measuring or runaway, and exhaustion.
The most frequently occurring gap is the common gap. When this gap occurs because of a slight change in psychology, traders expect it to be filled soon. Once a gap is filled, it no longer has significance.
The early portion of the soybean chart on this page shows common gaps during the December and January period which were later filled.
The breakaway gap on this chart occurred on May 7 and begins a major bull move. Breakaway gaps often occur after a stretch of sideways trading and in the leading days of an uptrend or downtrend. This type of gap remains unfilled for a long time.
It sometimes is difficult to tell right away that it's a breakaway gap and not a common gap. When the market fails to fill this gap after a couple of weeks, this confirms the breakaway gap.

Additional gaps

A measuring gap typically occurs in the middle of a price move and predicts how much farther the move will go. It is also called a midpoint gap and a runaway gap.
On this soybean chart, the measuring gap, which occurred on June 8, left an empty spot from $6.16 to $6.26. The April 5 low at $4.90 marked the beginning of this move. The distance from the low at $4.90 to the measuring gap is $1.26 to $1.36. Adding this distance to the measuring gap projects a move to at least $7.50. Whether you add the distance to the top, bottom or middle of the measuring gap depends on your preference.

An exhaustion gap shows frustrated bears giving up and aggressive bulls trying to make the market go their way. It is the first sign of sputtering before the end.
Though prices may go higher after an exhaustion gap at the top, the rally will not last long before the market dies. An extreme exhaustion gap may form an island reversal.
What about gaps that remain unfilled? They become future chart objectives.If gaps are unfilled when a futures contract expires, there are usually corresponding gaps on the charts of subsequent contract months.
Gaps also appear on longer-term charts such as weekly commodity charts, but gaps on monthly charts are rare because they generally are constructed to avoid gaps caused by contract changeover. Like those on the daily charts, gaps on weekly charts are also "made to be filled".
A downtrend may slide to a slow, gradual halt in the saucer bottom formation. Open interest and volume follow the same pattern as prices in this formation, reflecting speculator disinterest in a market with little action and little profit potential. Our example on the monthly cocoa chart took three years to form.
Saucer bottoms on daily charts may take at least four weeks to become visible.
Although this bottom formation doesn't meet the requirements of other bottom formations, it's just as significant in signaling a trend change. Usually, the longer it takes to form a saucer bottom, the more violently prices will rise out of their lows.

Key reversals

One of the most easily recognizable technical signals in trend change is the key reversal. A key reversal often has an unusually wide trading range. Its requirements are a day's range outside the previous day's range with a close higher than the previous close for an upward turnaround and a lower close for a downward turn.
Here again, this chart formation reflects market psychology. A key reversal is the climax of a period of buying or selling fever. In extremely volatile markets, two or more key reversals may occur. The key reversal on the silver chart defined the top of its rally and signaled a fall in prices.
 
To be a valid key reversal top, trading volume must be heavy and the daily trading range should be wide. Prices first surge to new highs, but fall back and close lower for the day.
For a key reversal bottom, the characteristics are the same. The selling climax has to have heavy volume with a wide trading range which first breaks to new lows, rebounds above the previous day's high and closes higher. Frequently, the highest trading volume and the highest or lowest price of the year will be set on a key reversal day.
An island reversal takes gaps to the extreme. It receives its name for obvious reasons. An island reversal can be only one day or a few days of trading above (or below) the previous and following day's trading activity The action is isolated by gaps on both sides. Thus, it leaves a day or a few days of price action surrounded by empty space.
The Japanese yen chart shows two island reversals. The 1-day island top of marked the climax of a bull move and the beginning of falling prices. The 3-day island reversal bottom in mid-May signaled a halt to the decline and the Island reversal beginning of a bear market rally.
Island reversals occur less frequently than key reversals. The exhaustion gap which marks the beginning of the island reversal will remain unfilled for a lengthy period because the island reversal is usually the climax to an existing trend.
Technical analysis is not an absolute tool. Because it is more an art than a science, individuals will interpret formations and trends differently.
"Thin markets" - those with very low open interest and trading volume - will create false technical signals. These markets, as well as deferred contracts which also have low open interest, should be avoided by inexperienced traders.
Despite these cautions, technical analysis is a powerful tool and if used with common sense, can enhance a trader's perspective and profits.
Now it's your turn - can you spot the Key Reversal in this chart from the MarketClub member's area:

