How To Trade

Trend following trading strategies

noreply@blogger.com (Andy Law) — Fri, 22 Jul 2011 06:04:00 +0000

No one invests without an expectation of future profit. Even professional CTAs invest with the hope that strategies they employ after back testing will be profitable over the long run. More generally, they often believe that the financial markets they trade will continue to have exploitable trends for their foreseeable existence. Thus, trend followers have intelligent assumptions about the future backing up their application of their strategies. They often make the entire trade planning process completely mechanical, from choosing which instruments they trade to timing their entries, sizing their positions, and timing their exits. However, there’s no rule that requires you to time all of your entries with a trend following strategy in order to size your positions and time your exits with such a strategy. You can easily mix a fundamentals based entry with a trend following exit method, for example. For this reason, I broadly define a trend following trading strategy as in the box.

Any pre-planned, rule-based strategy for managing open position P&L in which open profits could hypothetically grow indefinitely under a limited set of circumstances, while open losses are limited under all circumstances

Note that this definition is independent of your reasons for entering the market and your timing in doing so. The fact that a trend following trading method is both pre-planned and rule-based means that decisions about how to react to all possible scenarios are made before entering the market, and thus a trader using a trend following method simple reacts to prices unemotionally once in the market rather than trying to predict what prices will do next.

Note also that I define trend following as a method of managing open position P&L, that is, exits and position sizes specifically, rather than both entries and exits.

Note that in my definition, I say that in a trend following trading strategy, “open losses are limited under all circumstances,” while “open profits could hypothetically grow indefinitely under a limited set of circumstances.
Clearly, then, a trend following trading strategy can be employed to time exits in any market situation in which sustained future movement in a particular direction is expected. Correctly anticipating sustained future movement in a financial instrument is difficult enough. Correctly anticipating the exact form that this sustained movement will take is impossible.
Source: Trend Trading: Timing Market Tides (Wiley Trading), Kedrick Brown.

What are differentiators

noreply@blogger.com (Andy Law) — Thu, 21 Jul 2011 06:41:00 +0000

“Technical training is king. If you train on technical thins, it is easier to make the business case because it is more critical. It takes a dramatic trigger like retirement case because it is more critical. It takes a dramatic trigger like retirement of the workforce or failing projects for a organization to pay attention to soft-skills training,” said Robert Blondin, vice president of learning strategy and assessment for ACS Learning Services, pointing out one of the key differences between technical and non-technical training. While many thins set technical training apart from non-technical, unfortunately, there is very little research on these “differentiators.” The differentitators were somehow validated and confirmed with our interviewees and members of several online training communities.

DFFRENTIATORS
Factors that distinguish techical training from non-technical training

The power of compounding

noreply@blogger.com (Andy Law) — Tue, 19 Jul 2011 05:24:00 +0000

It is normal to think of investing as primarily returning capital gains, but current income should by no means be overlooked because the compounding factor of interest and dividends can be a significant ingredient in the long-term performance of a portfolio. We alluded earlier to the fact that time horizon have shortened with the ability of technology to present us all with instant, quotes, and news. This is a shame because compounding requires a large amount of time, together with the discipline and patience to take advantage of this important investment principle, and that is not within the grasp of most inventors today.
You can read the power of compounding and interest and between compounding and dividends in The Investor's Guide to Active Asset Allocation: Using Technical Analysis and ETFs to Trade the Markets

What is cash flow

noreply@blogger.com (Andy Law) — Tue, 19 Jul 2011 04:41:00 +0000

Very loosely, cash flow is the increase in cash over some reporting period, which will usually be a quarter, half-year, or year. There are three principal components to cash flow: (a) cash flow generated or consumed by operations, (b) cash flow associated with capital spending. Clearly if a company trumpets an increase in its cash flow and that increase turns out to have come from issuing shares or taking out a loan, a very different improved operational position. Similarly, if the cash flow worsens because of capital expenditure that should generate greater future income, then due account of those improved prospects needs to be taken before reading too much into the reduced figure. Cash flow from operational activities is what many companies refer to as “cash flow” and it can sometimes be used as a surrogate for gross income, but first, deductions must be made for the replacement of worn-out plant. It is useful to compare gross profit with cash flow from operational activities. If gross profit exceeds this component of cash flow, then sensors should be on full alert for creative accounting since profits are much easier to massage than cash flow from operational activities.

