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ow are Portuguese bond yields? Is the
European Central Bank (ECB) going to
keep interest rates as they are? How is Chinas
economy faring? Is the euro still fragile? The
answers to these questions and many more
are what foreign-currency traders need to
know if they intend to navigate todays 24-
hour market that is dominated by institutional
traders. Its overwhelming, without a doubt,
but a signifcant event in one country can impact the economy of another. As with
anything, over time, youll see similar patterns playing themselves out and youll
be able to connect the dots and assimilate that information in such a way that it
creates a positive impact on your trading.
The Federal Reserve has suggested they may end their quantitative easing (QE)
as early as 2014. This has sparked some optimism in the US markets. We have seen
some growth in the US economy there are signs of a housing recovery, slow and
steady growth in the jobs market, and an increase in manufacturing activity. This
economic growth is mild, but we have seen a slight rise in the 10-year Treasury yields
as well as a rally in the US dollar. If the trend in the Treasury yields continues, it is
likely that we can see more capital being invested in the US, which will contribute
to a further rise in the value of the US dollar. But a rise in the US dollar could have
a negative impact on the earnings of multinational companies. And a slowdown or
end to QE in the US could have a negative impact on other countries.
September 2013 Volume 31, Number 10
OPENING POSITION
8 March 2006 Technical Analysis of STOCKS & COMMODITIES
Jayanthi Gopalakrishnan,
Editor
O
EDITORIAL
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So
nce again we got a reminder of just
how sensitive the financial markets
are. We saw a major selloff in the Japanese
markets, which as expected triggered a
domino effect on markets throughout the
world. Add disappointing earnings numbers
from US corporations and you have a situa-
tion that just got worse. So what started off as
a strong year ended up correcting, and rather
rapidly. I must admit that although correc-
tions are healthy for any market, when you have a 2% drop, it gets you thinking.
Prior to the Federal Reserves FOMC meeting, I usually take a look at the yield
curve. At present, its looking a little flat, and given that the general consensus
is that the Fed is going to tighten at their January 31st meeting, I am concerned
that the yield curve may be heading in the direction of being inverted. And if that
were to happen, that would not be a good sign for the US economy. Im not
suggesting that we are going to go through a recessionary period. But given that
almost anything can happen, it doesnt hurt to expect the worst. If nothing else,
it helps to preserve your capital.
with that in mind, you can see why its important to design a trading
system that gets you out of the market at the right time. When access to
the markets is easy, the number of options available increases. This makes it
important to be thorough with the different types of orders, front-end software, and
trading systems that are out there. Lee Leibfarth, in his article The Automated
Daytrader starting on page 22, addresses the various options that are available and
how you can take advantage of them.
But before getting to the stage of placing that trade, you need to understand the
market you are trading. You should be able to do so after reading Paolo Pezzuttis
Understanding Market Structure. The markets follow different behavior pat-
terns, and you need to determine if it is volatile, trending, in a trading range, moving
strongly in one direction, or moving but not with much momentum.
Only when you know what the structure of the market is will you be able to apply
the correct trading technique. But thats just the first step. You still have to have
discipline, as you will find out after reading this months Technical Analysis of
STOCKS & COMMODITIES interview with Ken Tower. Only then will you be able to
know when to exit.
Heres to smart trading!
+0603 Opening Position 1/24/06, 9:48 AM 1
8 September 2013 Technical Analysis of STOCKS & COMMODITIES
H
I
ntermarket relationships abound, and they dont necessarily have the same
end result each time they occur. This makes it necessary to really understand
how markets behave, how they impact other markets, and how you can distill the
information to take advantage of it in your trading. Its a challenge and may be
enough to turn you away from trading the currency markets. However, once you
fgure out a way to narrow down all this information and apply it to your trading,
the act of placing those entries and exits may just be a matter of looking at a few
simple indicators.
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THESE RESULTS ARE BASED ON SIMULATED OR HYPOTHETICAL PERFORMANCE RESULTS THAT HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE THE RESULTS SHOWN IN AN ACTUAL PER-
FORMANCE RECORD, THESE RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, BECAUSE THESE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THESE RESULTS MAY HAVE UNDER-OR
OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED OR HYPOTHETICAL TRADING PROGRAMS IN GENERAL ARE ALSO
SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR
LOSSES SIMILAR TO THESE BEING SHOWN. THE TESTIMONIAL MAY NOT BE REPRESENTATIVE OF THE EXPERIENCE OF OTHER CLIENTS AND THE TESTIMONIAL IS NO GUARANTEE OF FUTURE
PERFORMANCE OR SUCCESS. TECHNICAL ANALYSIS OF STOCKS & COMMODITIES LOGO AND AWARD ARE TRADEMARKS OF TECHNICAL ANALYSIS, INC.