The answer is given here: Show me the Key Reversal


Lesson 3

Answer Page


The Key Reversal is circled in red. Its day's range is outside the previous day's range on both the high AND the low end. And it closed lower than on the previous day...
This signaled a very strong likelihood that a significant, new downward trend was about to begin.
As you can see, on the MarketClub chart this was automatically detected - and visually indicated - by our Trade Triangle algorithm (note the red triangle on the next day's bar)...
...making it much quicker and easier to spot than it would have been if you were manually scanning for reversal bars.

 SOURCE :- MarketClub

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20 June, 2011

Lesson 2 (Finding a Friend in the Trend)

6/20/2011 12:10:00 PM

Lesson 2

Finding a Friend in the Trend

"The trend is your friend" may very well be the most common pearl of wisdom in the trading world - and for good reason...
Because trends persist for long periods, a position taken with the trend is much more likely to be successful than one taken randomly or against the trend. Trading with the trend in a bull market means buying on dips; in a bear market, selling on rallies.
First though, a quick refresher about bar charts (the two trend examples we'll see in a moment are illustrated on bar charts):
  • on a bar chart, each vertical line - or bar - connects that day's, week's, or month's high and low; and
  • the tiny, horizontal tick sticking out from the right of the bar indicates that closing price for that day, week, or month
Now, on to the trend...
An uptrend is a series of higher lows and higher highs. Uptrend lines are drawn under the lows of the market and give support. A downtrend is a series of lower lows and lower highs. Downtrend lines are drawn across the highs and give resistance to the market. The soybean chart shown below has both an uptrend line and a downtrend line.

Lows and highs vs. closes

A trendline can be drawn when two points are available. The more times a trendline is touched, the more technically significant this support or resistance line becomes.
While some chartists draw trendlines through lows and highs, others may prefer drawing lines through closes in hopes of detecting a change in trend more quickly.
Trendlines may change angles, requiring another line drawn through new high or low points. For example, the sideways trading action in March and April broke the steeper uptrend line connecting the Feb. 13 and March 20 lows. But when the uptrend resumed in early May, a more shallow uptrend line can be drawn connecting the February and late-April lows.
The most reliable trendlines are those near a 45° angle. If about four weeks have elapsed between the two connecting points, this increases the trendline's validity. However, steep trendlines that don't fit these guidelines, like the uptrend line in the early portion of the soybean chart, may be just as useful.
Often, minor uptrends or downtrends will confuse the beginner. It may seem the market has turned around. However, sharp chartists will see these minor trends as small ripples within a major wave. Remember, if the trendline isn't broken, that trend remains intact. Two closes outside the trendline are the criteria for detecting a change in trend. However, very seldom do markets go directly from uptrend to downtrend. At the end of a move, traders become less aggressive and prices may swing in a sideways pattern or consolidation period.
Many times, markets break into an uptrend or downtrend out of a sideways trading pattern or consolidation period. In the soybean chart, prices traded in a 50
Because traders need time to be convinced that they should put their money into the market, sideways patterns are more likely to occur near the bottom of a move. The beginning of a downtrend often will be sharp and sudden as investors pull money out of the market.

