Flashcards in Trading for a Living - Dr. Alexander Elder Deck (279):
What is slippage?
-The difference between the price at which you place your order and the price at which it gets filled.
what are commissions?
-Service charge assessed by a broker or investment advisor for providing investment advice and/or handling the purchase or sale of a security.
What is a market order?
-Buy or sell an investment immediately at the best available current price.
-The default option
-Likely to be executed.
-Often filled at a worse price than prevailed when you placed it.
what is a limit order?
-A buy or sell transaction at a set number of shares and at a specified limit price or better.
-Limit orders also allow an investor to limit the length of time an order can be outstanding before being canceled.
How do you reduce slippage?
-Trade liquid, high-volume markets and avoid thinly traded stocks, where slippage tends to be higher.
-Go long or short when the market is quiet.
-Use limit orders to buy or sell at specified prices.
-Keep a record of prices at the time you placed your order.
What is a bid?
-A bid is an offer made by an investor, trader or dealer to buy a security.
-It stipulates both the price and the quantity he will purchase at that price.
What is a ask?
-The ask is the price a seller is willing to accept for a security.
-Might also stipulate the amount of the security available to be sold at the stated price.
-The ask will always be higher than the bid.
What is a bid-ask spread?
-The amount by which the ask price exceeds the bid price.
-The difference between the highest price that a buyer is willing to pay for an asset and the lowest price that a seller is willing to accept to sell it.
What is charting?
-Study the market data to identify price patterns and profit from them
What is a bar chart?
-Investment charts that show the range of prices of a security across a given period of time.
-A single bar represents a predetermined unit of time, typically one day of trading.
-The distance between the high and the low of any bar reflects the intensity of conflict between bulls and bears.
what is the opening price?
-The price at which a security first trades upon the opening of an exchange on a given trading day.
-Tends to reflect the amateurs' opinion of value
what is the closing price?
-The final price at which a security is traded on a given trading day.
-Represents the most up-to-date valuation of a security until trading commences again on the next trading day.
-Tends to reflect the actions of professional traders.
what does the Efficient Market Theory entail?
-Nobody can outperform the market because any price at any given moment incorporates all available information. ---The logical flaw of is that it equates knowledge with action. People may have knowledge, but the emotional pull of the crowd often leads them to trade irrationally.
what does the Random Walk theory entail?
Theory that market prices change at random. Sure, there is a fair bit of randomness or "noise" in the markets, just as there is randomness in any crowd. Still, an intelligent observer can identify repetitive behavior patterns of a crowd and make sensible bets on their continuation or reversal - People have memories.
what does the Chaos Theory entail?
Related to financial markets, proponents of chaos theory believe that price is the very last thing to change for a security. Price changes can be determined through stringent mathematical equations.
Where is the closing price on a bar chart?
Closing price on the right side of the bar
Where is the opening price on a bar chart?
Opening price on the left side of the bar.
What does the top and bottom of a bar chart indicate?
The top of the vertical line indicates the highest price a security is traded at during the day (maximum power of the bulls), and the bottom represents the lowest price (maximum power of the bears).
Claim there is a perfect order in the markets; markets move like clockwork in response to immutable natural laws.
what is a Support in a charting context?
A price level where buying is strong enough to interrupt or reverse a downtrend
Represented on a chart by a horizontal line connecting two or more bottoms
what is a Resistance in a charting context?
Price level where selling is strong enough to interrupt or reverse an uptrend
Represented on a chart by a horizontal line connecting two or more tops
Where to draw support and resistance lines?
across the edges of congestion areas where the bulk of the bars stopped rather than across extreme prices.
Are trendlines (support and resistance lines) good for identifying trends?
No! Trendlines are widely subjective - they are among the most self-deceptive tools. Trend identification is an area in which computerized analysis is miles ahead of classical charting
The longer a support or resistance area - it's length of time or the number of hits it took -...
The taller the support and resistance zone,...
The greater the volume of trading in a support and resistance zone,...
the stronger it is.
the stronger it is.
the stronger it is
What is a protective stop?
an order to sell below the market when you are long to cover shorts above the market when you are short,
Protects you from getting badly hurt by a reversal.
What is a false breakout?
a price moves through an identified level of support or resistance but does not have enough momentum to maintain its direction.
What is a trading range?
Most rallies stop at about the same high level, and declines Peter out at about the same low level.
What does a Kangaroo tail indicate?
it shows that a certain price has been rejected by the market. It usually leads to a swing in the opposite directions. As soon as you recognize a tail, trade against it.
What is a stop/ stop-loss order?
A stop-loss order is an order placed with a broker to sell a security when it reaches a certain price. Stop-loss orders are designed to limit an investor’s loss on a position in a security.
What does a moving average (MA) reflect?
A moving average reflects the average value of data in its time window. A 5-day MA shows the average price for the past 5 days.
What does a MA represent?
A moving average represent an average consensus of value for the period of time in its window
What is the most important message of a MA?
The most important message of a moving average is the direction of its slope
What is a whipsaw?
A rapid reversal of a trading signal
What is a channel?
A channel consists of two lines drawn parallel to a moving average. A well drawn-channel should contain approximately 95% of all prices that occurred during the past 100 bars.
When the fast MACD line rises above the slow Signal Line, what does ti show?
It shows that bulls dominate the market, and it is better to trade from the long side and vice versa.
How many types of MA are there and what are they?
There are three types of moving averages:
-simple moving average
-exponential moving average
-weighted moving average
What makes an exponential MA better in comparison to a simple MA?
An EMA is a better trend-following tool because it gives greater weight to the latest data and responds to changes faster than a simple MA.
What are the two major advantages of the exponential MA over a simple MA?
1. It assigns greater weight to last trading day
2. EMA does not drop old data the way a simple MA does; it slowly fades away
What's a good EMA window long-term stock investors?
A 220-day moving average works for long-term stock investors who want to ride major trends
Is changing indicator parameters useful?
