• No results found

Successful Day Trading

N/A
N/A
Protected

Academic year: 2021

Share "Successful Day Trading"

Copied!
12
0
0

Loading.... (view fulltext now)

Full text

(1)

Successful Day Trading

Successful Day Trading

Christopher M. Quigley

Christopher M. Quigley

B.Sc., M.M.I.I. Grad., M.A.

B.Sc., M.M.I.I. Grad., M.A.

Judging from the contents of an increasing

Judging from the contents of an increasing number of emails more and more inve

number of emails more and more investors are

stors are

choosing to "actively" trade the market rather than simply "buy and hold" it. In the main, this is

choosing to "actively" trade the market rather than simply "buy and hold" it. In the main, this is

due to the fact that in a

due to the fact that in a bear market the latter strategy creates losses that are d

bear market the latter strategy creates losses that are difficult to accept

ifficult to accept

long term. However another reason is that

long term. However another reason is that smart investors are realising the potential for "income

smart investors are realising the potential for "income

generation" rather than capital gain from their inv

generation" rather than capital gain from their investments.

estments.

Accordingly I set out below some parameters to h

Accordingly I set out below some parameters to help these new "traders" avoid the worse pitfalls

elp these new "traders" avoid the worse pitfalls

and hopefully guide them towards the

and hopefully guide them towards the mind-set required for long term success.

mind-set required for long term success.

(This article has some notes from earlier publications for ease of reference).

(This article has some notes from earlier publications for ease of reference).

1.

1.

Start

Start

. Markets are rational. The best theory to

. Markets are rational. The best theory to gain this insight is Dow Theory (see note

gain this insight is Dow Theory (see note

1). Learn everything you can

1). Learn everything you can about Hamilton's and Dow's perceptions and

about Hamilton's and Dow's perceptions and make it part of your

make it part of your

investment "macro-view".

investment "macro-view".

2.

2.

Due

Due to

to the

the growing

growing complexity

complexity in

in financial

financial reporting

reporting and

and the

the opportunity

opportunity for

for abuse

abuse

therein, with its concomitant risk, it may be advisable

therein, with its concomitant risk, it may be advisable to trade through exchange

to trade through exchange traded funds

traded funds

(ETF') or Contracts for Difference (CFD's). These funds trade like stocks but offer exposure to

(ETF') or Contracts for Difference (CFD's). These funds trade like stocks but offer exposure to

equity sectors, commodities, currencies and interest rates. Thus you h

equity sectors, commodities, currencies and interest rates. Thus you have better opportunity for

ave better opportunity for

diversification with less risk. (If you do not understand CFD's see not

diversification with less risk. (If you do not understand CFD's see note 2 below).

e 2 below).

3.

3.

When

When you

you enter

enter a

a position

position know

know beforehand

beforehand your

your exit

exit point.

point. Always

Always place

place a

a sell

sell stop

stop thus

thus

limiting your potential loss.

limiting your potential loss.

4.

4.

As

As your

your profits

profits rise

rise adjust

adjust your

your sell

sell stop

stop upwards

upwards thus

thus locking

locking in

in your

your profits.

profits.

5.

5.

A

A trading

trading platform

platform offering

offering discount

discount commissions

commissions is

is absolutely

absolutely vital.

vital.

6.

6.

Technical

Technical analysis

analysis data

data is

is vital

vital to

to judge

judge your

your entry

entry and

and exit

exit points.

points. Get

Get a

a good

good system

system that

that

offers "real time" streaming providing one minute, five minute, ten

offers "real time" streaming providing one minute, five minute, ten minute and one hour

minute and one hour ticker

ticker

readings in addition to the regular dail

readings in addition to the regular daily timelines. I prefer the five minute screen for active da

y timelines. I prefer the five minute screen for active day

y

trading.

trading.

7.

7.

Using

Using too

too many

many technical

technical indicators

indicators creates

creates "paralysis

"paralysis by

by analysis".

analysis". Get

Get to

to know

know the

the

indicators that work for you and stick to

indicators that work for you and stick to them. Consistency will bring greater reward. I like

them. Consistency will bring greater reward. I like

MACD (moving average convergence divergence, 10 and 20 DMA's (daily moving averages)

MACD (moving average convergence divergence, 10 and 20 DMA's (daily moving averages)

and purchase volume. For p

and purchase volume. For price I use the candlestick format rather than the

rice I use the candlestick format rather than the simple line as it gives

simple line as it gives

more information on the market psychology of actual price movement. (See note 3 below).

(2)

8.

8.

You

You must

must adopt

adopt a

a trading

trading strategy.

strategy. If

If you

you do

do not

not have

have one

one find

find one.

one. If

If you

you are

are new

new to

to

trading use the many simulation packages available

trading use the many simulation packages available online to test and retest your knowled

online to test and retest your knowledge and

ge and

approach. Do not start to spend

approach. Do not start to spend a major part of your capital until

a major part of your capital until you have proven to

you have proven to yourself that

yourself that

you can consistently make good

you can consistently make good investment decisions in real time. It is better to be losing time

investment decisions in real time. It is better to be losing time

rather than time

rather than time

and money

and money

. For me the best strategy to successfully day trade is a

. For me the best strategy to successfully day trade is a

 Momentum

 Momentum

Strategy

Strategy

. This strategy highlights only top

. This strategy highlights only top

Growth Stocks

Growth Stocks

 with high

 with high

Price Earnings Ratios

Price Earnings Ratios

. A

. A

good BUY indicator is a

good BUY indicator is a

BULLISH ENGULFING

BULLISH ENGULFING

 candlestick moving up through a significant

 candlestick moving up through a significant

DMA on high volume. ideally with a

DMA on high volume. ideally with a

MACD

MACD

 changing from negative to positive. A good SELL

 changing from negative to positive. A good SELL

indicator is a

indicator is a

BEARISH ENGULFING

BEARISH ENGULFING

 candlestick moving down through

 candlestick moving down through a significant DMA,

a significant DMA,

ideally with MACD moving from positive to negative.

ideally with MACD moving from positive to negative.

