Technical Analysis 101 : Session 1

Stanley Yabroff
Val Alekseyev
Technical Analysis Basics

Time Frames
Auctions
Chart Types
Trends
Trading Ranges
Support and Resistance
 Technical Analysis

A method of evaluating securities

Does not measure a security’s intrinsic value
Uses price charts and other tools to identify
patterns
 Basic Assumptions

1. The market discounts everything

 Basic Assumptions

1. The market discounts everything

2. Price moves in trends
 Basic Assumptions

1. The market discounts everything

2. Price moves in trends
3. History tends to repeat itself
 Dow Theory Principals

Markets have three trends

Trends have three phases
The markets discount all news
Market averages must confirm each other
Trends are confirmed by volume
Trends exist until proven otherwise
Technical Analysis and the Markets

Commodity Futures
Fixed Income
Foreign Exchange
Equities and Indices
Fundamental vs Technical Analysis

Fundamental Analysis:
Based on the study of economic factors
Supply demand relationships
Government economic reports
Geo-political factors
Acts of nature
Corporate balance sheets, cash flow statements,
and income statements
Fundamental vs Technical Analysis

Fundamental Analysis:
Based on the study of economic factors

Technical Analysis:
Study of price action through charts
and price history
 Fundamental Analysis

The Study of Supply and Demand

Supply Demand

Price
 Futures Markets

Futures markets and other derivative markets

were created as risk management tools
 Futures Markets

Futures markets are an anticipatory market

 Types of charts

• Bar charts
• Candlestick charts
• Constant volume charts
• Line charts
• Tflow charts, exclusively CQG
 Bar Charts

• Vertical line representing the high and low of the sessions

• Horizontal line on the left of vertical is the opening
• Horizontal line on the right of the vertical is the close.
• Timeframe can be anything from 1 minute to annual,
including intraday, daily, weekly, monthly, quarterly,
semiannual, and annual.
 Candlestick Charts
• The candlestick chart like the bar chart includes the high,
low, open and close.
• The Japanese put great interest in the opening and the
closing.
• The candlestick charts have a colored body which
represents the open and close. In CQG the body of the
candlestick is colored green if the close is higher than the
open (trades up). The body of the candlestick is colored
red if the open is higher than the close (trades down)
• The shadow or the black vertical line represents and
trading activity which is higher than the open or close which
is higher or any trading activity which is lower than the
open or close which ever is lower.
 Timeframes

• The timeframe used for forming a chart depends on the

compression of the data:
– Intraday, daily, weekly, monthly, quarterly or annual data.
– The less compressed the data is, the more detail is displayed.
– Different time horizons represent different trend lengths.
• Many traders look at multiple timeframes.
– Traders trend to look at three time frames: trend, trade and trade
entry. i.e. monthly (trend), weekly (trade), and daily (entry).
– Short term traders may look at weekly, daily, and intraday
timeframes.
 Advantages of multiple timeframes

• Identify divergences in timeframes

• Trade when all three timeframes are in sync.
• Confirm trade systems in multiple timeframes.
• Better timing of trades.
• Better monitoring of trades in longer systems.
• Protecting your position from trades in higher timeframes.
• Better profit objectives from the longer timeframes.
 Constant Volume Bars

• Constant volume bars, CVB, look like bar charts but each
bar represents the same number of contract or ticks rather
than a set timeframe.
• A 500 contract CVB chart, each bar represents 500
contract no matter how long it takes to trade 500 contracts.
• It is time independent. Overnight a bar may represents an
hour or more to trade 500 contracts. During the day the
same 500 contracts could trade in seconds.
• The advantage to CVB is the void of distortions in the
quantitative indicators as a result of inactivity, common at
night.
 Line Charts