Once their number reaches double digits, individualized parameters create confusion. Don’t change indicator parameters while looking for trades. Fiddling with parameters to obtain signals you’d like to see robs your indicators of their most valuable feature – their objectivity
Name the three trading rules for EMAs?
1. When an EMA rises, trade that market from the long side. Buy when prices dip near the moving average. Once you are long, place a protective stop below the latest minor low, and move it to the break-even point as soon as prices close higher.
2. When the EMA falls, trade that market from the short side. Sell short when prices rally toward the EMA and place a protective stop above the latest minor high. Lower your stop to breakeven as prices drop
3. When the EMA goes flat and only wiggles a little, it identifies an aimless, trendless market. Do not trade using a trend-following method.
How can technical analysts define value?
Technical analysts can define values by tracking spread between a fast and a slow EMA. Value lives in the zone between the two moving averages.
What are the two MAs in Dual EMAs?
The longer EMA shows a longer-term consensus of value. The shorter-term EMA shows a shorter-term consensus of value
What's the ratio between a long-term EMA and a short-term EMA?
Approximately two to one (26-week and 13-week EMA on a weekly chart; 22-day and 11-day EMA on a daily chart)
What does a Moving Average Convergence Divergence (MACD) consist of and how does it appear on charts?
MACD consists of three EMAs. It appears on the charts as two lines whose crossovers give trading signals.
Name the two trading rules for MACD-lines
1. When the fast MACD line crosses above the slow Signal line, it gives a buy signal. Go long, and place a protective stop below the latest minor blow
2. When the fast line crosses below the slow line, it gives a sell signal. Go short, and place a protective stop above the latest minor high
What type of indicator are MACD Lines?
Trend following indicators
What kind of indicator is the MACD Histogram?
What is the benefit of MACD Histogram in comparison to MACD lines?
MACD-Histogram offers a deeper insight into the balance of power between bulls and bears than the original MACD lines. It shows not only whether bulls or bears are in control but also whether they are growing stronger or weaker.
What does the MACD Histogram measure and how does it appear on a chart?
MACD-Histogram measures the difference between the MACD line and the Signal line. It plots the difference as a histogram – as a series of vertical bars.
If the fast line is above the slow line, MACD-Histogram is positive and plotted above the zero line. If the fast line is below the slow line, MAC-Histogram is negative and plotted below the zero line. When the two lines touch, MACD-Histogram equals zero. When the spread between the MACD and Signal lines increases, MACD-Histogram becomes taller or deeper.
What is central aspect of the MACD Histogram?
The slope of MACD-Histogram is more important that its position above or below the centerline
What are the 2 trading rules for the MACD Histogram?
1. Buy when MACD-Histogram stops falling and ticks up. Place a protective stop below the latest minor low
2. Sell short when MACD-Histogram stops rising and ticks down. Place a protective stop above the latest minor high
What do record peaks and lows on a MACD Histogram show?
A record peak for the past three months of daily MACD-Histogram shows that bulls are very strong and prices are likely to rise even higher. A record new low for MACD-Histogram for the past three months shows that bears are very strong and lower prices are likely ahead.
When MACD-Histogram reaches a new high during a rally, the uptrend is healthy and you can expect the next rally to retest or exceed its previous peak. If MACD-Histogram falls to a new low during a downtrend, it shows that bears are strong and prices are likely to retest or exceed their latest low.
What to MACD Histogram Divergences show?
Divergences between MACD-Histogram and prices are infrequent, but they give some of the most powerful signals. They often mark major turning points. They don’t occur at every important top or bottom, but when you see one, you know that a big reversal is probably at hand.
What is a bullish divergence?
Bullish Divergences occur towards the ends of downtrends, they identify market bottoms. A classical bullish divergence occurs when prices and the oscillator both fall to new low, rally, with the oscillator rising above its zero line, then both fall again. This time, prices drop to lower low, but and oscillator traces a higher bottom than during its previous decline.
What is an absolute must for a bullish divergence (MACD-Histogram)?
Notice that the breaking of the centerline between two indicator bottoms is an absolute must for a true divergence. MACD-Histogram has to cross above that line before skidding to its second bottom. If there is no crossover, there is no divergence.
What is a key point for a bullish divergence (MACD Histogram)?
MACD-H gives a buy signal when it ticks up from the second bottom. It does not have to cross above the centerline for the second time
When is the buy single in bullish divergences (MACD-H)?
The buy signal occurs when MACD-H, still below zero, simply stops declining and traces out a bar that is less negative than its preceding bar.
What is a bearish divergence?
Bearish divergences occur in uptrends – they identify market tops. A classical bearish divergence occurs when prices reach a new high and then pull back, with an oscillator dropping below its zero line. Prices stabilize and rally to higher high, but an oscillator reaches a lower peak than it did on a previous rally.
What is an absolute must for a bearish divergence (MACD-H)?
Notice that the breaking of the centerline between the two indicator tops is an absolute must for a true divergence. MACD-Histogram has to drop below its zero line before rising to the second top.
What is a key point pertaining to bearish divergence in MACD-H?
Another key point: MACD-H gives a sell signal when it ticks down form the second top. We don’t need to wait for it to cross below the centerline again.
When does the sell signal occur in bearish divergences (MACD-H)?
The sell signal occurs when MACD-H, still above zero, simply stops rising and traces out a bar shorter than the preceding bar.
What are triple bearish/bullish divergences?
Triple Bullish or Bearish Divergences consist of three price bottoms and three oscillator bottoms or three price tops and three oscillator tops. They are even stronger than regular divergences. In order for a triple divergence to occur, a regular bullish or bearish divergence first has to abort.
What is the hound of the baskervilles?
This signal occurs when a reliable chart or indicator pattern doesn’t lead to the action you expected and prices move in the opposite direction. A divergence may indicate that an uptrend is over, but if prices continue to rise, they give the Hound of the Baskervilles signal. This shows that something is fundamentally changing below the surface. Then it is time to get in gear with the new powerful trend.