Source: Pattern Recognition and Trading Decisions, by Chris Satchwell

You can go back to how to trade home page to get to know the latest posts from how to trade

History of Wall Street

noreply@blogger.com (Andy Law) — Mon, 18 Jul 2011 11:25:00 +0000

How did Wall Street begin? What is the history of Wall Street? Wall Street takes its name from a wall of brush and mud that was built alongside the street’s original pathway. The Dutch settlers built the wall shortly after establishing a trading post on the island of Manhattan in 1609. In 1626 the Ducth purchased the entire island from the local Indians with trinkets and beads worth the equivalent of $24. After they purchased the island, the Dutch improved the wall to keep their cows in and the Indians out. The path knowns as Wall Street quickly bacame the center for commercial and community activity that connected the docks serving the Hudson River on the west and east rivers allowed for importing of goods between the different mercants who then built their homes and businesses close by.
And of course, soon after homes and businesses were built, a city hall and church were erected. Although stocks and bonds were not known at this time, merchants bought and sold such commodities as tobacco, furs, and molasses.

In 1664, the English gained control of the area and the settlement was renamed New York. In 1789, George Washinton was inaugurated president on the steps of the Federal Hall on Wall Street, and a few months later the first U.S Congress met in the same building. Stocks and bonds were still unheard of.

On March 8, 1817, the constitution of rules for conduct of business was adopted. The organization was named New York Stock & Exchange Board. However, on January 29, 1863, the name was shortened and changed to New York Stock Exchange, a name that has continued to this day.
The changes of the past have paved the roads of the future for both the Dow Jones Industrial Average and Nasdaq Composite. Such changes as trading hours, execution systems, and technical indicators have opened more doors for investors.

Source: Technical Charting for Profits, by Mark Larson

Types of Diversification

noreply@blogger.com (Andy Law) — Sun, 17 Jul 2011 12:00:00 +0000

THREE TYPES OF DIVERSIFICATION

Diversification is among the most important and underutilized tools available to traders and investors because it allows improvement of our rates of return without proportionately increasing risk assumed to achieve these enhanced levels of performance. The most commonly employed type of diversification—asset class diversification—has already been discussed in Chapters 3 and 4, where we looked at how diversification among assets that had low correlations improved our overall performance. A review of Tables 3.2 to 3.13 and Tables 4.4 to 4.8 shows that diversification almost always yielded improvements when compared with the performance of individual assets.

This chapter focuses on the two other diversification methodologies: adaptation of different parameter sets for the same trading system and combining of negatively and/or uncorrelated trading systems.

DIVERSIFICATION OF PARAMETER SETS

Assuming that a trading account has adequate equity under management, it is preferable to diversify parameter sets rather than to trade multiple contracts with the same parameter set. Although there maybe strong positive correlations between parameter sets of the same trading system, Tables 7.1 to 7.20 show that even minor modifications to parameter sets can make the difference between an overall profitable or losing outcome. Furthermore, as shown in Chapter 7, because we can never be certain as to which parameter set will outperform in the future, parameter set diversification greatly aids in minimizing regret. Minimization of regret in this context strengthens our psychological ability to adhere to a disciplined and consistent (e.g., systematic and/or mechanical) approach toward trading.[2.]

A comparison of Tables 9.1 and 9.2 exemplifies this final point. Table 9.1 shows the results of various parameter sets on the two moving average crossover system for IMM Swiss franc during the in-sample period of 1993 to 2002. Notice that the best-performing parameter set in this Table was the 10- and 29-day moving average crossover; the second-to-worst-performer was the 7- and 20-day parameter set. Compare this with Table 9.2, which is the same system on the IMM Swiss franc for the out-of-sample year of 2003. Not only is the best-performing parameter set of our in-sample period now the worst performer, but also our second-to-worst in-sample performer has now become the top-performing parameter set.

Table 9.2 is even more instructive in the context of diversification when we compare the performance of the 7- and 20-day and the 6- and 20-day parameter sets. Although these parameter sets retained identical longer-term moving average parameters and the shorter-term moving average parameter was changed only by one step, the 7- and 20-day parameter set was the year’s top performer, while the 6- and 20-day parameter set remained in the bottom half of all parameter sets analyzed.