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10 September 2013 Technical Analysis of STOCKS & COMMODITIES
Author Sylvain Vervoort replies:
1. Days 1 & 2 are not important. I am
simply trying to show the lowest low and
highest high.
2. For the upstep and downstep pattern,
the last candle has to open inside the
body of the previous candle; whether
there are wicks or not is not important
for the pattern.
3. There are some differences. For ex-
ample, in scenario 1 in the upstep pattern,
the second-to-last candle represents the
lowest low. In scenario 3, the lowest low
is represented by the last candle.
TRADING CONTESTS
Editor,
Is there a back issue that covers any
trading contests or that names the best
top traders? Have you published any
ratings or do you offer any newsletters
on this? Can you recommend a good
source for education on trading stocks,
options, and forex, as well as technical
analysis? I am trying to source the best
traders to follow ideas from.
LORNE
As an educational, how-to magazine, we
generally do not cover contests or rate
individual traders. There are several
organizations unrelated to this magazine
that do hold contests and can be found
on the Internet via a search. If it were
ratings on trading systems you seek, we
might suggest trying FuturesTruth.com
or Collective2.com.
As for following other traders, weve
recently listed some services in our
monthly Trade News & Products section
that may interest you; you can review
that information for followup.
We do publish a Readers Choice
Awards section every year in our Bonus
Issue, which presents the results of our
readers votes for their favorite products
and services across more than 20 catego-
ries of investing software and services.
It does not rate individual traders, but
it presents a list of services and some
resources that our readers fnd useful.
You also may be interested in our
monthly interviews, in which we get to
know a trader or analyst in the feld and
learn about their approach.
As for education on technical analysis
itself, simply put, this magazine has been
the best source of education on technical
analysis since its debut in 1982. We hope
you will keep reading to take in all that
the technical analysis community has
to offer by way of this magazine and by
way of our website at www.traders.com.
You can also fnd leads to many other
educational resources within our pages
or at our site.Editor
SVAPO CODE QUESTION
Editor,
I was reading through your website.
I respect the work of author Sylvain
Vervoort, with his logic and practicality.
His SVAPO, or short-term volume and
price oscillator (November 2007 S&C),
drew my attention as a technical trader.
I loved the concept, as I was looking for
a way to integrate some insight from
volume into my trading setup that
is, something simple (not like Wyckoff
concepts) and that also doesnt have
to go through reading the tape of each
trade. Not only do I not want to get into
that, but I also dont have it in my trad-
ing platform.
The code for SVAPO has few issues
for me. Its true each one of us can code
the same concept differently, especially
when it comes to smoothing and
averaging, and I would avoid too many
smoothings, especially with the TEMA
(triple exponential moving averages)
or the LR (linear regression). However,
theres a specifc line of code that doesnt
The editors of S&C invite readers to submit their opinions and information on subjects
relating to technical analysis and this magazine. This column is our means of communica-
tion with our readers. Is there something you would like to know more (or less) about?
Tell us about it. Without a source of new ideas and subjects coming from our readers,
this magazine would not exist.
Email your correspondence to Editor@Traders.com or address your correspondence
to: Editor, STOCKS & COMMODITIES, 4757 California Ave. SW, Seattle, WA 98116-4499. All
letters become the property of Technical Analysis, Inc. Letter-writers must include their full
name and address for verifcation. Letters may be edited for length or clarity. The opinions
expressed in this column do not necessarily represent those of the magazine.Editor
1 2 3 4
1 2 3 4
FIGURE 1: UPSTEP PATTERN. This reproduction of
Sylvain Vervoorts Figure 2 from his July 2013 article
in S&C demonstrates that four scenarios are possible
for the upstep pattern.
FIGURE 2: DOWNSTEP PATTERN. As with the upstep
pattern, four possible downstep patterns are possible.
STEP CANDLE PATTERN
Editor,
The upstep and down-
step patterns presented
in Figures 2 & 3 in
Sylvain Vervoorts July
2013 article (The Step
Candle Pattern), [re-
produced here as Figures 1 & 2], leave
me with some questions:
1. All eight have four or fve trading days
illustrated. Are days 1 & 2 important?