9.

9.

The holy grail of trading is patience

The holy grail of trading is patience

. If you do not have a trade that has a good

. If you do not have a trade that has a good

 probability to work profitably for you the best place to be is in cash. This is hard to learn but is

 probability to work profitably for you the best place to be is in cash. This is hard to learn but is

absolutely essential.

absolutely essential.

10.

10.

If

If you

you think

think trading

trading is

is gambling

gambling you

you have

have missed

missed the

the point

point and

and need

need to

to be

be re-educated.

re-educated.

Go back to

Go back to

start

start

 and get your thinking rational.

 and get your thinking rational.

---Read Christopher M. Quigley’s decade of published essays on Trading & Investment at MarketOracle.Co.UK.

Read Christopher M. Quigley’s decade of published essays on Trading & Investment at MarketOracle.Co.UK.

http://www.marketoracle.co.uk/UserInfo-Christopher_Quigley.html

http://www.marketoracle.co.uk/UserInfo-Christopher_Quigley.html

---Day Trading Strategies Taught At Wealthbuilder.ie:

Day Trading Strategies Taught At Wealthbuilder.ie:

---1.

1.

Straddle

Straddle Trade.

Trade.

2.

2.

Wall

Wall Street

Street &

& German

German DAX:

DAX: Interactive

Interactive Arbitrage/Confirmati

Arbitrage/Confirmation

on Trade.

Trade.

(Charts: Wall St./DAX: 3 min/60 min/24 hour).

(Charts: Wall St./DAX: 3 min/60 min/24 hour).

3.

3.

Momentum

Momentum Trade.

Trade.

A.

A.

Price

Price Consolidation

Consolidation Break

Break

B.

B.

Moving

Moving Average

Average &

& Bullish

Bullish Engulfing

Engulfing Cross

Cross

C.

C.

Moving

Moving Average

Average &

& Bearish

Bearish Engulfing

Engulfing Cross

Cross

D.

D.

VIX/McClennan

VIX/McClennan Oscillator

Oscillator Trend

Trend Confirmation

Confirmation

4.

4.

Swing/Continuation

Swing/Continuation Trade.

Trade.

Price Action Formation Patterns.

Price Action Formation Patterns.

(3)

A.

A.

Triangle/Wedge

Triangle/Wedge

B.

Flag/Pennant

B.

Flag/Pennant

C.

C.

Double

Double Top/Bottom

Top/Bottom

D.

D.

Head

Head &

& Shoulders

Shoulders

5.

5.

Bollinger

Bollinger Band

Band Volatility

Volatility Squeeze

Squeeze Trade.

Trade.

6.

6.

Channel/Range

Channel/Range (Slow

(Slow Stochastic)Trade.

Stochastic)Trade.

7.

7.

Candlestick

Candlestick Pattern/Scalp

Pattern/Scalp Trade.

Trade.

A.

A.

Hammer

Hammer &

& Spinning

Spinning Top

Top

B.

B.

Shooting

Shooting Star

Star &Hanging

&Hanging Man

Man

C.

Doji

C.

Doji

D.

D.

Bullish

Bullish Engulfing

Engulfing

E.

E.

Bearish

Bearish Engulfing

Engulfing

Wealthbuilder’s Day Trading Strategies Explained:

Wealthbuilder’s Day Trading Strategies Explained:

---Straddle Trade.

Straddle Trade.

Straddle trades take advantage of major market moving news events. Once the trend is identified, following news Straddle trades take advantage of major market moving news events. Once the trend is identified, following news release, the negative side of the trade is closed (or allowed stop out) and the positive side is allowed to run until a release, the negative side of the trade is closed (or allowed stop out) and the positive side is allowed to run until a sell candlestick or consolidation t

sell candlestick or consolidation technical trigger is received or profits are banked by personal preference.echnical trigger is received or profits are banked by personal preference. Arbitrage Trade

Arbitrage Trade

The Arbitrage Trade seeks to activate trades t

The Arbitrage Trade seeks to activate trades t hat have a high probability of success by hat have a high probability of success by utilizing early bearish orutilizing early bearish or  bullish movement on the Wall St DBT

 bullish movement on the Wall St DBT to trade the German DAX or vice versa.to trade the German DAX or vice versa. Momentum Trade.

Momentum Trade.

With the momentum strategy one

With the momentum strategy one aims to enter a strong trend aims to enter a strong trend and remain in the position as and remain in the position as long as technicals arelong as technicals are supportive.

supportive.

Swing/Continuation Pattern Trade. Swing/Continuation Pattern Trade. Flag/Pennant Formation.

Flag/Pennant Formation.

The objective of this strategy is to identify high probability swing or continuation pattern trades. The objective of this strategy is to identify high probability swing or continuation pattern trades.

The flag pattern forms what looks like a rectangle. The rectangle is formed by two parallel trend lines that act as The flag pattern forms what looks like a rectangle. The rectangle is formed by two parallel trend lines that act as support and resistance for the price until the price breaks out. In general, the flag will not be perfectly flat but will support and resistance for the price until the price breaks out. In general, the flag will not be perfectly flat but will have its trend lines sloping.

have its trend lines sloping. The pennant forms what looks like aThe pennant forms what looks like a symmetrical triangle, symmetrical triangle, where the support and where the support and resistance trend lines converge towards each other 

resistance trend lines converge towards each other 

..

Swing/Continuation Pattern Trade.

Swing/Continuation Pattern Trade. Descending Triangle Formation. Descending Triangle Formation.