MECHANICS OF TRADING SYSTEM DIVERSIFICATION

Diversification of negatively and/or uncorrelated trading systems is one of the most effective methods of improving rates of return without proportionately increasing the risk assumed to achieve these enhanced levels of performance. To illustrate this point, let us examine a trend-following system from Chapter 3 (MACD) with our diversified futures portfolio, and a directionally biased intermediate-term mean reversion system from Chapter 4 (RSI Extremes with the 200-day moving average filter) with our mean reversion portfolio, and then compare these results with the combined performance of both trading systems.

In comparing Tables 9.3 and 9.4 to Table 9.5, the first and most important improvement is in the profit to maximum drawdown ratio. This is due to the fact that low correlations between the trend-following and mean reversion systems led to a smoothing of equity drawdowns for the performance of the combined trading system results. Although the maximum drawdown column shown in Table 9.5 was larger than in Table 9.3 or 9.4, it represented an increase only of roughly 17 percent and 20 percent respectively. By contrast, because Table 9.5 took all signals generated by both systems, its total net profits were additive, thereby leading to an overall improvement in performance results.

In addition, combining these uncorrelated trading programs lessened many of the deficiencies of both methodologies as stand-alone systems. For example, one of the drawbacks to the trend-following system as a standalone solution is that it experiences more losing trades than winners. By contrast, by combining these two systems, the winning trade percentage increased from 42.85 percent for trading the MACD system alone to 50.82 percent.

Because these two trading systems are not highly correlated, sometimes both will generate profits; sometimes one will profit while the other loses; and sometimes both will lose. Consequently, the only way to replicate the backtested performance of these combined system results is through consistent implementation of all signals generated by all assets and/or trading systems. In other words, traders should not try to outguess the systems.

Although consistent implementation of all signals for all assets sounds like a straightforward proposition, it is complicated by the fact that both systems could be trading the same asset. In fact, this was the case for the combined trading system results generated in Table 9.5, because both the trend-following and mean reversion portfolios contained the E-mini S&P 500 futures contract. Consequently it is quite possible that these two trading systems could have generated opposite trading signals for the same instrument.

When I first started trading multiple systems with low correlations, I encountered this problem of conflicting trading signals. I failed to take a buy signal in the trend-following system because my mean reversion system had generated a sell signal for the same instrument. During the overnight trading session, my mean reversion realized its profit, which corresponded to what would have been a temporary open equity drawdown in the trend-following system (had I taken that trade). Then, almost immediately after the mean reversion system’s profitable exit, the market reversed, and I awoke to find that I had missed out on one of that year’s most profitable trend trades.

This painful lesson reinforced the fact that a prerequisite to successful implementation of diversified trading strategies is never missing a trading signal. Subsequently I have found that the simplest and preferred solution to this problem of conflicting signals for the same asset is the maintenance of two (or more) separate trading accounts—one for each distinct trading methodology (e.g., trend-following, intermediate-term mean reversion, short-term).

Is this book interesting to you ?, If yes, Grab the book now.
Read cusomer reviews before you get the book

What is volume

noreply@blogger.com (Andy Law) — Sat, 16 Jul 2011 19:10:00 +0000

Volume is simply the number of measurable units of a financial instrument that are bought (or sold) during a trading session. There are two ways of looking at the relationship between volume and price. In low-volume trading, it is often possible to move price a good deal, which means that low volumes can be associated with high price movements. Equally, low volumes might be associated with a flat market. With the same financial instrument, on another occasion, there might be a high volume of trading in a narrow price range, which means that many people agree that the price is correct. Similarly, a high volume could be associated with a wide price range, which means that there is less agreement on price but some urgency to transact. My conclusion is that there is no consistent relationship between volume and price movement, but volume/price patterns exist that do have predictive value. I will examine some of these later (so subscribe to get the latest update). A point about volume that needs to be appreciated is that it offers a measure of the urgency with which people wish to trade. For example, at market tops high volumes sometimes mean that wise money is leaving the market and the unwise entering.

Oscillators do not travel between 0 and 100

noreply@blogger.com (Andy Law) — Sat, 16 Jul 2011 15:08:00 +0000

A good place to begin to dispel some of the common beliefs about our technical indicators is with oscillators. The mainstream believe that oscillators generally travel between a scale of zero and 100. Generally 20 and below is viewed as oversold, and 80 or above is an overbought market. Wrong.