2. There was no mention of the candle
wicks (days high & low). Are they
important?
3. For both the upstep and downstep,
why do scenarios 1 & 3 as well as 2 &
4 look the same?
JIM VON DER WISCHE
September 2013 Technical Analysis of STOCKS & COMMODITIES 11
LETTERS
make sense to me. I saw a port done by
a respected thinkscripter on another site,
and unfortunately he ported the same
error, translating the study as-is.
Here is the line of code I am referring
to (its the main logic/formula for
calculating the SVAPO):
{SVAPO result of price and volume}
SVAPO:=Tema(Sum(If(haC>(Ref(haC,-
1)*(1+cutoff/1000)) AND
Alert(vtr>=Ref(vtr,-1),2), vc,
If(haC<(Ref(haC,-1)*(1-cutoff/1000)) AND
Alert(vtr>Ref(vtr,-1),2),-vc,0)),period)/
(vave+1),period);
Volume and its average will be in the
millions, so what is the value of adding
1 to a fgure like that?
Vervoorts article on the SVAPO also
inspired me to think further of volume
integration, so I am now coding another
study looking at net directional volume,
which is the difference between up &
down volume for a given period, as an
indicator of volume accumulation and
dispersion. Its what I was looking for, so
thank you again for the inspiration.
Keep up all the great and valuable
work.
K.
Sylvain Vervoort replies:
Thanks for your letter. The +1 is simply
for when there is no volume data avail-
able, in which case you would get a
division by zero, which would create an
error in the formula. With 1, there would
be no error message.
RAVE FOR VAN DER MERWE
Editor,
Congratulations on publishing articles in
S&C by Koos van der Merwe. He gets it
right, and I hope you will publish work
by him more often.
MIKE
Thank you for your feedback. Readers
who would like to read additional ar-
ticles by Merwe can visit the Traders.
com Advantage area of our website,
www.traders.com, which contains on-
line articles published daily. You will
fnd many additional articles there by
Merwe.Editor
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12 September 2013 Technical Analysis of STOCKS & COMMODITIES
Placing protective stops affects your trading performance
in good and bad ways. Should you or shouldnt you use
them? Here in part 2 of this series, we take a look.
by Anthony Trongone, PhD, CTA, CFP
espite the consensus of trading literature advocating the
use of a protective stop-loss order, so far, this analysis
does not appear to support this statement. In part 1 of my
study published last month in the August 2013 issue of
STOCKS & COMMODITIES, I examined the results of taking a
long position from 9:3010:30 am (that is, in the opening hour
of trading) and the effect of using certain percentage stops.
Here in part 2, Ill expand on the earlier analysis.
Stops Ahead
Trading Without A Backstop
Part 2
BACKGROUND
In the previous study, I took a long position in the spiders
(SPDR S&P 500 ETF Trust) at 9:30 am, along with a stop-sell
order at various percentages below this opening (9:30 am)
price. If the stop order did not fll, I promptly offset the long
position at 10:30 am ET.
The fndings in the study I will present here expand the ear-
lier analysis from 743 to 764 trading days (June 1, 2010June
12, 2013) to once again obtain the performance results. Since
most active traders do not enter into trading decisions blindly,
I began experimenting using a stop order with various trading
systems. Last month in part 1, I ran an analysis using early
morning volume (7:308:30 volume greater than two million
shares) to assess the effect on trading the spiders (SPY) in
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September 2013 Technical Analysis of STOCKS & COMMODITIES 13
the opening hour. Despite the $3.32 loss in
165 trading days, when using a 0.25% stop
(below the 9:30 price), there were just 98
stop flls but a proft of $2.27. When this
same condition was present, a 0.50% stop
(below the 9:30 price) resulted in 64 stop
flls, but it produced a loss of -$5.39.
The beneft of applying a stop order to a
long position is already questionable; how-
ever, it gets even more complicated because
the question of what percentage to use when entering a protective
backstop can make the difference in your bottom line.
HERES WHY
Well continue the analysis by measuring the proftability of
trading stops using two different predictor variables in separate
studies. I begin by looking at an earlier hour loss. More specifcally,
what impact does a loss of $0.20 or more (<= -$0.20) have on the
performance of the opening hour? In Figure 1, you see the 153
days in the 8:309:30 session when this condition was present.