The descending triangle is a bearish formation that

The descending triangle is a bearish formation that usually forms during a downtrend as a continuation pattusually forms during a downtrend as a continuation patt ern. Noern. No one can tell for sure how long

one can tell for sure how long it will last. it will last. There are instances when descending triangles form as reversal patterns atThere are instances when descending triangles form as reversal patterns at the end of an uptrend, but

the end of an uptrend, but they are typically continuation pattthey are typically continuation patterns. Regardless of where they form, descendingerns. Regardless of where they form, descending triangles are

(4)

Bollinger Band Trade Bollinger Band Trade

The Bollinger Band Squeeze occurs when volatility falls to low levels and the Bollinger Bands narrow. Periods of The Bollinger Band Squeeze occurs when volatility falls to low levels and the Bollinger Bands narrow. Periods of low volatility are often followed by periods of high volatility. Therefore, a volatility contraction or narrowing of the low volatility are often followed by periods of high volatility. Therefore, a volatility contraction or narrowing of the  bands can foreshadow a significant advance or decline

 bands can foreshadow a significant advance or decline. Once the squeeze play is on, a subsequent band break signals. Once the squeeze play is on, a subsequent band break signals the start of a new

the start of a new move.move. Channel/Range Trade. Channel/Range Trade. In the context of technical anal

In the context of technical analysis, a channel/range is defined as tysis, a channel/range is defined as the area between two parallel lines and he area between two parallel lines and is oftenis often taken as a measure of a trading range.

taken as a measure of a trading range. The upper trend line connects price The upper trend line connects price peaks (highs) or closes, and the lowerpeaks (highs) or closes, and the lower trend line connects lows or closes. An example of a channel/range is shown below.

trend line connects lows or closes. An example of a channel/range is shown below. Breakout points in channels Breakout points in channels indicate bullish (on upward trends) or

indicate bullish (on upward trends) or bearish (on downward trends) signals.bearish (on downward trends) signals. Candlestick Pattern Trade

Candlestick Pattern Trade Formation: Hammer. Formation: Hammer.

Candlestick pattern trades seek to “scalp” profits through trading highly recognizable candlestick formats. Candlestick pattern trades seek to “scalp” profits through trading highly recognizable candlestick formats. The hammer pattern normally appears when a

The hammer pattern normally appears when a short term doen trend is about short term doen trend is about to change. The longer the lengtto change. The longer the length of theh of the taper the better.

taper the better.

Formation: Bullish Engulfing. Formation: Bullish Engulfing.

Candlestick pattern trades seek to “scalp” profits through trading highly recognizable candlestick formats. Candlestick pattern trades seek to “scalp” profits through trading highly recognizable candlestick formats.

The longer the candle with the bullish engulfing formation pattern the higher the probability that the bull trend it The longer the candle with the bullish engulfing formation pattern the higher the probability that the bull trend it indicates will persist.

indicates will persist.

Formation: Bearish Engulfing. Formation: Bearish Engulfing.

Candlestick pattern trades seek to “scalp” profits through trading highly recognizable candlestick formats. Candlestick pattern trades seek to “scalp” profits through trading highly recognizable candlestick formats.

The longer the candle with the bullish engulfing formation pattern the higher the probability that the bear trend it The longer the candle with the bullish engulfing formation pattern the higher the probability that the bear trend it indicates will persist.

indicates will persist.

Formation: Shooting Star. Formation: Shooting Star.

Candlestick pattern trades seek to “scalp” profits through trading highly recognizable

Candlestick pattern trades seek to “scalp” profits through trading highly recognizable candlestick formats. candlestick formats. The shooting star pattern normally appears

The shooting star pattern normally appears when a short term up-trend is about when a short term up-trend is about to change. The longer the to change. The longer the length oflength of the taper the better.

the taper the better. Formation: Doji. Formation: Doji.

Candlestick pattern trades seek to “scalp” profits through trading highly

Candlestick pattern trades seek to “scalp” profits through trading highly recognizable candlestick formats.recognizable candlestick formats.

The Doji pattern normally appears when there is complete indecision as to future trend. The next significant candle The Doji pattern normally appears when there is complete indecision as to future trend. The next significant candle that appears normally indicates the future micro trend.

that appears normally indicates the future micro trend.

--- --Read Christopher M. Quigley’s decade of published essays on Trading & Investment at MarketOracle.Co.UK. Read Christopher M. Quigley’s decade of published essays on Trading & Investment at MarketOracle.Co.UK.

http://www.marketoracle.co.uk/UserInfo-Christopher_Quigley.html

http://www.marketoracle.co.uk/UserInfo-Christopher_Quigley.html

--- ---Note 1: Note 1: Dow Theory Dow Theory

(5)

The Dow theory has

The Dow theory has been around for almost 100 years. Developed by Charles Dow been around for almost 100 years. Developed by Charles Dow and refined byand refined by William Hamilton, many of the ideas put

William Hamilton, many of the ideas put forward by these two men have forward by these two men have become axioms of Wall Street.become axioms of Wall Street.

Background: Background:

Charles Dow developed the Dow theory from his analysis of market price action in the late 19th. Charles Dow developed the Dow theory from his analysis of market price action in the late 19th.

Century. Until his death in 1902, Dow was part owner as well as editor of the Wall Street Journal. Even Century. Until his death in 1902, Dow was part owner as well as editor of the Wall Street Journal. Even though Charles Dow is credited with initiating Dow theory, it was S.A. Nelson and William Hamilton who though Charles Dow is credited with initiating Dow theory, it was S.A. Nelson and William Hamilton who later refined the theory into what it is today. In 1932 Robert Rhea further refined the analysis. Rhea later refined the theory into what it is today. In 1932 Robert Rhea further refined the analysis. Rhea studied and deciphered some

studied and deciphered some 252 editorials through which Dow and 252 editorials through which Dow and Hamilton conveyed their thoughtsHamilton conveyed their thoughts on the market.

on the market.