False breakouts

Another way beginners might be fooled is seeing false breakouts of tops and bottoms. As prices begin to make their move in switching from a downtrend to an uptrend, traders with short positions will "cover." This buying many times will cause the market to rally above the downtrend line. This short covering rally seldom holds, and prices may drop back to the breakout point. The uptrend is confirmed when prices close above the high of the short rally.
On a topping formation, long liquidation takes prices through the uptrend line on a short break. Before the downtrend begins, the market sometimes rallies back to "test" the uptrend line as shown on the soybean chart in September. As the downtrend unfolds, the second reaction rally could not top the highs of the first rally.
Channel lines are an extension of the trendline theory. The October through January downtrend on the soybean chart shows prices staying in a "channel" between the downtrend line and a line drawn parallel to it, connecting the lows. A channel line in a downtrending market helps identify where support may be found.
Speedlines are another line which show where prices may find support or resistance. Frequently, speedlines and trendlines will overlap, emphasizing that line's importance to the market.
The speedline on the soybean chart starts from the June 29 low. To find the points to connect with the low, divide the range between the low ($6.40) and the high($9.94) into thirds and subtract from the high.
Plot the point obtained by subtracting one-third of the range from the high on the day the high was made. A line drawn between this point ($8.76) and thelow established the 1/3 speedline. The 2/3 speedline is drawn through the point that is two-thirds of the range subtracted from the high ($7.58) plotted on the day the high was made.
Another way to detect a change in trend is by looking for a price from which the market reacts two or three times.
A double bottom, such as the one on the T-Bill chart, indicated the 87.10 to 87.20 area gave support to the market. Although a recovery had begun from the late-May low, prices broke the short-term uptrend in mid-June. The question then became: Will aggressive short-selling and long liquidation overwhelm the short-covering and new buying that come from support at the May low?
The soybean chart displays a triple top, where prices met resistance in approximately the same area three times before falling. Just the inverse of making the double bottom goes through traders' minds as the market makes a top: Will new buying and short-covering be able to overwhelm the new selling and long liquidation coming from the triple-top resistance area?
As with trendlines, the more time that elapses between the tests of support and resistance in double or triple tops or bottoms, the more valid the formation becomes. Also, the greater the reaction between tests of the support or resistance, the more likely the point will hold.
Though these examples are from daily bar charts, technical analysis works just as well on weekly and monthly charts. Because the longer-term charts cover more time, their trendlines are more important in identifying areas of support and resistance to the market.

How do I know?

In identifying the trend in a market, it is wise to start with the longer term charts to identify the long-term trend. The daily charts offer trends for the shorter-run.
Technical analysis is more an art than a science. The answer to your question, "How do I know where to draw the trendlines?" is, "They're your charts, draw them wherever they seem to work best for you."
And, of course, the only way to get a feel for what works best for you is to practice - let's give it a try now...
This chart from the MarketClub member's area depicts a few different trends - find the major uptrend and mentally draw the uptrend line and trend channel line on the chart:

To see if you spotted the major uptrend and correctly applied the trend line and channel line, take a peek at the answer here: Reveal the major uptrend


Lesson 2

Answer Page

The major uptrend is identified by the lower line or 'trend line', and the upper line or 'channel' line. (Note: if it were a downward trend, the upper line would be the trend line and the lower line would be the channel line.)

Did you also notice the green triangle on the price line near the start of the trend? How about the red one on the price line near the end of the trend?
These are MarketClub's proprietary Trade Triangles. We developed the Trade Triangles to make spotting the trend as easy as can be. No more need to spend hours scanning charts or plotting trend lines and channel lines - the Trade Triangles instantly alert you to any potential trend change: green for an upward shift and red for a downward shift.

 SOURCE  :- MarketClub

Posted by Nifty Statistics
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19 June, 2011

The Psychology of Commodity Price Movement

6/19/2011 11:02:00 AM


Lesson 1

The Psychology of Commodity Price Movement

The price of a futures contract is the result of a decision made by both a buyer and a seller. The buyer believes prices will go higher; the seller feels prices will decline. These decisions are represented by a trade at an exact price.
Once the buyer and seller make their trade, their influence in the market is spent — except for the opposite reaction they will ultimately have when they close the trade. Thus, there are two aspects to every trade: 1) each trade must ultimately have an opposite reaction on the market, and 2) the trade will influence other traders.
Each trader's reaction to price movements can be generalized into the reactions of three basic groups of traders who are always present in the market:
1) traders who have long positions
2) those who hold short positions; and
3) those who have not taken a position but soon will
Traders in the third group have mixed views on the market's probable direction. Some are bullish while others are bearish, but a lack of positive conviction has kept them out of the market. Therefore, they have no vested interest in the market's direction.
The impact of human nature on futures prices can perhaps best be seen by examining changing market psychology as a typical market moves through a complete cycle from price low to price low.