Figure 2 reports the results of these 153 trades in 764
trading days (a 20% activity rate). These premarket losses
had a slightly positive impact on the opening hour (a $1.31
advance) of trading; however, the opportunity cost of entering
this order was -$0.92.
Considering there were 83 stops in 153 trades (54.25%),
a 0.25% (quarter percent) stop-loss order was costly. It is
diffcult to achieve success when more than half your trades
trigger your stop orders (this translates into one fll in every
1.84 trading days).
SCATTERGRAM
Performing an analysis on those scores with a loss equal to
$0.20 or more (<= -$0.20) gives you a snapshot of your fnd-
ings, as it reports a $1.31 advance in 153 trades; however, by
compiling these trades into a summary score, you are losing
information. Figure 3 shows how to correct this by creating
a scattergram of those scores with a strong 8:309:30 loss (x-
axis in red) along with the resulting 9:3010:30 performance
scores (y-axis in blue).
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AFTER A LOSS OF <= -$0.20 IN THE 8:30 TO 9:30 SESSION,
THE EFFECT OF A 0.25% STOP ON THE OPENING HOUR
TRADING
DAYS
0.25%
STOPS
9:30 TO 10:30
PERFORMANCE
REVENUE EXPENSE
OPPORTUNITY
COST
153 83 $1.31 $26.43 $26.04 -$0.92
FIGURE 1: 8:309:30 HOURLY DROP OF $0.20 OR MORE (<= -$0.20). What effect does this excessive loss in the preceding hour have on the opening hour of
trading? Should we take a long position at the ringing of the opening bell together with a protective stop-loss order?
FIGURE 2: THE RESULTS OF TAKING A LONG POSITION WITH A 0.25% STOP. In 153 trades, a long
position along with a 0.25% stop was unable to deliver meaningful savings.
FIGURE 3: THE PERFORMANCE RESULTS OF AN 8:309:30 LOSS IN THE OPENING HOUR. Although those scores to the far left of the scattergram show the 20
most aggressive losses (<= -$0.70), the opening hour was able to rebound after these declines, lifting it to $5.71 in prots.
SPY
8:309:30 am
14 September 2013 Technical Analysis of STOCKS & COMMODITIES
scores (lower 10%) as well as the 76 best ROC scores (upper
10%) to assess the 9:3010:30 performance of the spiders.
The -$5.36 ROC score is a meaningful price change; it
certainly would qualify as one of the scores in the bottom
10%.
Figure 4 reports the fndings of these 76 qualifying days
in the two outlying categories. When given either condition,
the spiders had a positive performance. The upper 10% (ROC
positive) had 39 stops with an opportunity cost of -$0.64,
whereas the lower 10% (ROC negative) had 48 stops with an
opportunity cost of -$4.00. Considering the $11.00 opening-
hour summary gain in 764 days, the $1.65 (ROC positive)
advance together with the $4.91 (ROC negative) advance
accumulated 60% of the profts.
Over the course of this study, the opening hour produced
$11.00 in profts. Figure 4 provides the results of the ROC
study. After separating the outlying scores (76 days in both
the upper and lower brackets), the spiders captured three-ffths
of the profts. Nevertheless, a stop-loss in either category was
not a good strategy; however, it was even costlier when the
ROC was negative (-$4.00).
PLACING STOP-LOSS ORDERS
I am not saying you should never take
stops. What I am advocating is never to
take stops without frst doing your analysis
to determine the best course of action. For
instance, prior to making my frst trading
decision of the day, I notice a morning
with strong volume along with a steady
increase in the price of the spiders. After running my analysis,
I uncover 12 days with a similar pattern:
$0.24, $0.36, $0.42, $0.84, -$1.12, $0.12, $0.16, -$1.32,
$0.64, $0.44, $0.06, $0.54
Would it make sense to take a long position with a protective
stop in this situation?
Without considering the sequence of these results, with 10
advances and $1.38 in profts, I would be willing to take a
long position, but what about the two declining hourly ses-
sions? Since they are excessively strong, I would consider
placing a long position with a stop-loss order or pass on the
protective stop, but take a position with fewer shares. Some
investors may choose to go heavy but would use a stop on
part of their position. Whats the best decision? The answer
A loss of $0.20 or more (<= -$0.20) in the 8:309:30 hour
was unable to carry over into the 9:3010:30 session. This
excessive loss, which gave us 83 stops (using a 0.25% stop
below the 9:30 price) in 153 trading opportunities, resulted
in a $1.31 proft in the opening hour; however, the expense
of executing 54.25 percent of these stop orders resulted in an
opportunity cost of -$0.92.