Main Assumptions: Main Assumptions: 1.

1. ManipulatiManipulation on of of the the primary primary trend trend as as not not being being possible possible is is the the primary primary assumption assumption of of the the DowDow theory. Hamilton also believed that while individual stocks could be

theory. Hamilton also believed that while individual stocks could be influenced it would be virtuallyinfluenced it would be virtually impossible to manipulate the market as a

impossible to manipulate the market as a whole.whole.

2.

2. Averages Averages discount discount everything. everything. This This assumptioassumption n means means that that the the markets markets reflect reflect all all knownknown information. Everything there is to know is already reflected in the markets through price. Price information. Everything there is to know is already reflected in the markets through price. Price

represents the sum total of all the hopes, fears and expectations of all participants. The un-expected will represents the sum total of all the hopes, fears and expectations of all participants. The un-expected will occur, but usually this will affect

occur, but usually this will affect the short-term trend. The primary trend will remain unaffected.the short-term trend. The primary trend will remain unaffected. Hamilton noted that sometimes the market would react negatively to good news. For Hamilton the Hamilton noted that sometimes the market would react negatively to good news. For Hamilton the reason was simple: the markets look

reason was simple: the markets look ahead, this explains the old Wall ahead, this explains the old Wall Street axiom "buy on the rumourStreet axiom "buy on the rumour and sell on the news".

and sell on the news".

Even though the Dow Theory is not meant for short-term trading, it can still add value for traders. Thus Even though the Dow Theory is not meant for short-term trading, it can still add value for traders. Thus no matter what your time frame, it always helps to be able to identify the primary trend. According to no matter what your time frame, it always helps to be able to identify the primary trend. According to Hamilton those who successfully applied the Dow Theory rarely traded on

Hamilton those who successfully applied the Dow Theory rarely traded on too regular a basis. Hamiltontoo regular a basis. Hamilton and Dow were not

and Dow were not concerned with the risks involved in getting exact tops and concerned with the risks involved in getting exact tops and bottoms. Their mainbottoms. Their main concern was catching large moves. They advised the close study of the markets on a daily basis, but they concern was catching large moves. They advised the close study of the markets on a daily basis, but they also sought to minimise the effects of random movements and recommended concentration on the also sought to minimise the effects of random movements and recommended concentration on the primary trend.

primary trend. Price Movement: Price Movement:

Dow and Hamilton identified three types of price movement for the Dow Jones Industrial and Rail Dow and Hamilton identified three types of price movement for the Dow Jones Industrial and Rail averages:

(6)

A.

A. Primary Primary movementsmovements B.

B. Secondary movementsSecondary movements C.

C. Daily Daily fluctuationsfluctuations A.

A. Primary Primary moves moves last last from from a a few few months months to to many many years years and and represent represent the the broad broad underlying underlying trendtrend of the market.

of the market.

B.

B. Secondary Secondary or or reaction reaction movements movements last last for for a a few few weeks weeks to to many many months months and and move move counter counter toto the primary trend.

the primary trend.

C.

C. Daily Daily fluctuationfluctuations s can can move move with with or or against against the the primary primary trend trend and and last last from from a a few few hours hours to to a a fewfew days, but usually not more than a week.

days, but usually not more than a week.

Primary movements

Primary movements, as mentioned, represent the broad underlying trend. These actions are typically, as mentioned, represent the broad underlying trend. These actions are typically referred to as BULL or BEAR trends. Bull means buying or positive trends and Bear means negative or referred to as BULL or BEAR trends. Bull means buying or positive trends and Bear means negative or selling trends.

selling trends. Once the primary trend has been identified, it will remain in effect until provenOnce the primary trend has been identified, it will remain in effect until proven otherwise

otherwise. Hamilton believed that the length and . Hamilton believed that the length and the duration of the trend were largelythe duration of the trend were largely undeterminab

undeterminable. Many traders and investors get hung le. Many traders and investors get hung up on up on price and time targets. The reality of theprice and time targets. The reality of the situation is that nobody knows

situation is that nobody knows where and when the primary trend will where and when the primary trend will end.end.

The objective of Dow Theory is to utilize what we

The objective of Dow Theory is to utilize what we do know,do know, not to haphazardly guess about what wenot to haphazardly guess about what we do not. Through a set of guidelines. Dow Theory enables investors to identify the primary trend and do not. Through a set of guidelines. Dow Theory enables investors to identify the primary trend and invest accordingly. Trying to predict the length and duration of the trend is an exercise in futility. invest accordingly. Trying to predict the length and duration of the trend is an exercise in futility. Success according to Hamilton and Dow is measured by the ability to identify the primary trend and Success according to Hamilton and Dow is measured by the ability to identify the primary trend and stay with it.

stay with it.

Secondary movements

Secondary movements run counter to the primary trend and are reactionary in nature. In a bull market run counter to the primary trend and are reactionary in nature. In a bull market a secondary move is

a secondary move is considered a correction. In a bear considered a correction. In a bear market, secondary moves are sometimes calledmarket, secondary moves are sometimes called reaction rallies. Hamilton characterized secondary moves as a

reaction rallies. Hamilton characterized secondary moves as a necessary phenomenon to combatnecessary phenomenon to combat excessive speculation

excessive speculation. Corrections and counter moves kept speculators in check and . Corrections and counter moves kept speculators in check and added a healthyadded a healthy dose of guess work to market movements. Because of their complexity and deceptive nature,

dose of guess work to market movements. Because of their complexity and deceptive nature, secondary movement

secondary movements require extra careful study and analysis. s require extra careful study and analysis. He discovered investors often mistake aHe discovered investors often mistake a secondary move as the beginning of a new primary trend.