Classic price pattern

Let's assume prices trade within a relatively narrow trading range (between points A and B on the chart). Recognizing the sideways price movement, the "longs" might buy additional contracts if the price advances above the recent trading range. They may even enter stop orders to buy at point B, to add to their position should the trend show signs of going higher...
...but, by the same token, recognizing prices might decline below the recent trading range and move lower, they might also enter stop loss orders below the market at A to limit their loss.
The "shorts" have exactly the opposite reaction to the market. If the price advances above the recent trading range, many of them might enter stop loss orders to buy above point B to limit losses. And they may add to their position if the price should decline below point A with orders to sell additional contracts on a stop below point A.

The third group is not in the market - instead, they are sitting on the sidelines watching for a signal indicating whether they should go long or short. This group may have stop orders to buy above point B, because presumably the price trend would begin to indicate an upward bias if point B were penetrated. They may also have standing orders to sell below point A for converse reasons.
Now, let's assume the market advances to point C.
If the trading range between points A and B has been relatively narrow and the time period of the lateral movement relatively long, then the accumulated buy stops above the market could be quite numerous. Also, as the market breaks above point B, brokers contact their clients with the news – resulting in a stream of market orders. As this flurry of buyers becomes satisfied and profit-taking from previous long positions causes the market to dip from the high point of C to point D, another distinct attitude begins working in the market.
Part of the first group that went long between points A and B did not buy additional contracts as the market rallied to point C. Now they may be willing to add to their position "on a dip." Consequently, buy orders trickle in from these traders as the market drifts down.
Traders who established short positions in the original A-B trading range have now seen prices advance to point C, then decline a bit toward the price at which they originally sold. If they did not cover their short positions on a buy stop above point B, they may be more than willing to "cover on any further dip" to minimize the loss.
And those traders not yet in the market will place price orders just below the market with the idea of "getting in on a dip."
The net effect of the rally from A to C is a psychological change in all three groups. The result is a different tone to the market, where some support could be expected from all three groups on dips. (Support on a chart is price level at which buying of a futures contract occurs in sufficient enough volume to halt a decline in price.) As this support is strengthened by an increase in market orders and a raising of buy orders, the market once again advances toward point C. Then, as the market gathers momentum and rallies above point C toward point E, the psychology again changes subtly.
The first group of long traders may now have enough profit to pyramid additional contracts with their profits. In any case, as the market advances, their enthusiasm grows and they set their sights on higher price objectives. Psychologically, they have the market advantage.
The original group who sold short between A and B and who have not yet covered are all carrying increasing losses. Their general attitude is negative because they are losing money and confidence. Their hopes fade as their losses mount. Some of this group begin liquidating their short positions either with stops or market orders. Some reverse their position and go long.
The group which has still not entered the market – either because their orders to buy the market were never reached or because they had hesitated to see whether the market was actually moving higher – begins to "buy at the market."
Remember that even if a number of traders have not entered the market because of hesitation, their attitude is still bullish. And perhaps they are even kicking themselves for not getting in earlier. As for those who sold out previously-established long positions at a profit only to see the market move even higher, their attitude still favors the long side. They may also be among those who are looking to buy on any further dip.
So, with each dip the market should find the support of:
1) traders with long positions who are adding to their positions
2) traders who are short the market and want to buy back their shorts "if the market will only back down some"; and
3) new traders without a position in the market who want to get aboard what they consider a full-fledged bull market
This rationale results in price action that features one prominent high after another and each prominent reactionary low is higher than the previous low. In a broad sense, it should appear as an upward series of waves reaching successively higher highs and higher lows – or, in other words, a general upward trend.
But at some point the psychology again subtly shifts. The first group with long positions and fat, unrealized profits is no longer willing to add to its positions. In fact they are looking for a place to "take profits." The second group of battered traders with short positions has finally been worn down to a nub of die-hard shorts who absolutely refuse to cover their short positions. They are no longer a supporting element, eagerly waiting to buy the market on dips.
The third group, who never quite got aboard the up-move, become unwilling to buy because they feel the greatest part of the upside move has been missed. They consider the risk on the downside too great when compared to the now-limited upside potential. In fact, they may be looking for a place to "short the market and ride it back down."
When the market demonstrates a noticeable lack of support on a dip that "carries too far to be bullish," this is the first signal of a reversal in psychology. The decline from point I to point J is the classic example of such a dip. This decline signals a new tone to the market. The support on dips becomes resistance on rallies, and a more two-sided market action develops. (Resistance is the opposite of support. Resistance on a chart is the price level where selling pressure is expected to act like a ceiling, stopping advances and possibly turning prices lower.)

