Archive for the ‘All Tutorials’ Category
The Dow Theory: Part II
This article will start by mentioning some of the shortcomings of the Dow Theory, which is explained in detail in: My First Post Examining Dow Theory. For example, the Dow Theory, on average, might miss around 20 to 25% of a move before generating a signal identifying it. For many traders this is too late. A Dow Theory buy signal usually occurs in the second phase of an uptrend as the price penetrates a previous intermediate peak. This is about where most of the trend following technical systems begin to identify the existing trends.
There is never a time when the Dow Theory does not lend itself to presumptions as to questions concerning the direction of the primary trend, because this is an area that is highly prone to misjudgment, particularly at the beginning of each major trend and ensuing for a short time after when the answer given by Dow will usually be prove wrong. There will be a certain time then when the Primary Trend will be up according to Dow, but analysts may advise not to invest at that stage because the looks of the trend are showing on the trend being diminished somewhat and the smart investor better stay out, and the one who is already invested may wish to opt out at this point, being that there is a larger chance that the trend will fail.
However as you see in the Chart below, one can do pretty nicely for himself over the years if he buys and sells only of Dow Theory signals:
Share and Enjoy
The Dow Theory: Part I
The Dow Theory is a major corner stone of Technical Analysis. It is one of the oldest and best known methods used to determine the major trend of stock prices. It was derived from the writings of Charles H. Dow as published in the newspaper he founded, “The Wall Street Journal”. It was later refined further by analysts and writers during the first few decades of the 20th century.
Seven Basic Principles of Dow’s Theory:
The Dow Jones Industrial Average and the Dow Jones Transportation Average reflect all information, experience, knowledge, opinions and activities of all stock market investors. Therefore, everything that could possibly affect the demand for or supply of stocks is not worthy of consideration.
There are 3 trends in stock prices. The Primary Tide is the major long-term trend. But no trend moves in a straight line for long, and therefore there come up Secondary Reactions in the form of intermediate-term corrections that interrupt and move in an opposite direction against the Primary Tide. Within these are Ripples, or minor day-to-day fluctuations that are or concern only to short-term traders and not Dow Theorists at all.
When the Primary Tide is upward pointing, this is also known as a “Bull Market”, there are usually three upwards pushes in stock prices. The first move up is the result of far-sighted investors accumulating stocks at a time when business is slow but anticipated to improve. The second move up is a result of investors buying stocks in reaction to improved fundamental business conditions and increasing corporate earnings. The final upwards push occurs when the general public finally notices that all the financial news is good. During this move there is usually rampant speculation seen.
When the Primary Tide is downward pointing, this is also known as a “Bear Market”, there are usually three downwards pushes in stock prices. The first push down occurs when far-sighted investors sell based on their experienced judgment that high valuations and booming corporate earnings are unsustainable. The second move down reflects panic as a now fearful public dumps at any price the same stock they just recently bought at much higher prices. The final push down results from distress selling and the need to raise cash.
The two Averages must confirm each other. To signal a Primary Tide Bull Market major trend, both Averages must rise above the latest highs made by their previous Secondary Reactions. To signal a Primary Tide Bear Market major trend, both the DJIA and DJTA must drop below their last Secondary Reaction lows. One average meeting these conditions alone in meaningless, but it is not uncommon for one Average to signal a change in trend before the other, with no set time limit as to when the second Average gives the trend confirmation.
Only end-of-day, closing prices on the Averages are considered. Intra-day price movements are ignored.
The end of a Primary Tide is confirmed only after being signaled by both Averages.
The next article will focus on some of the shortcomings of this Historic Theory.
Share and Enjoy
How To Minimize Stock Market Risks?
Irrespective of whether you are a beginner or a seasoned stock market investor, there is one universal question that every one is trying to grapple with, ‘How to minimize stock market risks?’
This, in other words tells us that risks are inherent in stock market investments and that we cannot do anything to avoid it completely but only minimize the risk factors. Here are a few tips that will help you minimize your stock market risks.
First take time to learn the basics. When you are new to stock market investments and when you are venturing into the stock market, give yourself enough time to understand how the stock market works and what are the different problem areas, etc. Poor basics in the stock market will always keep you an amateur stock investor. You must also learn different approaches that are used by successful stock marketers.