(7)

Daily

Daily fluctuations,fluctuations, while important when viewed as a group, can while important when viewed as a group, can be dangerous and unreliablebe dangerous and unreliable individually. getting t

individually. getting too caught up in the movement of one or two doo caught up in the movement of one or two d ays can lead to hasty decisions thatays can lead to hasty decisions that are based on

are based on emotion.emotion. To invest successfully it is vitally important to keep the To invest successfully it is vitally important to keep the whole picture in mindwhole picture in mind when analysing daily price

when analysing daily price movements.movements. In general they agreed the study of daily price action can addIn general they agreed the study of daily price action can add valuable insight, but only when taken in

valuable insight, but only when taken in greater contextgreater context..

The Three Stages of Primary Bull Markets and Primary Bear Markets The Three Stages of Primary Bull Markets and Primary Bear Markets ..

Hamilton identified three stages to both primary bull and primary bear markets. The

Hamilton identified three stages to both primary bull and primary bear markets. The stages relate asstages relate as much to the psychological state of the market as to the movement of prices.

much to the psychological state of the market as to the movement of prices.

Primary Bull Market

Primary Bull Market

Stage

Stage 1. 1. AccumulatioAccumulationn

Hamilton noted that the first stage of a bull market was largely indistinguishable from the last reaction Hamilton noted that the first stage of a bull market was largely indistinguishable from the last reaction rally in a

rally in a bear market. Pessimismbear market. Pessimism, which was excessive at the , which was excessive at the end of the end of the bear market, still reigns at bear market, still reigns at thethe beginning of a bull market. In the first stage of a

beginning of a bull market. In the first stage of a bull market, stocks begin to find a bottom and quietlybull market, stocks begin to find a bottom and quietly firm up. After the first leg peaks and starts to head down, the bears come out proclaiming that the bear firm up. After the first leg peaks and starts to head down, the bears come out proclaiming that the bear market is not over. It is at this stage that careful analysis is

market is not over. It is at this stage that careful analysis is warranted to determwarranted to determine if the decline is aine if the decline is a secondary movement.

secondary movement. If is a secondary move, then the low forms above the previous low,If is a secondary move, then the low forms above the previous low, a quiet a quiet period will ensue as the market firms and then an advance will begin. When the previous peak is period will ensue as the market firms and then an advance will begin. When the previous peak is surpassed, the beginning of the second leg and a primary bull will be confirmed.

surpassed, the beginning of the second leg and a primary bull will be confirmed. Stage

Stage 2. 2. Movement Movement With With StrengthStrength

The second stage of a primary bull market is usually the longest, and sees the largest advance in prices. The second stage of a primary bull market is usually the longest, and sees the largest advance in prices. It is a

It is a period marked by improving business conditions and increased valuations in stocks. This isperiod marked by improving business conditions and increased valuations in stocks. This is considered the easiest stage to make profit as

considered the easiest stage to make profit as participparticipation is ation is broad and the trend followers begin tobroad and the trend followers begin to participate.

participate. Stage

Stage 3. 3. ExcessExcess

Marked by excess speculation and the

Marked by excess speculation and the appearance of inflationary pressures. Durinappearance of inflationary pressures. During the third and g the third and finalfinal stage, the public is fully involved in the market, valuations are excessive and confidence is

stage, the public is fully involved in the market, valuations are excessive and confidence is extraordinar

extraordinarily ily high.high.

Primary Bear Market

Primary Bear Market

Stage

Stage 1. 1. DistributioDistributionn Just as accumulation is the

Just as accumulation is the hallmark of the first stage of hallmark of the first stage of a primary bull market, distribution marks thea primary bull market, distribution marks the beginning of a bear market. As the "smart money" begins to realise that business conditions are not beginning of a bear market. As the "smart money" begins to realise that business conditions are not quite as good as once thought, and thus they begin to sell

(8)

indicate a bear market is

indicate a bear market is at hand and at hand and general business conditions remain good. However stocks begin togeneral business conditions remain good. However stocks begin to lose their lustre and the decline begins to take hand. After a moderate decline, there is a reaction rally lose their lustre and the decline begins to take hand. After a moderate decline, there is a reaction rally that retraces a portion of the decline.

that retraces a portion of the decline. Hamilton noted that reaction rallies during a bear market wereHamilton noted that reaction rallies during a bear market were quite swift and sharp

quite swift and sharp. This quick . This quick and sudden movement would invigorate the bulls to proclaim the bulland sudden movement would invigorate the bulls to proclaim the bull market alive and well.

market alive and well. However the reaction high of the secondary move would form and be lowerHowever the reaction high of the secondary move would form and be lower than the previous high.

than the previous high. After making a lower high,After making a lower high, a break below the previous low,a break below the previous low, would confirm thatwould confirm that this was the second stage of a

this was the second stage of a bear market.bear market.

Stage

Stage 2. 2. Movement Movement With With StrengthStrength

As with the primary bull market stage two of a primary bear market provides the largest move. This is As with the primary bull market stage two of a primary bear market provides the largest move. This is when the trend has been identified as down and business conditions begin to deteriorate. Earnings when the trend has been identified as down and business conditions begin to deteriorate. Earnings estimates are reduced, shortfalls occur, profit margins shrink

estimates are reduced, shortfalls occur, profit margins shrink and revenues fall.and revenues fall.

Stage

Stage 3. 3. DespairDespair At the final stage of a

At the final stage of a bear market all hope is lost and stocks are frowned upon. Valuations are low, butbear market all hope is lost and stocks are frowned upon. Valuations are low, but the selling continues as participants seek to sell no matter what. The news from corporate America is the selling continues as participants seek to sell no matter what. The news from corporate America is bad, the economic outlook is bleak and no buyers are to be found. The market will continue to decline bad, the economic outlook is bleak and no buyers are to be found. The market will continue to decline until all the bad news is fully priced into the stocks. Once stocks fully reflect the worst possible outcome, until all the bad news is fully priced into the stocks. Once stocks fully reflect the worst possible outcome, the cycle begins again.

the cycle begins again. Signals:

Signals: A.

