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).
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.
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
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 TheoryThe 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:
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.
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
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.
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
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