In figure 1.1 the standard default period of 14 is used for the Relative Strength Index with a daily bar chart of Yen futures. The Yen is falling in a bear market within this time horizon. The graph showing the RSI indicator has an upper black band marking a range of resistance from 60 to 65. A lower band marks 23 to 28 to highlight a support zone for the indicator. Study the indicator tops closely. At no time is the Yen strong enough to push the RSI oscillator successfully through the 65 level. (Spot traders need to keep in mind that this is a futures chart, which will be inverted from the spot market.) Each time the indicator tests the range from 55 to 65, the Yen renews its former downtrend and establishes new lows against the dollar. The oscillator then declines to a support zone within a range of 20 to 30. There will be many more examples to reinforce this concept. The general rule to follow for a bear market is that RSI will oscillate within a range of 20 to 30 at the low end of the scale up to an upper resistance zone of 55 to 65. This is true regardless of market or time horizon.

In a bull market the RSI will shift and begin to oscillate within a range marked by a support zone of 40 to 50 toward an upper resistance zone of 80 to 90. Figure 1-2 shows the same Yen futures market but over a weekly time horizon when the Yen is in a bull market or the dollar is weak. Each time the Yen declines, the oscillator falls to a support zone near 40 to 50. The 40 level is never broken. The strong Yen rallies push the oscillator into the 80s. Even minor advances that lead to more complex consolidations allow the RSI to decline only as far back as the 40 to 50 zone.

Do these RSI ranges defining bull and bear markets apply to other oscillators? Yes, when the period used for the indicator has benn correctly defined. We’ll cover how to find the correct period in the next chapter, and we will readdress the issue of buy and sell ranges as other oscillators are discussed. As an example, in Chapter 14 a price projection method is described for the Stockastics Oscillator that gives the trader permission to buy a market when the Stochastics Oscillator falls from an extreme high down toward the 75 area. Yes, buy, as the signal wil warn the trader that the market could target an additional move equal to the rally that preceded the minor pullback that allowed the indicator to decline from its extreme high over 80. This is only one example of instances when it would be incorrect to sell just because the Stochastics indicator has crossed the 80 range. Conversely a trader would have permission from Stochastics to sell the market when the oscillator moves back up to the 25 zone as the market would then target a new price low equal to the decline that precede the minor rebound from the oversold condition. Examplses for this price projection method from Stochastics will be offered in their right context in Chapter 14, but the point to make at this time is that oscillators can be used to forecast market trends, which is contrary to popular belief today.

Is this book interesting to you ? If yes, grab the book to read more
Read customer reviews before you get the book

Preferred Stocks

noreply@blogger.com (Andy Law) — Fri, 15 Jul 2011 07:08:00 +0000

Preferred stocks have several advantages over common stocks. They are less risky because the issuer promises to return par value when the stock is called. They are often issued with a dividend higher than the common stock dividend so they serve the dual purpose of producing income while preserving capital. And the preferred stock dividend must be paid before any payment can be made on the common stock.

You have probably been aware of these characteristics, but you may not know there are substantial profits to be made by purchasing preferred stocks at a discount and selling them ata premium price.

This type of transaction is possible because the prices of some preferred stocks fluctuate above and below the issue price, which in many cases is $25. The prices usually fluctuate within $2 of the issue price. Here’s an example of how profitable it can be when you buy at a discount and sell at a premium.

Suppose you purchase a $25 par value stock for $23.50, hold it a year while collecting a dividend of 6 percent, and sell it for $26.50. At the conclusion of that round-trip transaction, you would have collected 6 percent in dividends and 12 percent in capital gains, which totals to a profit of 18 percent in one year.

You can find listings of preferred stocks in the Wall Street Joural, Barron’s weekly magazine, and Investor’s Business Daily. Barron’s shows the current price, yield, and the new highs and lows for the year. By checking through the list you should be able to find a few stocks priced at a discount large enough to deliver a profit from either rising to a premium price or being called at par value.