An assessment of the 10 worst scores (from -$1.74 to
-$0.98) showed they were not consistently brought on by
strong losses. Six of them occurred when the earlier loss in
the spiders was between a loss of -$0.20 and -$0.34; the other
four scores had losses of -$0.63, -$0.65, and -$0.93, and the
biggest hourly setback (-$1.74) followed a loss of -$1.22 (dot
with red border).
MOMENTUM INDICATOR
A three-day rate of change (ROC) is a momentum indicator;
it measures the price change among three trading days. In this
case, I am using the 8:30 am price; therefore, it is the t
1
t
3
price difference:
8:30 am price of SPY on June 21, 2013: $159.46
8:30 am price of SPY on June 18, 2013: $164.82
$159.46 $164.82 = -$5.36 ROC
This study includes those ROC scores in the outlying 10% of
the 764 trading days; consequently, it uses the 76 worst ROC
3 day ROC
(10% OUTLIERS)
TRADING
DAYS
.0025
STOP
9:30 10:30
RESULTS
REVENUE EXPENSE
OPPORTUNITY
COST
ROC POSITIVE 76 39 $1.65 $13.35 $12.34 -$0.64
ROC NEGATIVE 76 48 $4.91 $15.48 $14.57 -$4.00
FIGURE 4: AN ASSESSMENT OF THE OUTLYING ROC SCORES USING A 0.25% STOP-LOSS ORDER. Both outlying categories were able
to produce a prot in the opening hour, but the opportunity cost of applying a 0.25% stop resulted in a negative outcome.
MONEY MANAGEMENT
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,
the Scottrade
T:8.125
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ISO 12647-7 Digital Control Strip 2009
TDAmeritrade-1309.indd 1 7/23/13 7:38:23 AM
24 September 2013 Technical Analysis of STOCKS & COMMODITIES
Time cluster n 5 at the termination of X: W(4),
Time cluster n 6 at the termination of (b): Y: W(4),
Time cluster n 7 at the termination of (c): Y: W(4)
n The trending indicator OSC (5, 70), observed in hindsight,
is an indispensable tool when it comes to practicing the
application of Elliott waves.
The OSC indicator is similar to the MACD in that it measures
the area between two moving averages. It is valuable in defn-
ing and labeling the Elliott waves, in spite of its lagging nature.
We observed, on the chart of Figure 3, the development of the
W(4) wave, which fuctuated in the 0.901.40 zone of the OSC
(5, 70). Moreover, the classic divergence between the indicator
and price movement from W(3) to W(5) is obvious here.
Note that most of the reversals take place at the time & price
confuences. In order to identify and label the most probable
Elliott waves, it all comes down to choosing the optimal time &
price tools. The key is to closely monitor the Fibonacci, Gann,
or Charles Dow ratios progressively, from their initial point
(0.03125, 0.0625, 0.09375, 0.125, 0.146, and so on) to the most
extended ones (2.618, 3.666, 4.236, 5.0, 6.85, 7.0, and so on).
If a ratio is overcome, consider the next one.
ORGANIZATION WITHIN CHAOS
Most Gann adepts will agree that his main
credo regarding the time & price relation-
ship plays a big role in identifying market
turns. The ideal Gann tool to use would be
the box, but to successfully use the box, you
need to go through the diffcult task of calibrating its height
(price parameter) and length (the duration or time parameter).
For more details on applying Gann techniques, I suggest you
study Michael Jenkins recent book, Square The Range Trad-
ing System.
The weekly chart in Figure 4 illustrates a rectangular Gann
box, drawn in hindsight. It considers the W(4) existing space
(also called the vital wave space) in the price zone between
the termination of W(3) at the 4.3485 level and the termina-
tion of W(2) at the 3.4715 level. Time-wise, the W(4) wave is
developing on the 121 bar scale.
The classic approach of drawing Gann boxes consists of
choosing the adequate time & price parameters (duration
interval and height), and then dividing them in quarters and
halves. You can also select thirds or any Fibonacci ratios you
feel the market adheres to. In the chart in Figure 4 the market
retraced to the 33.33% price threshold and remained in the
0%33.33% price zone for the duration of the entire W(4)
wave. The market fow almost tested the 50% time threshold,
exceeding it by two bars.