A. Identification Identification Of Of The The TrendTrend

The first step in the identifying the primary trend is to analyse the individual trend of the Dow Jones The first step in the identifying the primary trend is to analyse the individual trend of the Dow Jones Industrial Average and the Dow Jones Transport Average. Hamilton used peak and trough analysis to Industrial Average and the Dow Jones Transport Average. Hamilton used peak and trough analysis to ascertain the identity of the trend.

ascertain the identity of the trend. An uptrend is defined by prices that form a series of An uptrend is defined by prices that form a series of rising peaksrising peaks and rising troughs [higher highs and higher l

and rising troughs [higher highs and higher l ows].ows]. In contrast, aIn contrast, a downtrend is defined by prices thatdowntrend is defined by prices that form a series of

form a series of declining peaks and declining troughs [lower highs and lower lows].declining peaks and declining troughs [lower highs and lower lows]. Once the trend has

Once the trend has been identified, it is assumed valid until been identified, it is assumed valid until proven otherwise. A downtrend isproven otherwise. A downtrend is considered valid until a

considered valid until a higher low formshigher low forms and the ensuing advance off the higher lowand the ensuing advance off the higher low surpasses thesurpasses the previous reaction high.

previous reaction high. Conversely, an uptrend is considered in place until a lower low forms.Conversely, an uptrend is considered in place until a lower low forms.

B.

B. Averages Must Averages Must ConfirmConfirm

Hamilton and Dow stressed that for a primary trend or sell signal to be valid, both the Dow Jones Hamilton and Dow stressed that for a primary trend or sell signal to be valid, both the Dow Jones Industrial and The

Industrial and The Transport averagesTransport averages must confirm each other.must confirm each other. For example if one average records aFor example if one average records a new high or new low, then the other must soon follow for a Dow theory signal to be considered valid. new high or new low, then the other must soon follow for a Dow theory signal to be considered valid.

(9)

C.

C. VolumeVolume

Though Hamilton did analyse statistics, price action was the ultimate determinant. Volume is more Though Hamilton did analyse statistics, price action was the ultimate determinant. Volume is more important when confirmin

important when confirming the strength of g the strength of advances and can also advances and can also help to identify potential reversals.help to identify potential reversals. Hamilton thought that volume should increase in the direction of the primary trend. For example in a Hamilton thought that volume should increase in the direction of the primary trend. For example in a primary bull market, volume should be heavier on

primary bull market, volume should be heavier on advances than during corrections. The opposite isadvances than during corrections. The opposite is true in a

true in a primary bear market. Volume should increase on the declines and decrease during the reactionprimary bear market. Volume should increase on the declines and decrease during the reaction rallies. Thus by analysing the

rallies. Thus by analysing the reaction rallies and corrections, it is possible to judge reaction rallies and corrections, it is possible to judge the underlyingthe underlying strength of the primary trend.

strength of the primary trend.

D.

D. Trading Trading RangesRanges

In his commentaries over the years, Hamilton referred many times to "lines". Lines are horizontal lines In his commentaries over the years, Hamilton referred many times to "lines". Lines are horizontal lines that form trading ranges. Trading ranges develop when the averages move sideways over a

that form trading ranges. Trading ranges develop when the averages move sideways over a period ofperiod of time and make it

time and make it possible to draw horizontal lines connecting the tops and the possible to draw horizontal lines connecting the tops and the bottoms. These tradingbottoms. These trading ranges indicate either accumulation or distribution, but are virtually impossible to tell which until there ranges indicate either accumulation or distribution, but are virtually impossible to tell which until there was a clear break to the upside or the downside.

was a clear break to the upside or the downside.

Conclusion

Conclusion

The goal of Dow and Hamilton was to

The goal of Dow and Hamilton was to identify the primaridentify the primary trend and catch the big moves up and be y trend and catch the big moves up and be outout of the market the rest of the time. They well understood that the market was influenced by emotion and of the market the rest of the time. They well understood that the market was influenced by emotion and prone to over-reaction, both up and down.

prone to over-reaction, both up and down. With this in mind, they With this in mind, they concentratconcentrated on identification anded on identification and following the trend.

following the trend. Dow theory [or set of

Dow theory [or set of assumptions] helps investors identify facts. It can form an excellent basis assumptions] helps investors identify facts. It can form an excellent basis forfor analysis and has

analysis and has become the cornerstone for many professional traders in understanding marketbecome the cornerstone for many professional traders in understanding market movement. Hamilt

movement. Hamilton and Dow on and Dow believed that success in the markets required serious study and believed that success in the markets required serious study and analysis.analysis. They realised that success was a

They realised that success was a great thing, but also realised that failure, while painful, should begreat thing, but also realised that failure, while painful, should be looked upon as learning experiences. Techni

looked upon as learning experiences. Technical analysis is an art form and the cal analysis is an art form and the eye and mind groweye and mind grow keener with practice. Study both success and failure with an

keener with practice. Study both success and failure with an eye to the future.eye to the future.

Note 2:

Note 2:

Contracts for Difference

Contracts for Difference

(10)

ONE of the most innovative financial instruments that have

ONE of the most innovative financial instruments that have developed over the last decad

developed over the last decade or so

e or so

is the CONTRACT FOR DIFFENCE, better known

is the CONTRACT FOR DIFFENCE, better known as a CFD. The explosion

as a CFD. The explosion in the use of this

in the use of this

 product is one of the reasons why London, as opposed to New York, is becoming the financial

 product is one of the reasons why London, as opposed to New York, is becoming the financial

location of preference for many financial mana

location of preference for many financial managers and hedge traders. CFD's are not allowed

gers and hedge traders. CFD's are not allowed in

in

the U.S. due to legal

the U.S. due to legal restrictions imposed by the American Regulators.

restrictions imposed by the American Regulators.