Is this book interesting to you ? If yes, grab the book now
Read customer reviews before you get the book

The book’s table of content:

Chapter 1: Basic Concepts of Technical Analysis
Chapter 2: Volume Analysis
Chapter 3: Moving Averages
Chapter 4: Porfolio Management
Chapter 5: Technical Analysis and the Stock Market
Chapter 6: Technical Analysis and the Internet
Chapter 7: Analyzing Closed-End Funds
Chapter 8: Analyzing Preferred Stocks
Chapter 9: Analyzing Real Estate Investment Trusts (REITs)
Final Review Exercise

Or go to Amazon , and click on the book’s image to see Table of content in more detail.

Bollinger bands: An invaluable indicator

noreply@blogger.com (Andy Law) — Fri, 15 Jul 2011 05:41:00 +0000

Bollinger bands indicator was developed by John Bollinger, Bollinger bands are an indicator that allows users to compare volatility and relative price levels over a period. Because standard deviation is a measure of volatility. Bollingger bands adjust themselves to market conditions. When the markets become more volatile, the bands widen (move further away from the average) and during less volatile periords, the bands contract (move closer to the average).
It’s among one of the most popular technical analysis techniques. The closer the prices move to the upper band, the more overbought the market and the closer the prices move to the lower band, the more oversold ther market.

Trading secrets for traders

noreply@blogger.com (Andy Law) — Fri, 15 Jul 2011 05:16:00 +0000

Here is the secret to all trading.
Ready?
Prices will either trend or range. That’s all there is to it. It really is that simple but clearly not that easy. These two discrete properties of price require diametrically opposite mind-sets and money manegement techniques. Knowing when to apply each is what makes trading so difficult. Fortunately, the FX market is uniquely suited to accommodate both styles, providing either trend or range traders with opportunities for profit. Since trend seems to be the more popular subjects, let’s examine it first.

What is trend? The simplest definition of trend is higher lows in an uptrend and lower highs in a downtrend. Some traders define trend as prices remaining within an upward or downward sloping 29-period moving average. Yet others may draw trend lines or channels. I have my own definition, involving Bllinger bands, which I will discuss later in this book, but regardless of how one difinestrend, the goal of trend trading is the same – join the move early and hold the position until of trend exhausts itself. The basic mind-set of the trend trader is “I am right or I am out”, and his governing philogophy boils down to this: Do today what happened yesterday. The implied bet all trend traders make is that price will continue to follow its current direction. If it doesn’t, there is little reason to hold on to the trade. Therefore, trend traders typically place very tight stops and often make several forays into the market in order to establish a proper entry.
By nature, trend trading generates far more losing trades then winning trades and requires rigorous risk control in order to achieve profits. How would this be the rule?..........
.............................................................
Get the book to read more
Read customer reviews for this book.

Trading with the Elliott Wave Theory

noreply@blogger.com (Andy Law) — Thu, 14 Jul 2011 10:54:00 +0000

Get this book
Read Customer Reivews

Imagine a technical analysis methodology that can tell you when you are wrong long before your stops are hit. Imagine a technical tool that allows you to make money even when your analysis is wrong. Imagine an analytical framework that permits you to develop a likely road map for prices that you can easily use to support or supplant other technical, or even fundamental, indicators. Imagine that this way of analyzing prices was developed with the basis for technical analysis—crowd psychology—in mind. Imagine a tool so flexible that there is little difference between applying it to five-minute bars and applying it to monthly bars. Imagine a tool that though complex, dovetails perfectly with traditional trendline and pattern analysis as well as the venerable Dow Theory. Imagine that you can use this form of technical analysis on stocks, bonds, currencies, commodities, or virtually any liquid and free market.

This methodology not only exists but has been around for more than seventy years. It is not a black box system. Price is this method’s only indicator—not the relative strength index, not a stochastics oscillator. Nobody trades the relative strength index; your trading account is not marked to market based on a stochastics oscillator. Your account is marked based on the difference between the current price of the item you bought or sold and where it stood when the trade was initiated.

This wonderful technical tool is the Elliott Wave Theory, one of the few technical tools that is predictive in nature. The astute trader or investor can employ the principle to accurately forecast market extremes. Most forms of technical analysis, although generally more accurate in terms of price determination than fundamental research, tend to be reactive and lag price action. Moving averages cross price well after the trend has changed. Confirmation of a head and shoulders reversal or triangle breakout occurs long after the most advantageous price levels to enter or exit a trade were achieved. Oscillators are based on smoothed prices and tend to trail price activity. In general, oscillators also work well only during periods of range trading in the markets.