What is the directional system?
The Directional system is a trend-following method that identifies trends and shows when a trend is moving fast enough to make it worth following. It helps traders to profit by taking chunks out of the middle of important trends.
How is the directional system defined?
Directional Movement is de ned as the portion of today’s range that is outside of the previous day’s range.The Directional system checks whether today’s range extends above or below the previous day’s range and averages that data over a period of time.
When is the directional movement positive?
If today’s range extends above yesterday’s range, Directional Movement is positive
When is the directional movement negative?
If today’s range extends below yesterday’s range, Directional Movement is negative
When is there no directional movement?
If today’s range is inside of yesterday’s range or extends above and below it by equal amounts, there is no Directional Movement (DM = 0). If today’s range extends both above and below yesterday’s range, DM is positive or negative, pending on which part of the “outside range” is larger.
What's a limit up day pertaining to directional movement?
On a limit-up day, +DM equals the distance from today’s close to yesterday’s high.
What's a limit down day pertaining to directional movement?
On a limit-down day, −DM equals the distance from today’s close to yesterday’s low.
What type of indicator is the directional system?
A trend following indicator
How do you identify the True Range of the market you analyse?
TR is always a posi- tive number, the largest of the following three:
a. The distance from today’s high to today’s low
b. The distance from today’s high to yesterday’s close
c. The distance from today’s low to yesterday’s close
What do Directional Lines show?
They allow you to compare di erent markets by expressing their directional movement as a per- centage of each market’s true range. Each DI is a positive number: +DI equals zero on a day with no directional movement up; −DI equals zero on a day with no directional movement down.
How do you calculate the directional lines?
What are smoothed directional lines?
Smooth +DI and −DI are created with moving averages.
How are smoothed directional lines plotted on a chart?
You get two indicator lines: smoothed Positive and Negative Directional lines, +DI13 and −DI13. Both numbers are positive.They are usually plotted in different colors.
What does the relationship between +Dl and -Dl indicate?
The relationship between Positive and Negative lines identi es trends.When +DI13 is on top, it shows that the trend is up, and when −DI13 is on top, it shows that the trend is down.The crossovers of +DI13 and −DI13 give buy and sell signals.
What does the Average Directional Indicator (ADX) show?
This unique compo- nent of the Directional system shows when a trend is worth following.
What does the Average Directional Indicator (ADX) measure?
ADX measures the spread between Directional Lines +DI13 and −DI13.
When does the ADX rise and decline?
During a persistent trend, the spread between two smoothed Directional lines increases, and ADX rises. ADX declines when a trend reverses or when a market enters a trading range. It pays to use trend-following methods only when ADX is rising.
Do I trade long or short when the positive Directional line is above the negative one?
Trade only from the long side when the positive Directional line is above the negative one.
Do I trade long or short when the negative Directional line is above the positive one?
Trade only from the short side when the negative Directional line is above the positive one.
When the ADX rises it is the best time to ...?
The best time to trade is when the ADX is rising, show- ing that the dominant group is getting stronger.
When ADX declines...?
it shows that the market is becoming less directional.There are likely to be many whipsaws. When ADX points down, it is better not to use a trend-following method.
When ADX falls below both Directional lines...?
it identifies a flat, sleepy market. Do not use a trend-following system but get ready to trade, because major trends emerge from such lulls.
The single best signal of the Directional system comes after...?
ADX falls below both Directional lines. The longer it stays there, the stronger the base for the next move. When ADX rallies from below both Directional lines, it shows that the market is waking up from a lull. When ADX rises by four steps (i.e., from 9 to 13) from its lowest point below both Directional lines, it “rings a bell” on a new trend. It shows that a new bull market or bear market is being born, depending on what Directional line is on top.
When ADX rallies above both Directional lines...?
it identi es an overheated mar- ket.When ADX turns down from above both Directional lines, it shows that the major trend has stumbled. It is a good time to take profits on a directional trade. If you trade large positions, you definitely want to take partial profits.
What is a Average True Range (ATR)?
Average True Range (ATR) is an indicator that averages True Ranges (described in "How to Construct the Directional System" above) over a selected period of time, such as 13 days. Since volatility is a key factor in trading, you can track it by plotting a set of ATR lines (usually 3) above and below a moving average. They will help you visualize current volatility and you can use that for decision making.
How to plot Average True Ranges and how do they help?
plot three sets of lines around a moving average: at one, two, and three ATRs above and below an EMA. These can be used for setting up entry points and stops, as well as profit targets.
How do Average True Ranges help with entries?
In the chapter on moving averages, we saw that it was a good idea to buy below value—below the EMA. But how far below? Normal pullbacks tend to bot- tom out near the minus one ATR.
Where to place your stop with Average True Ranges?
You want your stop to be at least one ATR away from your entry. Any- thing less than that would place your stop within the zone of normal market noise, making it likely to be hit by a random short-term move. Placing your stop further away makes it more likely that only a real reversal can hit your stop.
How do Average True Ranges help with profit targets?
After you buy a stock, depending on how bullish it appears to you, you can place an order to take pro ts at +1, +2, or even +3 ATRs. Kerry likes to get out of his winning positions in several steps, placing orders for taking pro ts for one third at 1 ATR, another third at 2 ATR, and the rest at 3 ATR.
What does overbought mean?
Overbought means a market is too high and ready to turn down
When does an oscillator become overbought?
An oscillator be- comes overbought when it reaches a high level associated with tops in the past.
What does oversold mean?
Oversold means a market is too low and ready to turn up
When does an oscillator become oversold?
An oscillator becomes oversold when it reaches a low level associated with bottoms in the past.
Are overbought and oversold absolute levels?
Be sure to remember that those aren’t absolute levels. An oscillator can stay over- bought for weeks when a new strong uptrend begins, giving premature sell signals. It can stay oversold for weeks in a steep downtrend, giving premature buy signals.