The Gann angles effciently illustrate the time & price
relationship on the chart in Figure 4. You can easily see that
after the market fow has tested the steep 1x4 and 1x2 angles
several times, it climbed to the decisive 1x1 angle. Once price
broke out of this angle, the market fow remained above it,
FIGURE 4: GANN BOXES. The market retraced to the 33.33% price threshold and remained in the 0 to 33.33% price zone for the duration of the entire W(4) wave.
The Gann angles efciently
illustrate the time & price
relationship on the chart in
Figure 4.
Weekly chart
Euro/RON spot forex
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Technical walkabout lead-off session
Sessions on trending techniques; innovations in technical analysis; and a live trading session
Workshops with industry leaders on system building; and the mental landscape
Panels: industry panel; veteran technical analysts; and market wizards
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26 September 2013 Technical Analysis of STOCKS & COMMODITIES
thus revealing the strength of the market, by staying above the
33.33% threshold of the W(4) wave space.
The shallow 4x1 angle is of lesser importance on this specifc
time frame. Instead, the angle illustrated by the TL-1/3 trendline
created by joining the termination of W(3) and W(4)
becomes the diagonal of the rectangular space of W(4) wave.
It plays an important role here, since it becomes a symmetry
axis within the development zone of W(4) wave.
The Gann box does a good job of revealing the degree of
freedom of W(4) wave, in hindsight. But how can this be studied
in real time, while the market is fuctuating in a chaotic manner
within the rectangular space?
To answer this question, I have used a Gann box and its
multiples, out of the frst swing of the W(4) wave associated
with the use of the 45-degree geometric angle. The Gann boxes
(especially the 144) with the 45-degree angles, both drawn by
hand on millimeter paper, are the specialty of Dawn Bolton-
Smith, the matriarch of technical analysis and a life member
of the Australian Technical Analysts Association (ATAA in
Sydney), who, in spite of being in her 80s, is still doing her
daily market analysis.
The frst Gann box in Figure 5 uses a diagonal size and angle
value that is equal to the trendline of W(4)s frst subwave swing.
Its angle value coincides with that of the 45-degree geometric
angle. I then multiplied this Gann box size to better describe
the market fow. I associated it with the drawings of the paral-
lel 45-degree geometric angles originating at an extreme pivot
high or a low. These boxes harmonically govern the entire area
occupied by W(4). Moreover, every time there is a change in
trend, the 45-degree angles act as a guide. The entire W(4) wave
terminates at the eighth drawn Gann box with the following
inner coordinates: 0.25 of price, and 0.666 of time.
FINDING THE TURNING POINTS
Most of the reversals in Figures 4 and 5 take
place at the time & price confuences governed
by the Gann boxes or by the 45-degree geo-
metric angle. The time & price relationship
practiced in real time, with its array of boxes
drawn using the frst swing, illustrates its
effciency in revealing a market turn. Once again, you see the
importance of using a systematic approach, which consists of
strictly monitoring the developing process of the confuences.
Once again, if a box or an angle is overcome, just draw and
consider the next one.
Take the time to understand the relationship between time &
price and the likelihood of price meeting confuence points. In the
second part of this article series, I will show you how the time
& price relationship can be seen developing in real time.
FIGURE 5: TURNING POINTS. Most of the reversals take place at the time & price conuences governed by Gann boxes or by the 45-degree geometric angle.
Ganns main credo regarding
the time & price relationship
plays a big role in identifying
market turns.
Weekly chart
Euro/RON spot forex
September 2013 Technical Analysis of STOCKS & COMMODITIES 27
Mircea Dologa, MD, began his investment
and trading career in 1987 as a Commodity
Trading Advisor and a registered general
securities representative. He subsequently
moved into teaching practical aspects of
trading using techniques he developed.
He is a contributor to many magazines
around the world, and is publisher of the
monthly World Charting Report, which
covers international indexes, commodities,
and forex charts. He is a member of several
technical analysis associations (ATAA &
STA) and an MTA associate member. He
may be contacted at mircdologa@yahoo.
com or via his website at www.pitchfork-
trader.com.
RELATED READING AND
REFERENCES
Dologa, Mircea [2006]. The
Third Wave, Technical Anal-
ysis of STOCKS & COMMODI-
TIES, Volume 24: May.