Contracts for Difference were developed in London

Contracts for Difference were developed in London in the early 1990's. The

in the early 1990's. The innovation is

innovation is

accredited to Mr. Brian Keelan and

accredited to Mr. Brian Keelan and Mr. Jon Wood of UBS Warburg. The

Mr. Jon Wood of UBS Warburg. They were then initially

y were then initially

used by institutional investors and hedge funds to

used by institutional investors and hedge funds to limit their exposure to volatility on the London

limit their exposure to volatility on the London

Stock Exchange in a cost-effective way, for in addition to being traded on margin, they helped

Stock Exchange in a cost-effective way, for in addition to being traded on margin, they helped

avoid stamp duty (a government tax on purchase and sale of securities).

avoid stamp duty (a government tax on purchase and sale of securities).

A CFD is in essence a contract between two parties agreeing that the buyer will be paid by the

A CFD is in essence a contract between two parties agreeing that the buyer will be paid by the

seller the difference between the contract value

seller the difference between the contract value of the underlying equity and

of the underlying equity and its value at time of

its value at time of

contract. This means that traders and investors can participate in

contract. This means that traders and investors can participate in the gains and losses (if shorting)

the gains and losses (if shorting)

of the market for a fraction of capital ex

of the market for a fraction of capital exposed if the equity was purchased ou

posed if the equity was purchased outright. In This

tright. In This

regard the CDS's operate like option

regard the CDS's operate like option contracts, but unlike calls and puts, there are n

contracts, but unlike calls and puts, there are no fixed

o fixed

expiration dates and contract amounts. How

expiration dates and contract amounts. However contract values are normally subject to interest

ever contract values are normally subject to interest

and commission charges. For this reason they are

and commission charges. For this reason they are not really suitable to investors with a long-term

not really suitable to investors with a long-term

 buy and hold strategies.

 buy and hold strategies.

CFd's allow traders to invest long or short using margin. This

CFd's allow traders to invest long or short using margin. This fixed margin is usually about 5-

fixed margin is usually about

5-10% of the value of the

10% of the value of the underlying financial instrument. Once the contract is p

underlying financial instrument. Once the contract is purchased there is a

urchased there is a

variable adjustment in the value of the

variable adjustment in the value of the clients account based on the

clients account based on the "marked to market" valuation

"marked to market" valuation

 process that happens in real time when the market is open. Thus for example if a stock ABC Inc.

 process that happens in real time when the market is open. Thus for example if a stock ABC Inc.

is trading at $100 it would cost approx. $10 to trade a CFD in ABC. If 1000 units were traded

is trading at $100 it would cost approx. $10 to trade a CFD in ABC. If 1000 units were traded

it would therefore cost the investor $10,000 to

it would therefore cost the investor $10,000 to "control" $100,000 worth of stock.

"control" $100,000 worth of stock. If the stock

If the stock

increased in value to $110 the "marked to market" process would add $10,000 to the client's

increased in value to $110 the "marked to market" process would add $10,000 to the client's

account (110-100 by 100

account (110-100 by 1000). As we can see the

0). As we can see the situation works very similarly to options but for

situation works very similarly to options but for

the fact that there are no

the fact that there are no standard option contract sizes and exp

standard option contract sizes and expiration dates and complicated

iration dates and complicated

strike levels. Their simplicity has added greatly to their popular app

strike levels. Their simplicity has added greatly to their popular app eal amount the retail public.

eal amount the retail public.

Contracts For Difference are currently available in over the

Contracts For Difference are currently available in over the counter markets in Sweden, Spain,

counter markets in Sweden, Spain,

France, Canada, New Zealand,

France, Canada, New Zealand, Australia, South Africa, Australia, Singapore, Switzerland, Italy,

Australia, South Africa, Australia, Singapore, Switzerland, Italy,

Germany and the United Kingdom. Their power and scope continue to grow. This development

Germany and the United Kingdom. Their power and scope continue to grow. This development

 poses a problem to American financial institutions in that unless

 poses a problem to American financial institutions in that unless there is a change in security

there is a change in security

regulation Wall Street will lose out on a financial instrument that is ch

regulation Wall Street will lose out on a financial instrument that is ch anging the manner in

anging the manner in

which the greater public and a

which the greater public and aggressive financial managers are investing for the future. It is

ggressive financial managers are investing for the future. It is

expected that Contracts for Difference will become the

expected that Contracts for Difference will become the medium of transaction for the majority of

medium of transaction for the majority of

World traders within the next decade.

World traders within the next decade.

Note 3: Note 3:

Moving Average Convergence Divergence

(11)

 Developed by Gerald A

 Developed by Gerald Appel, MACD is one of the simplest and

ppel, MACD is one of the simplest and most reliable indicators

most reliable indicators

available. MACD uses moving averages, which

available. MACD uses moving averages, which are lagging indicators, to include some

are lagging indicators, to include some trend

trend

following characteristics. These lagging indicators are turned into a momen

following characteristics. These lagging indicators are turned into a momen tum oscillator by

tum oscillator by

subtracting the longer moving average from the

subtracting the longer moving average from the shorter moving average. The resulting plot forms

shorter moving average. The resulting plot forms

a line that oscillates above and below zero.

a line that oscillates above and below zero.

The most popular formula for the standard MACD

The most popular formula for the standard MACD is the difference between a stock's 26-da

is the difference between a stock's 26-day and

y and

12-day exponential moving averages. However Appel and others have since tinkered with these

12-day exponential moving averages. However Appel and others have since tinkered with these

original settings to come up with a MACD

original settings to come up with a MACD that is better suited for faster or slower securities.

that is better suited for faster or slower securities.