How do you mark overbought and oversold oscillators?
We can mark overbought and oversold oscillator levels by horizontal reference lines. Place those lines so that they cut across only the highest peaks and the lowest valleys of that oscillator for the past six months.The proper way to draw those lines is to place them so that an oscillator spends only about 5 percent of its time beyond each line. Readjust these lines once every three months.
When an oscillator rises or falls beyond its horizontal reference line...?
it helps identify an unsustainable extreme, likely to precede a top or a bottom.
Oscillators work spectacularly well in ..., but give premature and dangerous signals when a...?
new trend erupts from the range
What type of indicator is stochastic?
What does stochastic track?
Stochastic tracks the relationship of each closing price to the recent high-low range.
What does Stochastic consist of?
It consists of two lines: a fast line called %K and a slow line called %D.
What are the ways to plot Stochastic?
There are two ways to plot Stochastic—Fast and Slow.
What does Fast Stochastic consist of?
Fast Stochastic consists of two lines—%K and %D—plotted on the same chart. It’s very sensitive but leads to many whipsaws.
How is Slow Stochastic different from fast Stochastic?
Many traders prefer to use Slow Stochastic, adding an extra layer of smoothing.The %D of Fast Stochastic becomes the %K of Slow Stochastic and is smoothed by repeating step 2 to obtain %D of Slow Stochastic. Slow Sto- chastic does a better job of ltering out market noise and leads to fewer whipsaws
What does Stochastic measure?
Stochastic measures the capacity of bulls or bears to close the market near the upper or lower edge of the recent range.When prices rally, markets tend to close near the high. If bulls can lift prices during the day but can’t close them near the top, Stochastic turns down. It shows that bulls are weaker than they appear and gives a sell signal.
Daily closes tend to occur near the lows in downtrends.When a bar closes near its high, it shows that bears can only push prices down during the day but cannot hold them down. An upturn of Stochastic shows that bears are weaker than they appear and ashes a buy signal.
What are the trading signals that Stochastic gives?
Stochastic gives three types of trading signals, listed here in the order of impor- tance: divergences, the level of Stochastic lines, and their direction.
When does a bullish divergence occur in Stochastic?
A bullish divergence occurs when prices fall to a new low, but Stochastic traces a higher bottom than during its previous decline.
When does a bearish divergence occur in Stochastic?
A bearish divergence occurs when prices rally to a new high, but Stochastic traces a lower top than during its previous rally.
What does a bearish divergence show?
It shows that bulls are becoming weaker and prices are rising out of inertia
When is the sell signal in bearish divergence in stochastic?
As soon as Stochastic turns down from the second top, it gives a sell signal: go short and place a protective stop above the latest price peak.The best sell signals occur when the rst top is above the upper reference line and the second below.
What does a bullish divergence show?
It shows that bears are losing strength and prices are falling out of inertia.
When is the sell signal in bullish divergence in stochastic?
As soon as Stochastic turns up from its second bottom, it gives a strong buy signal: go long and place a protective stop below the latest low in the market.The best buy signals occur when the rst bottom is below the lower reference line and the second above it.
When you identify an uptrend on a weekly chart, wait for daily Stochastic lines
to decline below their lower reference line. Then, without waiting for their crossover or an upturn, place a buy order above the high of the latest price bar. Once you are long, place a protective stop below the low of the trade day or the previous day, whichever is lower.
When you identify a downtrend on a weekly chart, wait for daily Stochastic lines
to rally above their upper reference line. Then, without waiting for their crossover or a downturn, place an order to sell short below the low of the latest price bar. By the time Stochastic lines cross over, the market is often in a free fall. Once you are short, place a protective stop above the high of the trade day or the previous day, whichever is higher.
Do not buy when Stochastic is..., and don’t sell short when it is ....This rule filters out most bad trades.
What do the line direction of Stochastic lines indicate?
When both Stochastic lines are headed in the same direction, they con rm the short- term trend.When prices rise and both Stochastic lines rise, the uptrend is likely to continue.When prices slide and both Stochastic lines fall, the short-term downtrend is likely to continue.
Can I use Stochastic in any time frame?
You can use Stochastic in any timeframe, including weekly, daily, or intraday. Weekly Stochastic usually changes its direction one week prior to weekly MACD-Histogram. If weekly Stochastic turns, it warns you that MACD-Histogram is likely to turn the next week—time to tighten stops on existing positions or start taking pro ts.
Why is the width of the stochastic window important?
Choosing the width of the Stochastic window is important. Shorter-term oscillators are more sensitive. Longer-term oscillators turn only at important tops and bottoms. If you use Stochastic as a stand-alone oscillator, a longer Stochastic is preferable. If you use Stochastic as part of a trading system, combined with trend- following indicators, then a shorter Stochastic is preferable.
What is the type of indicator is the Relative Strength Index?
What does the Relative Strength Index (RSI) measure?
It measures any trading vehicle’s strength by monitoring changes in its closing prices. It’s a leading or a coincident indicator—never a laggard.
What does the Relative Strength Index identify?
RSI fluctuates between 0 and 100. When it reaches a peak and turns down, it identifies a top. When it falls and then turns up, it identifies a bottom.
What are the trading signals the Relative Strength Index gives?
RSI gives three types of trading signals. They are, in order of importance, diver- gences, chart patterns, and the level of RSI.
When RSI breaks above its downtrend line...
place an order to buy above the latest price peak to catch an upside breakout.
When RSI breaks below its uptrend line
place an order to sell short below the latest price low to catch a downside breakout.
What are the buy and short signals pertaining to RSI Levels?
When RSI rises above its upper reference line, it shows that bulls are strong but the market is overbought and entering its sell zone. When RSI declines below its lower reference line, it shows that bears are strong but the market is oversold and entering its buy zone.