_____ [2006]. Trading The
Trend In Wave 3, Technical
Analysis of STOCKS & COM-
MODITIES, Volume 24: June.
_____ [2006]. Trading Wave 3,
Technical Analysis of STOCKS
& COMMODITIES, Volume 24:
September
_____ [2012]. World Charting
Report, monthly periodical,
Paris, France, http://pitchfork-
trader.com/reports.html.
_____ [2013]. Elliott Waves: Beginner To
Professional Level, http://pitchfork-
trader.com.
_____ [2008]. Integrated Pitchfork Analy-
sis: Basic To Intermediate Level, John
Wiley & Sons, London.
_____ [2008]. Integrated Pitchfork
Analysis: Advanced Level (II), Ptch-
forktrader.com, Paris.
_____ [2009]. Integrated Pitchfork
Analysis: Advanced Level (III), Ptch-
forktrader.com, Paris.
Jenkins, Michael S. [2012]. Square The
Range Trading System, www.stock-
cyclesforecast.com.
Neely, Glenn [1990]. Mastering Elliott
Wave: Presenting The Neely Method,
Windsor Books.
eSignal (Interactive Data Corp.)
CHART PATTERNS
28 September 2013 Technical Analysis of STOCKS & COMMODITIES
Back To The Basics
Muscle Up
Those Averages
M
are a bit more complex and require more
computation. Nevertheless, you can use
both these moving averages to see who
has more muscle in a trend the bear or
the bull. Both moving averages provide
a foor (support) or a roof (resistance) to
a fnancial asset.
ARE THEY CONVERGING
OR DIVERGING?
The MACD is a popular indicator; it
is the difference between two EMAs.
If you take an average of a smaller
amount of data, your average will be
greater. In this case, it would apply to
a faster moving average (50-day) and
the opposite would happen for a larger
set of data (slower moving average,
that is, 200-day). It would be the differ-
ence between these two averages (see
sidebar Calculating MACD on page
30). The signal line is the average for
the graph; usually a nine-day average
is used. You can use the MACD to see
whether momentum is picking up or
declining if the MACD has rising
lows, then momentum is picking up,
and if it has lower highs, it shows that
the security is losing momentum.
THE CROSSING OVER
Although there are many possible
strategies, I will highlight one basic
strategy. Moving averages help the
trader to determine whether to buy or
sell a fnancial asset at the market price.
This is known as the moving average
crossover strategy. Most traders use a
50-day SMA and a 200-day SMA. The
strategy is fairly simple:
1. If the 50-day SMA crosses over the
200-day SMA, it is a buy signal.
2. If the 50-day SMA crosses under
the 200-day SMA, it is a short
signal.
You cannot, however, base your trades
solely on moving averages and the
MACD; you should look at the bigger
picture. Do the fundamentals support what
the technical indicators are telling you?
THE BIG PICTURE
The chart in Figure 1 is a daily chart of
the EUR/USD pair with the 50-day SMA
INDICATORS
Trading the currency markets means you need to be well aware of global macro
and micro economic variables. But when it comes to trading these markets, simple
is better. Find out more through this example of the EUR/USD currency pair.
by Ajay Pankhania
oving averages, although simple, are sometimes underused. In extreme market
movements, moving averages have a smoothing effect. They are also vital and
fundamental to the foundations of indicators we know today, one of them being
the moving average convergence/divergence (MACD).
BULL OR BEAR?
There are many types of moving averages. Two of the more popular ones are the simple
moving average (SMA) and exponential moving average (EMA). SMAs are calculated
by adding the price of the fnancial asset and dividing it by the number of observations
(See sidebar Calculating Moving Averages on page 30). In other words, you can
calculate a simple moving average as you would normally calculate an average. EMAs
N
I
K
K
I
M
O
R
R
September 2013 Technical Analysis of STOCKS & COMMODITIES 29
M
E
T
A
T
R
A
D
E
R
Forex traders should look at the big
picture and determine if fundamentals
support technical analysis.
and 200-day SMA overlaid on the price chart. The MACD is
displayed in the subchart below the price chart. In the case
of the EUR/USD, you would look at how quantitative easing
(QE) will affect the dollar, if the Eurozones growth rate is
contractive or expansive, political stability in the Eurozone
nations, and so forth.