Using shorter moving averages will produce a qui

Using shorter moving averages will produce a quicker, more responsive indicator, while using

cker, more responsive indicator, while using

longer averages will produce a slower indicator.

longer averages will produce a slower indicator.

What does MACD do?

What does MACD do?

MACD measures the difference between two moving

MACD measures the difference between two moving averages. A positive MACD indicates that

averages. A positive MACD indicates that

the 12-day EMA (exponential moving average) is trading above the 26-day EMA. A negative

the 12-day EMA (exponential moving average) is trading above the 26-day EMA. A negative

MACD indicates that the 12-day EMA is trading

MACD indicates that the 12-day EMA is trading below the 26-EMA. If MACD is positive and

below the 26-EMA. If MACD is positive and

rising, then the gap between the 12-day EMA and the 26-day EMA is widening. This indicates

rising, then the gap between the 12-day EMA and the 26-day EMA is widening. This indicates

that the rate-of-change of the faster moving average

that the rate-of-change of the faster moving average is higher than the rate-of-change for the

is higher than the rate-of-change for the

slower moving average. Positive momentum is increasing and this

slower moving average. Positive momentum is increasing and this would be considered bullish.

would be considered bullish.

If MACD is negative and declining further, then

If MACD is negative and declining further, then the negative gap between

the negative gap between the faster moving

the faster moving

average and the slower moving average is expanding. Downward momentum is accelerating and

average and the slower moving average is expanding. Downward momentum is accelerating and

this would be considered bearish. MACD centerline

this would be considered bearish. MACD centerline crossovers occur when the faster moving

crossovers occur when the faster moving

average crosses the slower moving average. On

average crosses the slower moving average. One of the primary benefits of MACD is that it

e of the primary benefits of MACD is that it does

does

incorporate aspects of both

incorporate aspects of both

momentum

momentum

 and

 and

trend

trend

 in one indicator. As a trend

 in one indicator. As a trend following

following

indicator, it will not be wrong for long. The

indicator, it will not be wrong for long. The use of moving averages ensures that

use of moving averages ensures that the indicator

the indicator

will eventually follow the movements of the underlying security.

will eventually follow the movements of the underlying security.

As a momentum indicator, MACD has the ability to

As a momentum indicator, MACD has the ability to foreshadow moves in the underlying stock.

foreshadow moves in the underlying stock.

MACD divergences can be a key fact

MACD divergences can be a key factor in predicting a trend change.

or in predicting a trend change. For example a negative

For example a negative

divergence on a rising security signifies that bullish momentum is wavering and

divergence on a rising security signifies that bullish momentum is wavering and that there could

that there could

 be a potential change in trend from bullish to bearish. This can serve as an alert for traders and

 be a potential change in trend from bullish to bearish. This can serve as an alert for traders and

investors.

investors.

In 1986 Thomas Aspray developed the MACD

In 1986 Thomas Aspray developed the MACD

histogram

histogram

in order to anticipate MACD

in order to anticipate MACD

crossovers. The MACD histogram represents the difference between MACD

crossovers. The MACD histogram represents the difference between MACD and the 9-day EMA

and the 9-day EMA

of MACD. The plot of this difference is presented

of MACD. The plot of this difference is presented as a histogram, making centerline crossovers

as a histogram, making centerline crossovers

and divergences more identifiable. Sharp increase

and divergences more identifiable. Sharp increases in the MACD histogram indicate that MACD

s in the MACD histogram indicate that MACD

is rising faster than the 9-day ema and bullish mo

is rising faster than the 9-day ema and bullish momentum is strengthening. Sharp declines in the

mentum is strengthening. Sharp declines in the

MACD histogram indicate that the MACD is falling faster that its 9-day ema

MACD histogram indicate that the MACD is falling faster that its 9-day ema and bearish

and bearish

momentum is increasing. Thomas Aspray recognized

momentum is increasing. Thomas Aspray recognized the MACD histogram as a tool to

the MACD histogram as a tool to

anticipate

anticipate

 a moving average crossover. Divergences usually appear in the MACD histogram

 a moving average crossover. Divergences usually appear in the MACD histogram

 before MACD moving average crossover. Armed with this knowledge, traders and investors can

 before MACD moving average crossover. Armed with this knowledge, traders and investors can

 better prepare for potential change. Remember the weekly MACD histogram can be used to

 better prepare for potential change. Remember the weekly MACD histogram can be used to

generate a long-term signal in order to establish the tradable trend, thus allowing only short-term

generate a long-term signal in order to establish the tradable trend, thus allowing only short-term

signals that agree with the major trend to be

(12)

© Christopher M. Quigley 2017 Dublin, Ireland,

© Christopher M. Quigley 2017 Dublin, Ireland,

info@wealthbuilder.ie

References

Related documents

After a petition for a rehearing en banc was denied, the United States Supreme Court granted certiorari. 8 ' Nev- ertheless, by applying the rational basis standard

For the real-time protocol, the difference between the best online opponent model (HardHeaded Frequency Model) and No Model is 0.0135; for the round-based protocol it is 0.0144

more than four additional runs were required, they were needed for the 2 7-3 design, which is intuitive as this design has one more factor than the 2 6-2 design

 Basic Maintenance of Eligible Broadband Internal Connections Components  E-rate support is available for basic maintenance and technical support appropriate to. maintain

○ If BP elevated, think primary aldosteronism, Cushing’s, renal artery stenosis, ○ If BP normal, think hypomagnesemia, severe hypoK, Bartter’s, NaHCO3,

I problematize three family images associated with the design and implementation of housing projects: the bureaucratic family, envisaged by policymakers as conflating with a model

To compare the performance between newly designed 1X probe for the dual activity of Exonuclease III and traditional 0X probe for 3’ to 5’ exonuclease activity, we

The depressed patient cohort consists of all patients over 18 years of age who meet criteria (explained below) ensuring that they: (i) indeed have depression, (ii) have a