Buy when RSI declines
below its lower reference line and then rallies above it.
ell short when RSI rises
above its upper reference line and then crosses below it.
What does Volume reflect?
Volume reflects the activity of traders and investors.
What does falling volume indicate?
When volume falls, it shows that the supply of losers is running low and a trend is ready to reverse. It happens after enough losers catch on to how wrong they are. Old losers keep bailing out, but fewer new ones come in. Falling volume is a sign that the trend is about to reverse.
What does a burst of extremely high volume indicate?
A burst of extremely high volume also gives a signal that a trend is nearing its end. It shows that masses of losers are bailing out.
What are volume spikes a sign of?
Volume spikes are more likely to signal an imminent reversal of a downtrend than an uptrend.Volume spikes in downtrends re ect explosions of fear. Fear is a power- ful but short-term emotion—people run fast, dump shares, and then the trend is likely to reverse.Volume spikes in uptrends are driven by greed, which is a slower- moving, happy emotion. There may be a slight pause in an uptrend after a volume spike, but then the trend is quite likely to resume.
Volume usually stays relatively low in
trading ranges because there is relatively little pain. People feel comfortable with small price changes, and at markets can drag on a long time.A breakout is often marked by a dramatic increase in volume because losers run for the exits.A breakout on low volume shows little emotional commitment to a new trend. It indicates that prices are likely to return into their trading range.
Rising volume during a rally shows that
more buyers and short sellers are pouring in. Buyers are eager to buy even if they have to pay up, and shorts are eager to sell to them. Rising volume shows that losers who leave are being replaced by a new crop of losers.
When volume shrinks during a rally
it shows that bulls are becoming less eager, while bears are no longer running for cover.The intelligent bears have left long ago, followed by weak bears who could not take the pain. Falling volume shows that fuel is being removed from the uptrend and it’s ready to reverse.
When volume dries up during a decline,
it shows that bears are less eager to sell short, while bulls are no longer running for the exits.The intelligent bulls have sold long ago, and the weak bulls have been shaken out. Falling volume shows that the remaining bulls have greater pain tolerance. Perhaps they have deeper pockets or bought later in the decline, or both. Falling volume identi es an area in which a downtrend is likely to reverse.
Volume rule of thumb:
if today’s volume is higher than yesterday’s, then today’s trend is likely to continue.
Are the terms “high volume” and “low volume” relative or absolute?
As a rule of thumb, “high volume” for any given market is at least ... percent above its average for the past two weeks, while “low volume” is at least ... percent below average.
What does is mean if prices rise to a new peak and volume reaches a new high?
If prices rise to a new peak and volume reaches a new high, then prices are likely to retest or exceed that peak.
High volume confirms trends.
If the market falls to a new low and the volume reaches a new high,
that bottom is likely to be retested or exceeded. A very high volume “climax bottom” is almost always retested on low volume, o ering an excellent buying opportunity.
If volume shrinks while a trend continues,
that trend is ripe for a reversal.When a market rises to a new peak on lower volume than its previous peak, look to take pro ts on a long position and/or for a shorting opportunity.This technique does not work as well in downtrends because a decline can persist on low volume. There is a saying on Wall Street:“It takes buying to put prices up, but they can fall of their own weight.”
What is On-Balance Volume?
OBV is a running total of volume. Each day’s volume is added or subtracted, depending on whether prices close higher or lower than on the previous day. When a stock closes higher, it shows that bulls won the day’s battle; that day’s volume is added to OBV. When a stock closes lower, it shows that bears won the day, and that day’s volume is subtracted from OBV. If prices close unchanged, OBV stays unchanged. On-Balance Volume often rises or falls before prices, acting as a leading indicator.
When OBV reaches a new high...
it confirms the power of bulls, indicates that prices are likely to continue to rise, and gives a buy signal.
When OBV falls bellow its previous low...
it confirms the power of bears, calls for lower prices ahead, and gives a signal to sell short.
OBV gives its strongest buy and sell signals when it
diverges from prices. If prices rally, sell off , and then rise to a new high, but OBV rallies to a lower high, it creates a bearish divergence and gives a sell signal. If prices decline, rebound, and then fall to a new low, but OBV falls to a more shallow bottom, it traces a bullish divergence and gives a buy signal. Long-term divergences are more im- portant than the short-term ones. Divergences that develop over the course of several weeks give stronger signals than those created over a few days.
When prices are in a trading range and OBV breaks out to a new high,
it gives a buy signal.
When prices are in a trading range and OBV breaks down and falls to a new low,
it gives a signal to sell short.
What is the Accumulation/Distribution indicator?
it tracks the relationship between opening and closing prices, in addition to volume.
When the market opens low and closes high, it moves from weakness to strength. That’s when A/D rises and signals that market professionals are more bullish than amateurs, and the up move is...
likely to continue.
When A/D falls, it shows that mar- ket professionals are more bearish than amateurs.When the market weakens during the day, it’s likely...
to reach a lower low in the days to come.
The best trading signals are given by divergences between A/D and...
If prices rally to a new high but A/D reaches a lower peak, it gives a signal to ...
A bullish divergence occurs when prices fall to a new low
but A/D bottoms out at a higher low than during its previous decline.
What type of indicator is the Force Index?
What does the force index show?
It combines volume with prices to discover the force of bulls or bears behind every rally or decline.
What three factors does the Force Index bring together?
It brings together three essential pieces of information—the direction of price change, its extent (distance), and the volume during that change
When does a Force Index especially stand out?
Force Index can be used in its raw form, but its signals stand out much more clearly if we smooth it with a moving average. Using a short EMA of Force Index helps pinpoint entry and exit points. Using a longer EMA helps con rm trends and recognize important reversals.
What is the window frame of an intermediate-term force index?
a 13-day EMA
What does an intermediate-term force index identify?