Lets see how fundamental events affected the currency pair
through the chart in Figure 1. In late March 2013, the EUR/USD
pair dipped below the 200-day SMA and the MACD indicates
that the pair is oversold. During that time there were concerns
about Cyprus and signs of a recession in the Eurozone. But
better-than-expected retail sales in Germany and the Cyprus
situation showing signs of being under control helped the
EUR/USD move higher. But in mid-April, the 50-day SMA
crossesd below the 200-day SMA (highlighted area), which
is a sell signal. However, the MACD does not confrm this
sell signal until a couple of weeks later when the blue line
crosses below the red line. Even then, it wasnt a very strong
sell signal. A strong sell signal was given on May 10, 2013
when price broke below the 50-day SMA and the MACD
displayed a sell signal. Note that the MACD indicator was
negative when the price dropped. This weakness in the EUR
coincided with the release of weak Eurozone GDP data.
In early June, the EUR/USD pair traded between the 50-day
and 200-day SMAs (which act as support & resistance levels)
and appeared as if it was looking to break through the 200-day
SMA ahead of the European Central Banks (ECB) monetary
policy decision. On June 6, 2013, after the ECB announced its
FIGURE 1: APPLYING MOVING AVERAGES ON THE EUR/USD. Here you see how the simple moving average (SMA), exponential moving average (EMA), and the moving
average convergence/divergence (MACD) helped indicate price movement in the EUR/USD. If you look at economic data, you will see how fundamental data impacts price
movement in this currency pair.
decision to leave interest rates unchanged, the EUR/USD moved
signifcantly higher, leaving its resistance level at the 200-day
SMA (blue arrow) far behind. The MACD confrmed this bullish
rally and will help to determine when the trend is likely to end,
since it looks at momentum and strength of a trend.
30 September 2013 Technical Analysis of STOCKS & COMMODITIES
(approximated) as (2 (n +1)) where n is the simple moving
average length.
Instead of calculating weights for all previous prices, how-
ever, it simply takes the previous days EMA and multiplies it
by (1 weight). Thus,
EMA
n
= (aP
n
) + ((1- a)EMA
n -1
)
where a is the multiplier, or (2 (n +1))
For a fve-day EMA:
EMA
5
= (0.333P
5
) + ((0.667)EMA
4
)
BE MINDFUL OF THE LAGS
Moving averages are based on past
price actions, so there can be consider-
able lag in its signals. Prices may have
begun their ascent or descent prior
to the crossovers. Since the MACD
relies on the EMA, the MACD is also
a lagging indicator. Therefore, it is advisable to use more
than one indicator. In the case of trading forex, it is important
and necessary to keep an eye on the fundamental data of the
global markets.
Ajay Pankhania is a technical analyst for Accendo Markets.
SUGGESTED READING
Ehlers, John F. [2003]. Moving Average Computations, Made
Easier, Technical Analysis of STOCKS & COMMODITIES,
Volume 21: December.
Hartle, Thom [1991]. Moving Average Convergence/Di-
vergence (MACD), Technical Analysis of STOCKS &
COMMODITIES, Volume 9: March.
Merrill, Arthur A. [1992]. Moving Average Crossovers,
Technical Analysis of STOCKS & COMMODITIES, Volume
10: August.
Pring, Martin J. [2000]. Using The Simple Moving Aver-
age, Technical Analysis of STOCKS & COMMODITIES,
Volume 18: June.
Star, Barbara [1994]. The MACD Momentum Oscillator,
Technical Analysis of STOCKS & COMMODITIES, Volume
12: February.
MetaTrader (MetaQuotes Software Corp.)
See Editoral Index
CALCULATING MACD
The moving average convergence/divergence (MACD) is
an oscillator developed by Gerald Appel. The formula for
calculating the MACD is:
Fast line = (12-period EMA) (26-period EMA)
Signal line = (Nine-period EMA of fast line)
A buy signal occurs when the MACD line crosses above the
signal line. A sell signal occurs when the MACD line crosses
below the signal line.
CALCULATING MOVING AVERAGES
Simple moving average (SMA)
The simple moving average is calculated by summing up all
the prices to be included in the average and then dividing that
sum by the number of observations. The formula for calculating
the moving average is:
(P
1
+ P
2
+ P
3
+ P
4
+ P
5
+ P
n
) n
where:
P
1
is the price of the frst time period used in the calculation
P
n
is the price of the last time period used in the calculation
n is the number of observations used to calculate the average
Exponential moving average (EMA)
The exponential moving average assigns more weight to recent
prices. The most recent price is assigned a weight, calculated
INDICATORS
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