Technical Analysis 101 : Session 2

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(No Transcript)
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Technical Analysis 101 Session 2 Stanley
Yabroff Val Alekseyev
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Session 2

• Trending Indicators
• Parabolic Indicator
• Moving Averages
• Ichimoku Clouds
• Elliot Waves
• Bollinger bands
• Average Directional Movement Indicator

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Oscillators and Studies
Trend Following MACD Moving Average
Convergence Divergence SAR Parabolic Stop and
Reverse Momentum Indicators RSI Relative
Strength Index Slow Stochastic K and D ROC
Rate of Change Timing Elliot Wave
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Parabolic

• Parabolic (Para)
• Welles Wilder's Parabolic study is a time/price
  reversal system. The letters "SAR" stand for
  "stop and reverse" meaning that the position is
  reversed when the protective stop is hit. It is a
  trend-following system. As prices trend higher,
  the SARs tend to start out slower and then
  accelerate with the trend. In a downtrend, the
  same thing happens but in the opposite direction.
  The SAR numbers are calculated and available to
  the user for the following day based on the
  following equation
• SAR (tomorrow) SAR (today) AF(EP trade SAR
  today)
• where AF begins at 0.020 (default value) and is
  increased by .02 each bar that a new high/low is
  made (depending on the trend direction) until a
  value of 0.20 is reached EP Extreme Price
  point for the trade made so far (if Long, EP is
  the extreme high price for the trade if Short,
  EP is the extreme low price for the trade).
• Thus, the Parabolic Time/Price System rides the
  trend until the SAR price is penetrated. Then the
  existing position is closed out and the reverse
  position is opened.

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Parabolic Stop and Reverse (SAR)
Trend Following System
Time/Price Reversal System
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Moving Averages

• Trend following indicator
• Moving average is a smoothing indicator
• Moving averages are lagging indicators which do
  not work well in non-trending markets. Results in
  trading whipsaws

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Types of Moving Averages

• Simple Moving Average
• Most commonly used arithmetic mean
• Gives equal weight to each price
• Weighted Moving Average
• Puts greater weight on the most recent activity.
  For example in a 5 bar weighted moving average
  the last bar is multiplied by 5, the next to the
  last bar is multiplied by 4 and so on. The total
  value is divided by the sum of the multipliers,
  i.e. the divisor to the 5 bar WMA is 15 (
  5432115)
• Exponential Moving Average
• Also puts greater weight on the most recent
  activity.
• Percentage weight is used t give greatest weight
  to most recent activity.
• Smoothed Moving Average
• Similar to the simple moving average except the
  previous smooth average value is subtracted
  rather than the oldest value in a simple moving
  average.

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Simple Moving Average

• For the following example the PERIOD 3.
• The first value for a Simple Average is
  determined by formula SIMPLE. It is plotted on
  the chart at the third bar from the left side of
  the screen.
• SIMPLE (PRICE 1 PRICE 2 PRICE 3) / PERIOD
• The next value would be plotted at the fourth bar
  from the left side of the screen.
• SIMPLE (PRICE 2 PRICE 3 PRICE 4)/PERIOD
• Subsequent values would be determined by
  eliminating the oldest PRICE from the
  calculation, and including the next more recent
  PRICE.
• Most widely used of all technical indicators

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Weighted Moving Average

• The CQG weighted moving average assigns weights
  linearly, assigning greater weights to more
  recent data points.
• Example
• A 21 period weighted moving average would be
  calculated as follows
• 21 Close (0) 20 Close (-1) 19
  Close (-2) .1 Close (-20)

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Exponential Moving Average Calculation

• Exponential Moving Average Calculation
• For the following example the PERIOD 3 and the
  PRICE CLOSE.
• To calculate an Exponentially Smoothed Moving
  Average, (ESMA), the user must enter an integer
  value for the PERIOD or a decimal value Smoothing
  Constant.
• A decimal value Smoothing Constant must be
  greater than 0.0 and less than or equal to 2.0.
  Example .5
• When an integer value is entered for PERIOD, the
  smoothing constant is converted by the system to
  a decimal value using the following formula
• Smoothing Constant
• 2 / (PERIOD 1)
• 2 / (31)
• 2 / 4
• .5
• The Exponentially Smoothed Moving Average, ESMA,
  may be calculated after the Smoothing Constant is
  known.
• The first ESMA value is initially set to the
  first PRICE before the calculation begins. The
  first PRICE is from the leftmost bar on the
  screen.
• The formula for calculating the ESMA is as
  follows