A 13-day EMA of Force Index identifies longer-term changes in the balance of power between bulls and bears. When it rises above zero, the bulls are stronger, and when it falls below zero, the bears are in charge. Its divergences from prices identify intermediate and even major turning points. Its spikes, especially near the bottoms, mark approaching trend reversals.
How many time frames should you use to analyse the markets?
The proper way to analyze any market is to review at least two neighboring time- frames.You must always start with the longer timeframe for a strategic view and then switch to the shorter timeframe for tactical timing.
What trading-timeframes are there?
-Long-term trading or investing
What are the advantages of long-term trading?
requires little day-to-day attention and may lead to spectacular gains.
What are the disadvantages of long-term trading?
drawdowns can be intolerably severe.
What are the advantages of swing trading?
a wealth of trading opportunities, fairly tight risk control.
What are the disadvantages of swing trading?
will miss major trends.
What are the advantages of day trading?
great many opportunities, no overnight risk.
What are the disadvantages of day trading?
demands instant re exes; transaction costs become a factor.
What is the expected duration of long term trading or investing?
The expected duration of a position is measured in months, sometimes years.
What is the expected duration of swing trading?
The expected duration of a trade is measured in days, some- times weeks.
What is the expected duration of day trading?
The expected duration of a trade is measured in minutes, rarely hours.
How can you combine fundamental analysis and technical analysis?
Fundamental analysis can help you nd a stock that may be worth buying. Use
technical analysis to time your entries and exits. Be prepared to buy and sell more than once during a major uptrend.
How can you turn yourself into your own instructor?
One of the best learning techniques involves returning to your closed-out trades two months later and replotting their charts.Trading signals that looked foggy when you saw them at the right edge of the screen become clear when you see them in the middle of your chart. Now, with the passage of time, you can easily see what worked and what mistakes you may have made. Creating these follow-up charts teaches you what to repeat and what to avoid in the future. Updating the charts of closed trades turns you into your own instructor.
What do general market indicators do?
They analyze the entire market rather than any specific stock.
Why are general market indicators worth following?
General market trends are responsible for as much as half the movement in individual stocks.
What does the New High - New Low Index (NH-NL) track?
The NH-NL tracks the behavior of market leaders by subtracting the number of New Lows from the New Highs. In my experience, NH-NL is the best leading indicator of the stock market.
When is the NH-NL positive and plotted above the centerline?
on days when there are more new highs than new lows.
When is the NH-NL negative and plotted below the centerline?
On days when there are more new lows than new highs.
When does NH-NL equal zero?
If the numbers of new highs and new lows are equal.
When does a stock appear on the list of new highs in the NH-NL?
When it's the strongest it's been in a year.
When does a stock appear on the list of new lows in the NH-NL?
When it's the weakest it's been in a year.
If the market relies to a new high and NH-NL climbs to a new peak, it shows that bullish leadership is growing and the uptrend is likely to..
If the market rallies but NH-NL shrinks, it shows...
that the leadership is becoming weak and the uptrend is in danger.
A new low in NH-NL shows that the downtrend is...
well led and likely to persist.
If stocks fall but NH-NL turns up, it shows that officers are no longer running, and the whole regiment is likely to...
When NH-NL is above its centerline, it shows that more market leaders are ...
bullish than bearish and it is better to trade form the long side. NH-NL can stay above its centerline for months at a time in bull markets.
When NH-NL is below its centerline, it shows that bearish leadership is ...
stronger, and it's better to trade from the short side. NH-NL can stay bellow its centerline for months at a time in bear markets.
If NH-NL stays negative for several months but then rallies above its centerline, it signals that ..
a bull move is likely to begin. It is time to look for buying opportunities, using oscillators for precise timing.
If NH-NL stays positive for several months but then falls below its centerline, it shows that a ...
bear move is likely to begin. It is time to look for shorting opportunities using oscillators for precise timing.
A rise in NH-NL shows that it's safe...
to hold long positions and add to them.
If NH-NL declines while the broad market stays flat or rallies,
it is time to take profits on long trades.
If NH-NL rises on a flat day, it gives ...
a bullish message and gives a buy signal.
When NH-NL falls on a flat day, it gives a ...
signal to sell short.
Divergences between the patterns of NH-NL and broad market indexes show that
leaders are deserting and the trends are likely to reverse?
What if in NH-NL the second peak of a bearish divergence is only slightly above zero (center line), in the low hundreds?
A big reversal is probably at hand and it's time to go short
What if in NH-NL the second peak of a bearish divergence is in the high hundreds?
The upside leadership is strong enough to prevent the market from collapsing
What if in NH-NL the latest shallow of a bullish divergence is shallow, in the low hundreds?
It show that the bearish leadership is exhausted and a major upside reversal is near.
What if in NH-NL the latest shallow of a bullish divergence is deep?
Then bears still have some strength, and the downtrend may pause but not reverse.
What is the advantage of weekly NH-NL in comparison to daily NH_NL?
The weekly NH_NL helps confirm major stock market trends and identify, major reversals.
When the weekly NH-NL drops below minus 4000 and then rallies above that level, it delivers
major buy signals.
When the weekly NH-NL rises above plus 2500 it confirms
When the tops or bottoms of weekly NH-NL diverge from price patters, the signal
How are the 65-day and 20-day NH-NL different to the regular daily NH-NL?
The 20-day NH-NL compares each day's high and low to the high-low range for the preceding month and the 65-day to the preceding quarter
What is the Stocks above 50-day MA indicator?
It tracks all stocks traded on the NYSE, American Exchange and NASDAQ and calculates how many of them trade above their moving averages.
How is the Stocks above 50-day MA indicator plotted?
It plots the percentage as a line that fluctuates between 0% and 100%.
A weekly chart of stocks above 50-day MA helps...
catch intermediate reversals- market turns that augur in trends that last anywhere from several weeks to several months. You don't need to look at this indicator daily, but it can be an important part of weekend homework
The percentage of stocks above their 50-day MA gives its trading signals not by reaching any certain levels but rather by...
reversing newer those levels.