The wave principle can be used on a stand-alone basis or in conjunction with indicators to help the trader better focus on buying and selling opportunities by identifying likely “energy points” in the market. Elliott Wave Theory’s predictive nature means that the trader or investor will be prepared to take action as soon as the market acts according to expectations.

History of Elliott Wave Theory
Ralph Nelson Elliott (1871–1948) developed the Elliott Wave Theory. Elliott was an accountant by trade who spent much of his career working for international railroad companies. He also had an interest in restaurant management and wrote articles and even a book on the subject (Tea Room and Cafeteria Management). Elliott fell ill following a stint as Auditor General of the International Railways of Central America in Guatemala. It was during his long convalescence that Elliott began his study of the U.S. stock market.

Elliott had a keen analytical mind. Even in his book on restaurant management, Elliott perceived that markets and the economy moved in cycles, or waves. This perspective led him to the work of Robert Rhea, whose tomes describing Dow Theory are still considered classics. It should come as no surprise that Elliott Wave Theory shares a great deal with its elder cousin, Dow Theory (see also Chapter 1).

It was not just the basic phases of a bull market that Elliott and Dow had in common. Both of these great market analysts detailed the market action based on how investors and traders acted and reacted at each point during a trend’s development (see Figure 8.1).

Figure 8.1: Trend Development in Dow Theory/Elliott Wave Theory

The two theories differ in many ways. Dow described bear markets in similar terms to bull markets. A primary bear market had a period of distribution, technical trader entry, and public participation (or in the case of a bear market, more likely, capitulation). Elliott saw bear markets as developing in two broad legs trending lower with a corrective period in between.

The most significant difference between the two theories is that Dow Theory is reactive, whereas the Elliott Wave Theory is proactive. Dow Theory offers a detailed framework describing how to determine whether or not a trend has already changed. To signal the end of a bull trend a lower high and a lower low of some degree is required. Dow Theory offers little guidance with regard to price projections. Dow Theory does offer vague ideas regarding possible retracement targets and equally vacuous ideas regarding how long a primary or secondary trend can be expected to last, but few tools are offered that give the user the ability to pinpoint possible market turning dates, times, and prices.

Elliott approached his analysis from a somewhat different point of view. He fully believed that the markets were deterministic. He argued that, by proper usage of the wave principle, one could accurately forecast market turning points—both in time and price—years in advance. Although no one has achieved that degree of accuracy yet, Elliott Wave Theory does provide an incredibly precise method for finding places of high probability where trend changes may occur. And, to add to its usefulness, its very nature quickly tells the user when the analysis is incorrect.
...............................................
Get this book to read more
Read customer reiviews for this book

Get PDF version of this article - elliott wave principle pdf here

Stop loss orders

noreply@blogger.com (Andy Law) — Thu, 14 Jul 2011 10:12:00 +0000

Get this book
Read Customer Reviews

It was the same with all. They would not take a small loss at first but had held on, in the hope of a recovery that would “let them out even.” And prices had sunk and sunk until the loss was so great that it seemed only proper to hold on, if need be a year, for sooner or later prices must come back. But the break “shook them out,” and prices just went so much lower because so many people had to sell, whether they would or not.

—Edwin Lefèvre

The success of chart-oriented trading is critically dependent on the effective control of losses. As mentioned in Chapter 7, it is not necessary to be right half the time; what is necessary is limiting losses on bad trades sufficiently so that winning trades are substantial enough to return a profit. Accordingly, a precise stop-loss liquidation point should be determined before initiating a trade. The most disciplined approach would be to enter a good-till-canceled (GTC) stop order at the same time the trade is implemented. However, if the trader knows he can trust himself, he could predetermine the stop point and then enter a day order at any time this price is within the permissible daily limit.