The downturn

Now the picture has changed. As the market begins to advance from point J to point K, traders with previously-established long positions take profits by selling out. Most of the hard-nosed traders with short positions have covered their shorts, so they add no significant new buying impetus to the market. In fact, having witnessed the recent long decline, they may be adding to their short positions.
If the rally back toward the contract highs fails to establish new highs, this failure is quickly noticed by professional traders as a signal the bull market has run its course. This is even more true if the rally at point K carries only up to the approximate level of the rally top at point G.
If the open interest also declines during the rally from J to K, it is another sign it was not new buying that caused the rally but short covering.
As profit-taking and new short-selling forces the market to decline from point K, the next critical point is the reactionary low point at J. A major bear signal is flashed if the market penetrates this prominent low (support) following an abortive attempt to establish new contract highs.
Put simply, if the temporary support level formed at point L is lower than that of point J, odds are the overall trend will continue much lower.
In the vernacular of chartists, a head-and-shoulders reversal pattern has been completed. But rather than simply explaining away price patterns with names, it is important to understand how the psychology of the market action at different points causes the market to respond as it does. It also explains why certain points are quite significant.
In a bear market, the attitudes of the traders would be reversed. Each decline would find the bears more confident and prosperous and the bulls more depressed and threadbare. With the psychology diametrically opposite, the pattern completely reverses itself to form a series of lower highs and lower lows.
Of course, at some point the bears become unwilling to add to their previously-established short positions. Those who were already long the market and had refused to sell higher would eventually be reduced to a hard core of traders who had their jaws set and refused to sell out. Traders not in the market who were perhaps unsuccessfully attempting to short the market at higher levels will begin to find the long side of the market more attractive. The first rally that "carries too high to be bearish" signals another possible trend reversal – and potential shift back into an upward trend.
And so the market continues on shifting between upward and downward cycles...
With this basic understanding of market psychology through three phases of a market, a trader is better equipped to appreciate the significance of all technical price patterns. No one expects to establish short positions at the high or long positions at the low, but development of a feel for market psychology is the beginning of the quest for trades that even hindsight could not improve upon.
When you analyze charts, approach them with the idea that they reflect human ideas about prices that are the result and the struggle between supply and demand forces. Your attitude and ability to judge market psychology will determine your success at chart analysis. Unexpected occurrences can change price trends abruptly, and without warning. Also, some of the chart formations may be hard to visualize. You'll sometimes need a good imagination as well.
Now, let's take the first step in putting what you've just learned to the test...
This chart from the MarketClub members' area depicts a significant change in the mentality of the market. Can you indentify the 'head and shoulders' formation that has signaled a shift in trader psychology?

The answer can be seen here: Reveal the 'head and shoulders' formation.

Answer Page

The 'head and shoulders' formation highlighted below gave a clear indication that trader sentiment had shifted from bullish to bearish.

By spotting the formation - and what it revealed about the shift in overall market psychology - you would have been able to maximize your profits by closing out any long positions in EUR/USD currency pair - or, opening a short position - before the downward move began in earnest.
So, did you identify it correctly?
If you did, great job - it will only get easier with experience.
If not, don't worry - you'll get the hang of it with a bit of practice.
OR, if you really want to speed up the learning curve - and make it as quick and simple as can be - you can have MarketClub's charting tools and auto alerts do most of the work for you...
With over 23 charting tools... Talking Charts... customizable, auto email alerts... Smart Scans... and our proprietary Trade Triangle trend indicators right at your fingertips, profiting like the pros will be easier than ever before.

 

source :-MarketClub

Posted by Nifty Statistics
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