Secondly, before you go to your desk, do your homework. Never approach your stock investments without first studying the current trends. Many people make the mistake of considering stock markets as a gamble. In gambling you will rely completely on your luck and there is no reasoning involved. Here in stock market trading, reasoning and analysis are the key elements. So Technical Analysis should never be forgotten. You will have to start your analysis of the market from day one. You cannot wait to become an expert trader before you can start learning Technical Analysis because without trying you will never become one.
Thirdly, improve your ability to connect various happenings around your market and deduce your conclusions based on the prevailing trends. Remember, the stock market is affected by many factors. So, depending on the stocks you choose you should know the factors that affect your stocks and you should keep a close tab on such factors.
Fourthly, always make a basis for all your decisions on stock market analysis and not on your emotions. Never make hasty decisions when you are panicked. When you are panicking, your reasoning abilities will be diminished. So decisions made in such situations cannot be sound stock market decisions.
The next and most important factor is finding all the help you can get. To achieve this you should find reliable resources that you can use to make sound stock market decisions. There are number of resources available both on-line and off-line. Try to make use of those resources prudently so that you will have a wider understanding of the stock market. Though there are many resources on the web, not all resources are equally effective in imparting you with the best information. So carefully choose your on-line stock market resources so that you will not be misled in any way.
By following the above basic tips you will be able to minimize your stock market risks to a great extent.
Share and Enjoy
Triangles, Flags, Fans and Pennants
This is a kind of a short-worded article. Even though I truly enjoy writing, I have to stop here and let the Charts speak for themselves. In a previous post I showed a recent symmetric triangle that the S&P 500 took. Below you see a similar triangle, this time Cattle Feed Futures from the Chicago Mercantile Exchange, the C.M.E. After you will see an example of an upwards-pointed triangle, also from the C.M.E Cattle Feed Charts. Then you see the downwards pointed triangle, this time–yes its the C.M.E again, but Orange Juice Futures instead.
The Flags in the 4th Chart are the present of System Flash Disk Pioneers, the Intra-day Chart from sometime in 2004, in the 60 minute time-frames. All about time frames in a future lesson, there are a few things to make clear about them and I’ll save them for the near future. Last is a nice, colorful chart from about 3 weeks ago showing the USO, or US Oil Fund, an equity E.T.F shown here both at the daily (left) and weekly (right) charts. It shows a Fan sloping outwards as fans tend to do.
Don’t worry, the explanation of dealing with all theses object of art, and truly Technical Analysis is also an art form besides being a Science, is forthcoming. By dealing with I only mean one thing, trading based on them; or rather their breakout periods and how also to determine breakout. Meanwhile, enjoy the art show and try to see what conclusions you can draw yourselves from what you see. This is truly a homework lesson, so take it seriously!.
These are, in order:
This is the way a Symmetric Triangle looks
This is the way an upwards-pointed triangle looks:
This is the way a downwards pointed Triangle looks
This is the way flags look, the pole being an extremely long Candle:
This is the way another type of symmetric triangle looks–long and thin:
This is the way Fans look, check the large one on the right side.
Like I wrote before, there is more to be said about trading using these patterns and I intend to say a lot more in future Tutorials.
Share and Enjoy
Do you Know a Sure Thing When You See One?
This advanced lesson will teach you the Know Sure Thing. This happens to be an indicator that is a complex, smoothed price velocity momentum indicator. This is a price velocity indicator that shows the rate of change in the prices over a moving average and weighted to give more recent data precedence. If it is used wisely, makes investing choices easier for even the most experienced. It was developed by Martin J. Pring and described in his book Martin Pring on Market Momentum, McGraw Hill 1993. Before you go jumping to conclusions, there IS no sure thing, as Pring points out, “it’s also important to know that this approach is not a sure thing.” But since there are better indicators available to us, we continue to search for the best method.
The KST can be used as a buy signal when the oscillating lines shown below cross each other going upwards. The sell signal is indicated when the lines seem to peak and come into a horizontal position, more or less. This is my approach, it is rather simple but it can give you more than 65% chance of having a profitable investment, more so when used for long term investment.