What do Consensus indicators draw attention to?
Consensus indicators, also called contrary opinion indicators, are not suitable for precision timing, but they draw attention to the fact that trend is near its exhaustion level. When you see that message, with to technical indicators for more precise timing of a trend reversal
Why must the majority be wrong at the market's turning points?
Prices are established by crowds, and by the time the majority turns bullish, there aren't enough new buyers to support a bull market
What is the CFTC and what do they report?
The Commodity Futures Trading Commission reports long and short positions of hedgers and big speculators
What is a hedger?
An investor who takes steps to reduce the risk of an investment by making an offsetting investment. There are a large number of hedging strategies that a hedger can use. Hedgers may reduce risk, but in doing so they also reduce their profit potential. Hedgers - the commercial producers and consumers of commodities - are the most successful market participants.
What is the SEC and what do they report?
The Securities and Exchange Commission reports purchases and sales by corporate insiders. Officers of publicly traded companies know when to buy or sell their shares.
When do officers and investors have to report their buying and selling to Securities and Exchange Commission?
Officers and investors who hold more than 5% of the shares in a publicly traded company. The SEC tabulates insider purchases and sales, and releases this data to the public
Does buying or selling by a single insider matter?
No, analysts who researched legal insider trading found that insider buying or selling was meaningful only if more than three executives or large stockholders bought or sold within a month.
What is a stock's float?
the total number of publicly owned shares available for trading
What is the Short Percent of Float?
the number of shares held short, which tends to run about one or two percent
What is the Days to Cover number?
If all shorts decided to cover, wile all other buyers stood aside and daily volume remained unchanged, how many day would it take for them to cover and bring short interest down to zero. The number normally oscillates between one and two days.
What information do the Short Percent of Float and Days to Cover number of a stock give us?
When planning buy or short a stock, it pays to check its Short Percent of Float and Days to Cover: If those are high, they show that the bearish side is overcrowded
What is a trading system?
A system is a set of rules for finding, entering, and exiting trades.
What is a mechanical trader?
A trader who uses strictly defined systems that leave very little room for personal judgement
What is a discretionary trader?
Traders who use systems that leave plenty of room for personal decisions.
What is backtesting?
apply your system's rules to a stretch of historical data, usually several years' worth
What is forward-testing?
trade small positions with real money. Serious traders begin with backtesting, and if its results look good, switch to forward-testing; if that works well, they gradually increase portion size
What is one-bar-at-a-time testing?
It consists of going through historical data one day at a time. scrupulously writing down your trading signals for the day ahead, and then clicking one bar forward and recording new signals and trades for the next day. The best of the three methods in preparation for the stock market.
What is paper trading?
Paper trading means recording your buy and sell decisions and tracking them like real trades, but with no money at risk. There is only one good reason to paper trade- to test your discipline as well as your system
What's your intermediate time frame?
Your favorite time frame to trade in?
What's the long-term time frame?
one order of magnitude longer than the intermediate time frame
What's the short-term time frame?
One order of magnitude shorter than the intermediate time frame
In the Triple Screen Trading System which time frame do you look at first?
First examine the long-term timeframe to make your strategic decision there
What is the purpose first screen of the Triple Screen Trading System?
To identify the weekly trend using a trend-following indicator and trade only in its direction
What do you do in the second scree of the Triple Screen Trading System?
The second screen applies oscillators to the daily charts in order to identify deviations from the weekly trend i.e. use daily declines during weekly uptrends to find buying opportunities and daily rallies during weekly downtrends to find shorting opportunities.
What is the third screen in the triple screen trading system?
The third screen is your entry technique. You can go to an even shorter time-frame or you can use the same intermediate timeframe
When do you place a buy order with the triple screen trading system?
When the weekly trends is up and a daily oscillator declines, place a buy order below the fast EMA on the daily chart, at a level of an average downside penetration
What is the impulse system?
It is a censorship system, using EMA and MACD-Histogram to tell you what not to do. If the bars are red: no buying allowed; if the bars are green no shorting allowed.
How do you use the impulse system in your overall strategy?
Develop trading plans based on any number of ideas, signals, or indicators - and then the Impulse system forces you to wait until it no longer prohibits an entry in the planned direction. In addition, the Impulse system helps recognize when a trend starts weakening and suggests an exit.
What is a good measure of inertia in the impulse system?
A good measure of the inertia of any trading vehicle is the slope of its fast EMA. A rising EMA reflects bullish inertia, while a falling EMA reflects bearish inertia.
How is the power reflected in the impulse system?
The power of any trend is reflects in the slope of MACD-Historgram
When do the red and green bars of the impulse system appear?
Green and red bars of the impulse system show when both inertia and power are pointing in the same direction.
What are the best trading signal in the impulse system when trying to catch market turns?
When trying to catch market turns, the best trading signals are given not by green or red but by the loss of green or red colors.
When should a swing trader exit a trade according to the impulse system?
A swing trader may stay in a trade, even if one of the timeframes turns blue. What he should never do is sty in a trade agains the color. If you're long, and one of the timeframes turns red, it its time to sell and go back to the sidelines.
What do channels help identify?
Channels help identify buying and selling opportunities
How do you construct a channel?
You construct a channel by plotting two lines parallel to a moving average: one above and another below
What do channels mark?
Channels mark the boundaries between normal and abnormal price action. It is normal for prices to stay inside a well drawn channel, and only unusual events push them outside. The market is undervalued below its lower channel line and overvalued above its upper channel line
What's a good width for a channel?
When setting a channel for any market, start with 3% or 5% of the EMA and keep adjusting those values until the channel contains approximately 95% of all price data for the past 100 bars, about five months on the daily chart.
What are the two trading rules for trading using standalone moving average channels?