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Smooth Moving Average

• A Smoothed Moving Average is similar to a simple
  moving average. However, in a smoothed moving
  average, rather than subtracting the oldest
  value, as in a simple moving average, the
  previous smoothed average value is subtracted.
• For the following example the PERIOD 3.
• First value is ready when Period first bars are
  accumulated.
• First value SMOOTH(1) AccumulatedPrice / Period
  where AccumulatedPrice is a sum of Period input
  prices.
• Next value (say SMOOTH(N)) is calculated as
• SMOOTH(N) SMOOTH(N-1) (Price(N) -
  SMOOTH(N-1)) / Period
• The next value would be plotted at the fourth bar
  from the left side of the screen.
• SMOOTH2 (PREVIOUS SUM - PREVIOUS AVG PRICE 4)
  / PERIOD
• For the second calculation of SMOOTH, PREVIOUS
  SUM is the sum of PRICE 1 PRICE 2 PRICE 3
  and PREVIOUS AVG is the initial value of SMOOTH.
• The next value would be plotted at the fifth bar
  from the left side of the screen.
• SMOOTH (PREVIOUS SUM - PREVIOUS AVG PRICE 5)
  / PERIOD
• Subsequent values would be determined by
  subtracting the PREVIOUS AVG from the PREVIOUS
  SUM, adding the next more recent PRICE, then
  dividing by the PERIOD.
• Example
• If the values 1,2,3,4 and 5 were reported for the
  first 5 bars the 3-period smoothed moving
  averages for those bars would be calculated as
  follows
• (12 3)/3 2
• This is the first value and would be plotted on
  the 3rd bar from the left.

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Single Moving Average Cross
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Two Moving Average Cross
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Three Moving Average Cross
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Ichimoku Cloud

• Trend following tool. Used heavily by Japanese
  traders, especially currency traders. It is
  gaining popularity in the United States.
• Ichimoku cloud system is comprised of five moving
  averages.
• Kijun (Trend) Line (highest high lowest low)/2
  calculated over last 26 periods
• Tenkan (Signal) Line (highest high lowest
  low)/2 calculated over last 9 periods
• Chikou (Lagging) Span Most current closing price
  plotted 26 time periods back
• Kumo (Cloud)
• Senkou Span A (Tenkan line Kijun Line)/2
  plotted 26 time periods ahead
• Senkou Span B (highest high lowest low)/2
  calculated over past 52 time periods, sent 26
  periods ahead.

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Advantages of the Ichimoku Clouds

• Trend identification
• Displays multiple levels of support and
  resistance, both currently and projects into the
  future.
• Comprised of moving averages with its strengths
  and weakness.
• Thickness of the cloud represents both the
  strength of the support or resistance and
  volatility.
• Thin cloud is little support or resistance .
• Thick cloud is strong support or resistance.
• Price closes above the cloud, the trend is up.
• Price closes below the cloud, the trend is down.
• Price closes in the cloud, the market is sideways.

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Ichimoku Cloud Chart
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Elliott Wave

• A trend moves in five waves.
• A trend can be in either direction.
• A correction occurs in three waves.
• Wave 1
• In a bullish trend wave 1 is accumulation stage
  and the very beginning of the new trend. Look for
  a bullish divergence between price and RSI.
• Volume is declining as the previous trend comes
  to an end.
• Wave 2
• First retracement, retraces wave 1 but does not
  violate the low of wave 1. This retracement
  should not retrace more than 61.8 of the
  original move.

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Ichimoku Cloud with Japanese Candlesticks
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Elliot Wave
Elliot Wave Impulse wave formation
followed by a Corrective wave.
Impulse wave Three waves in the
direction of the trend
Corrective wave Three waves
against the trend
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Elliott Wave 2

• Wave 3
• Usually the longest, strongest wave in the
  direction of the trend.
• Higher than wave 1.
• Volume and open interest accelerates
• Wave 4
• Countertrend trend wave.
• Wave 4 should not go lower than the low of wave
  2.
• Wave 5
• Wave 5 is in the direction of the trend.
• Wave 5 is either the longest, strongest wave or
  second to wave 3.
• Wave 3 and Wave 5 are the strongest waves in the
  direction of the trend.
• A wave
• In a bull market, A wave is bearish.

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Elliott Wave 3

• Wave B
• Wave B is an up wave.
• Should not take out the high of Wave 5.
• Wave C
• Wave C is a down wave.
• Should take out the low of Wave B.
• Most often there is a 5 wave structure within the
  major 5 wave structure.
• The placement of the wave identifiers moves if
  new highs or lows are made. They cant be used in
  trade systems.
• They are timing indicators and can identify which
  moves can be the ultimate high or low, but must
  be confirmed by other indicators such as RSI,
  MACD or slow stochastic.
• Elliott Wave works well with the Imoku Clouds.

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Stan Yabroff stan_at_cqg.com
Val Alekseyev valekseyev_at_cqg.com
1 800-525-7082 www.cqg.com