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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