How should stop points be determined? A basic principle is that the position should be liquidated at or before the point at which price movement causes a transition in the technical picture. For example, assume a trader decides to buy the stock in Figure 9.1 after the April 1995 upside breakout has remained intact for five bars (weeks). In this case, the protective sell stop should be placed no lower than the lower boundary of the April 1994–April 1995 trading range, since the realization of such a price would totally transform the chart picture. Some of the technical reference points commonly used for placing protective stops include:

1. Trend Lines. A sell stop can be placed below an uptrend line; a buy stop can be placed above a downtrend line. One advantage of this approach is that the penetration of a trend line will usually be one of the first technical signals in a trend reversal. Thus, this type of stop point will strongly limit the magnitude of the loss or surrendered open profits. However, this attribute comes at a steep price: Trend line penetrations are prone to false signals. As discussed in Chapter 3, it is common for trend lines to be redefined in the course of a bull or bear market.

2. Trading Range. As illustrated in the preceding stock example, the opposite side of a trading range can be used as a stop point. Frequently, the stop can be placed closer (particularly in the case of broader trading ranges) because if the breakout is a valid signal, prices should not retreat too deeply into the range. Thus, the stop might be placed somewhere in the zone between the midpoint and the more distant boundary of the range (see the dashed line representing the midpoint of the trading range in Figure 9.1). The near end of the trading range, however, would not be a meaningful stop point. In fact, retracements to this area are so common that many traders prefer to wait for such a reaction before initiating a position. (The advisability of this delayed entry strategy following breakouts is a matter of personal choice: In many instances it will provide better fills, but it will also cause the trader to miss some major moves.)

3. Flags and Pennants. After a breakout in one direction of a flag or pennant formation, the return to the opposite end (or some point beyond) can be used as a signal of a price reversal, and by implication a point for placing stops. For example, in Figure 9.2 the dashed line marks the stop level indicated by the lower boundary of a flag. After the upside breakout of the flag, a penetration of this level would imply a reversal of the current uptrend and require liquidation of the long position.

Figure 9.2: Stop placement following flag pattern breakout—DuPont.
Chart created with TradeStation^® by Omega Research, Inc.

4. Wide-Ranging Days. Similar to flags and pennants, after a breakout in one direction, the return to the opposite end can be used as a signal of a price reversal, and hence a point for placing stops. For example, in Figure 9.3 note how the return of prices back to below the true low (see Appendix) of the wide-ranging up day formed in mid-September (after initially trading above this pattern) led to a major price collapse.
.......................................
Getthe book to read more
Read cutomers' reviews for this book

What is stock market

noreply@blogger.com (Andy Law) — Thu, 14 Jul 2011 09:45:00 +0000

What is stock market ?, this questions have been asked by many people for decades. And different answers have been told for this question.

In Wikipedia, it said that:

A stock market or equity market is a public (a loose network of economic transactions, not a physical facility or discrete) entity for the trading of company stock (shares) and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.

Read more in Wiki.

and another opinion from factmonster

The word stock simply refers to a supply. You may have a stock of T-shirts in your closet, or a stock of pencils in your desk. In the financial market, stock refers to a supply of money that a company has raised. This supply comes from people who have given the company money in the hope that the company will make their money grow.
A market is a public place where things are bought and sold. The term "stock market" refers to the business of buying and selling stock. The stock market is not a specific place, though some people use the term "Wall Street"—the main street in New York City's financial district—to refer to the U.S. stock market in general.

Read more in factmonster

Or a common sharing knowledege saying that:

Stock market is a place where share of listed companies are traded at agreed price.
Prices of share are governed by demand/supply conditions.
As there is more demand for share of reputed companies the price of these share goes on increasing.

Types of Chart

noreply@blogger.com (Andy Law) — Thu, 14 Jul 2011 09:11:00 +0000

Get this book
Read Customer Reviews

The price chart, of course, is the primary tool of the technical analyst. Although there are a variety of formats, most charts use a grid system in which the x-axis measures time while the y-axis measures price level. The time increment of the x-axis can vary according to the longer- or shorter-term perspective of the analyst. Charts can be constructed using price data for any interval: yearly, monthly, weekly, daily (the most common), and intraday (e.g., 60 minutes, 30 minutes, etc.).

BAR CHARTS
Bar charts are by far the most common type of price chart. In a bar chart, each day is represented by a vertical line that ranges from the daily low to the daily high. The day’s closing value is indicated by a horizontal protrusion to the right of the bar. Additionally, the day’s opening value is often (but not always) indicated by a horizontal protrusion to the left of the bar. Figure 2.1 is a daily bar chart of an individual stock.

Figure 2.1: Daily bar chart—Micron Technology.
Chart created with TradeStation^® by Omega Research, Inc.