The KST seems to work, on the Charts I’ve tried it on, and may be useful to those who can get the formula and build the indicator in MetaStock version 11.0.
If you’re interested, this is MetaStock’s code for the KST indicator:
Periods:= Input(“Enter the number of periods”, 1,9999,1);
((1*Mov(((C/Ref(C,-(9*periods)))*100),(6*periods),E)
+2*(Mov(((C/Ref(C,-(12*periods)))*100),(12*periods),E))
+3*(Mov(((C/Ref(C,-(18*periods)))*100),(6*periods),E))
+4*(Mov(((C/Ref(C,-(24*periods)))*100),(6*periods),E)))
/10)-100;Mov(
((1**(Mov(((C/Ref(C,-(9*periods)))*100),(6*periods),E)
+2*(Mov(((C/RefC,-(12*+periods)))*100),(6*periods),E))
+3*(Mov(((C/RefC,-(18*periods)))*100),(6*periods),E))
+4*(Mov(((C/RefC,-(24*periods)))*100),(9*periods),E))
)/10-100,(9*periods),E);Input(“Plot a horizontal line at “,-100,100,0);
To get this indicator working, you must type the above code in the Equis Metastock 11.0 Charting Software at the Indicator Builder Option. Below is an example of It being used on Fannie Mae. Note that both red lines below the Chart have bowed into a horizontal position. This seems a time to sell, but never short-sell on this indicator, as that is not one of its defined uses.
produced by MetaStock (www.equis.com)
Share and Enjoy
Understanding the RMO Oscillator
The Rahul Mohindar Oscillator can be used across any time frame and for any financial instrument. It is designed to work with both Bar Charts and Japanese Candlestick Charts. This indicator is a gauge as to market direction and can be a primary trend indicator in many trading systems.
The RMO is displayed as a histogram. As a bullish “buy” sign, we will look for the point at which the histogram shows movement crossing the oscillator’s zero line going upwards. If it should go down and cross the line going down, that would be our “sell” sign, or a “short-sell” sign.
The complete trading system is available through the Equis International MetaStock Charting Software. An example of the complete, 5 step method is shown in the Chart below.
This is the way the Charted RMO Trading Model looks using Apple Computers(AAPL):
published by MetaStock(www.equis.com)
The RMO Oscillator, explained above, is the green graph shown at the top window of the Chart. This indicator is the first gauge as to the market direction. Once the primary trend is determined, the second window should be observed.
The second window of the Chart contains Swing Trade 2 in pink, and Swing Trade 3, which is purple. These two indicators are designed to help us see the medium term and the long term trends. The pink histogram (Swing Trade 2) represents the medium term trend and the purple histogram (Swing Trade 3) represents the long term trend. When the histograms cross each other, it represents a change in the strength of the trend.
Moving forward past the third window for the while, we see the blue and red Bar Chart below it. The red and blue alert arrows and the color of the bars on the Bar Chart represent the crossing points of the Swing Trade 2 and Swing Trade 3 histograms. These signify a change in the strength of the trend. Blue bars are taken as bullish signals, while Red bars are bearish.
To enter a long buy or exit a short sell position, three conditions must be met:
1. The RMO is currently above zero.
2. The most recent alert arrow must be blue.
3. The price bars on the Bar Chart must have become blue at or before the examined time frame.
To enter a short-sell or exit a position, the reverse must be true on all three conditions.
Now to the third window that we skipped before. This is the exit swing indicator and gives added protection when applying stops by having us put in a trailing stop at certain situations. The rules for applying this is that first you must be invested and in a profitable position. If you are in a long position, for example, and this indicator falls below the red horizontal line demarcating the chart, consider putting a trailing stop below the trade. And if this indicator, called the exit swing indicator crosses above the blue line demarcating the chart, consider putting a trailing stop above your short sell position.
This is just one example of the many different and complex trading methods in the Science of Technical Analysis. It has a whole realm on to itself that can never be beat by any other method of Market Analysis for success rate, popularity and enthusiasm which investors using it see. This world must be examined by all who wish to invest and those who put it off or blame it for certain disasters speak from a stance of utter ignorance of the Science, for if they examined even the simplest line studies, they would know the truth.