1. Draw a moving average and build a channel around it. When a channel is relatively flat, the market is almost always a good buy near the bottom of tis trading channel and good sell near the top
2. Wehen the trend turns up and a channel rises sharply, an upside penetration of the upper channel line shows very strong bullish momentum. It indicates that you will probably have one more chance to sell in the area of the highs that are being made. It is normal of the market to return to its moving average after an upside penetration, offering can excellent buying opportunity. Sell your long position when the market returns to the top of the channel
What's a good indicator to combine with channels?
Combining channels and divergences . Indicators give some of their strongest signals when the diverge from prices
What's unique about standard deviation channels (Bollinger Bands)?
The unique feature of these channels is that their width changes in response to market volatility.
What is a typical emotional mistake for an newbie?
Counting money in open trades. Thinking about money interferes with decision making. Professionals focus on managing trades; they count money only after those trades are closed
What is innumeracy?
The inability to count or understand the basic notions of probability- is a fatal weakness for traders
What is a "businessman's risk"
The amount of risk exposes the investor only to a minor equity drop. A loss, on the other hand, may threaten an account's health and even survival
What are the two quick ways to ruin an account?
Not to using stops and putting on trades that are too large for that account's size
What is the Two Percent Rule?
The 2% Rule prohibits you from risking more than 2% of your account equity on any single trade.
Why is risk management important for success?
Because good market analysis alone will not make you a winner. The ability to find good trades will not guarantee success. Markets are full of good analysts who destroy their accounts. You can profit from your research only if you protect yourself from sharks
To what do the 2% apply to?
The rule applies only to money in your trading account. It doesn't include your savings, equity in your house...
What is the 6% rule?
The 6% Rule prohibits you from opening any new trades for the rest of the month when the sum of you losses for the current month and the risks in open trades reach 6% of your account equity
What is the open risk on trades?
The dollar risk of any open position is the distance from your entry to the current stop, multiplied b y the trade size. If the trade starts going your way and you move your stop to breakeven, your open risk will become zero.
Why is the 6% rule important?
That limit - risking no more than 6% of your account equity in any given month - keeps your total risk under control, ensuring long-term survival.
What is the first question you should ask yourself before considering a new trade?
Considering all my open and closed trades for this month, do I have enough available risk for this trade?
How big should your potential reward be in relation to your risk?
Your potential reward should be at least twice as big as your risk
Why is trading without target fatal?
His emotions will prime him to act at the worst possible times: continue to hold and add to his longs at the top and sell out own disgust near the bottom
What are the two components all market moves?
signal and noise.
What is market noise?
When the trend is up, we can define noise as that part of each day's range that protrudes below that previous day's low. When the trend is down, we can define noise as that part of each day's range that orptruedes above the previous day's high
What is market signal?
signal is the trend of your stock.
What are SafeZone stops?
Use the slope of a 22-day EMA to define the trend. If the trend is up, mark all downside penetrations of the EMA during the look-back period (10-20days), add their depths, and divide the sum by the number of penetrations. This gives you the Average Downside Penetration for the selected look-back period. You want to place your stops father away from the market than the average level of noise. That-'s why you need to multiply an Average Downside Penetrate by a factor of two or greater
Ist the SafeZone for stops a mechanical gadget?
No, SafeZone is not a mechanical gadget to replace independent thought? You have to establish the look back-period, the wind of time during which SafeZone is calculated. You also need to fine-tune the coefficient by which you multiply the average penetration, so that your stop goes outside of the normal noise level
What is Nic's stop?
He invented this method of placing a top not near the lowest low, but at the second lower (more shallow) low
What are the most import principles with placing stops?
-don't place them at obvious levels, easily visible to anyone looking at that chart (also not at round numbers)
What are Average True Range stops?
When you enter doing a price bar, place your stop at least one ATR away form the extreme of that bar. A two ATR stop is even safer. You can sue it as a trailing stop, moving it at every bar
How can signal and noise help you with finding good entries into trades?
If you see a stock in a strong trend but don’t like to chase prices, drop down one timeframe. For example, if the weekly trend is up, switch to the daily chart, and you’ll probably see that once every few weeks, it has a pullback below the value zone. Measure the depths of several recent penetrations below the slow EMA to calculate an average penetration. Place a buy order for the day ahead at that distance below the EMA and keep adjusting it every day.You will use a splash of noisy behavior to get a good entry into a trend- following trade.
What should you do after your stock begins making a profit?
Never let an open trade that shows a decent paper profit turn into a loss! Before you put on a trades start planning at what level you'll begin protecting you profits. For example, if your pro t target for that trade is about $1,000, you may decide that a pro t of $300 will need to be protected. Once your open pro t rises to $300, you’ll move your protective stop to a breakeven level. I call that move “cu ng the trade.”
Should you give a trade "more room" to a losing trade by adjusting the stop?
Never, the logical thing to do when a trade start acting badly is to accept a small loss. Move your stop only in the direction of your trade. Continue to monitor that stock and be ready to buy it again if it bottoms out. Persis- tence pays, commissions are cheap, and professional traders often take several quick stabs at a trade before it starts running in their favor.
How do you calculate your buy grade?
(high - buy point)/ (high - low)
How do you calculate your sell grade?
(sell point - low) / (high-low)
How do you calculate your trade grade?
(sell-buy) / (channel high - channel low)
What does the question "Is this an A-trade" entail?
You need to have a clear idea of what would be a perfect setup for you, “an A-trade.” Perfect doesn’t guarantee pro ts—there are no guarantees in the market—but it means a setup with a strong positive expectation. It also means something you’ve traded before with which you are comfortable. Once you know what it is, you can start looking for stocks that exhibit that pattern.
What does scanning mean?
Scanning means reviewing a group of trading vehicles and zooming in on trading candidates. Your scanning can be visual or computerized: you may ip through mul- tiple charts, taking a quick glance at each, or else have your computer run through that list and ag stocks whose patterns appeal to you.To repeat, de ning a pattern you trust must be your rst step, scanning a more distant second.