• Line charts simply connect the close of each bar, ignoring

any intra bar activity.
• Most spreads, CLE-QO (NYMEX CRUDE – ICE BRENT
CRUDE) , are displayed as a line.
• Many market participants believe the close is the single
most important price.
 TFlow Charts
• The birth of the TFlow chart are a result of both technology
and accurate volume data including whether the buyer or
seller was the aggressor as well as observing the behavior
of traders on the trading floor prior to electronic trading.
• Each bar is colored part red and part green. The red
portion represents trades in which the seller hit the bid,
accepted a lower price to enter the trade. The green portion
represents trades in which the buyer lifts the offer, accepts
a higher price to enter the trades.
• Volume is the most sensitive indicator and tflow indicates
whether the buyer or the seller is the aggressor, adding
context to the volume data.
 TFlow Chart 2
• There are two ways to calculate the TFlow charts.
• First, the traditional TFlow charts are constructed based on
the inside market, best bid and best offer. A trade above the
offer or below the bid triggers the creation of a new bar.
• TFlow charts are new and exclusive to CQG and represents
a new view of volume as it changes during the trading day.
• Second, the TFlow chart was adopted to fit time based
charting. For example, a five minute TFlow chart would be a
five minute chart except the coloring would represent the
proportion of traders lifting offers or hitting bids.
• Time Based TFlow provides the added information of TFlow
charts but continues the comfort most traders have with
traditional time charts.
 Continuation Charts
• In the futures market we are faced with contracts which
expire, therefore techniques are necessary to link the
active front month contracts with expired contracts for long
term analysis.
• 1. Standard continuation: the chart continuation rolls to next
front contract as soon as the prior contract expires. The
weakness to this continuation process is the presence of a
delivery period where the holder of a long contract can be
issued a delivery notice. This is acceptable to a hedger, but
a problem for a speculator.
• 2. Adjusted continuation: the user selects the number of
trading days prior to expiration to roll the next contract.
 Continuation Chart 2
• 3. Active Continuation: the futures contract rolls to the next
contract based on volume and open interest. This
methodology assures the speculator that they are not in the
contract when it goes first noticed and can be asked to
deliver on the contract. This is the most popular
methodology for our users.
• Adjusted and active continuations also have an option for
equalized closes. This is adjust all prior data to reflect the
basis difference between the two closes when the rollover to
a new contract occurs. This methodology is appropriate for
interest rate based futures or a trade system is being back
tested. This methodology is questionable for deliverable
commodity contracts which has identifiable seasonality.
• The equalized closes would mask the seasonality.
 Support and Resistance Levels
• Support levels are price levels where buying has entered
the market prior or is expected to enter the market
currently.
• Resistance levels are price levels where selling has
entered the market prior or is expected to enter the market
currently.
• Support and resistance levels are identified by horizontal
line from recent highs and lows or trendlines which connect
highs and lows.
• Buy support when penetrated becomes resistance.
• Sell resistance when penetrated becomes support.
 Support and Resistance 2

• All our markets are auction markets

• Auction markets move higher to find sellers.
• Auction markets move lower to find buyers
 Support and Resistance 3

• Trendlines
• Up trendline is a straight line drawn upward connecting
successive swing or reaction lows.
• Down trendline is a straight line drawn downward
connecting successive swing or reaction highs.
• Two points are needed to draw a trendline and a third point
is necessary to confirm the validity of a trendline.
• The longer a support or resistance hold the stronger, more
important the level.
• Volume is a sign of the strength of the support or
resistance levels.
 Retracements

• Another indication of the strength of a trend is retracements

from highs and lows.
• Markets do not trade in one direction, they take breathers
and retrace.
• Dow retracement levels are 33%; 50%; 66%
• Fibonacci retracement levels are 38.2%;50%;61.8%
• Strong trends retrace 33-38.2%
• Weak trends retrace 66-68.1%
 Electronic Trading

98% of all trading

is now done electronically
across all asset classes,
creating a resurgence and growth of
technical analysis
 Technical Systems
Charting
Mechanical
Trend-following
Range
Automated executed, black box
Artificial intelligence
Neural network
 Stan Yabroff
stan@cqg.com

Val Alekseyev
valekseyev@cqg.com

1 800-525-7082 www.cqg.com