In futures markets, the opening and closing prices shown on a bar chart are representative values (usually determined by exchange-authorized professional traders in a particular contract) that approximate the average price during the first and last minutes of the trading day, respectively. In the case of stocks, the opening and closing prices represent the actual first and last sales of the day as recorded by the specialist in a particular equity

The daily bar chart is most useful for trading purposes, but bar charts for longer data periods provide an extremely important perspective. These longer-period bar charts (e.g., weekly, monthly) are entirely analogous to the daily bar chart, with each vertical line representing the price range and final price level for the period. (On weekly or monthly charts, the opening and closing prices are simply the opening price from the first trading period included in the bar and the closing price of the last trading period included in the bar. For example, each bar on a weekly chart would use Monday’s opening price and Friday’s closing price.) Figure 2.2 is a weekly bar chart of the stock pictured in Figure 2.1. The segment within the rectangle corresponds to the period captured in Figure 2.1. Figure 2.3 is a monthly bar chart for the same stock. The large and small rectangles enclose the periods depicted by Figure 2.2 and Figure 2.1, respectively.

Figure 2.2: Weekly bar chart—Micron Technology.
Chart created with TradeStation^® by Omega Research, Inc.

Figure 2.3: Monthly bar chart—Micron Technology.
Chart created with TradeStation^® by Omega Research, Inc.

Used in combination, the monthly, weekly, and daily bar charts provide a telephoto-type effect. The monthly and weekly charts would be used to provide a broad market perspective and to formulate a technical opinion regarding the potential long-term trend. The daily chart would then be employed to determine the timing of trades. If the long-term technical picture is sufficiently decisive, the trader may already have a strong market bias by the time he or she gets to the daily charts. For example, if the monthly and weekly charts suggest the market has witnessed a major long-term top, the trader will only monitor the daily charts for sell signals.

The difference in perspective between daily and weekly charts can be striking; hence, both types of charts should be examined. For example, the daily bar chart for the March 1995 silver contract (Figure 2.4) is dominated by a very bearish, massive top pattern. The weekly silver chart (Figure 2.5), however, provides a very different picture. Although in this chart the late 1993–1994 price pattern still looks toppy, the chart also reveals that prices are near the low end of a broad historical price range and that a major price base was apparently formed during the 1991 to early 1993 period. Thus, while both charts seem to imply a near-term bearish bias, the weekly chart provides strong reasons for viewing another price downswing as a potential major buying opportunity, whereas there is not even a hint of such a conclusion in the daily chart.

Figure 2.4: Daily bar chart perspective—March 1995 silver.

Figure 2.5: Weekly bar chart perspective—silver nearest futures.

...........................................
Get the book to read more...
Read customer reviews for this book.

Navigating the Labyrinth

noreply@blogger.com (Andy Law) — Tue, 12 Jul 2011 11:02:00 +0000

Forecasting prices is a daunting task, but an even more formidable exercise is analyzing all of the various factors of supply and demand. The situation has been exacerbated in recent decades by the emergence of the world market with all its intertwining interconnections that create a mind-boggling tangle. Prices of crude oil and metals skyrocketed in the beginning of this new millennium, but they also saw some major corrections following each new high. Analysis of supply and demand alone is not as effective as technical levels in explaining the countertrends within the major uptrends in those markets.

Copper and the Mobius Strip of Supply and Demand
First, consider one particular global commodity market: that mainstay of the Bronze Age, copper. Increased Chinese demand for industrial metals, which was fueled by accelerated building of factories to respond to the global hunger for cheap goods, caused copper futures prices to quintuple from 2002 to 2007, as shown below. That’s the simple explanation. When discussing the bull market on copper on a fundamental level, there is no definite end to the factors that influence its market value. Chasing down a solid point of origin for why copper has been such a hot commodity for the past decade is like peeling away the layers of an onion only to find another whole onion at the core. One industry leads to another in an unending trail.

Copper Futures, 2002–2007
Source: eSignal

Demand
China is the world’s largest consumer of copper, using 3.72 million tons in 2006. AME Mineral Economics research forecasts China’s portion of world consumption for 2008 to be 22.8 percent, all of Western Europe’s portion to be 21.7 percent, and the U.S. portion to be 13.4 percent. There are many reasons for China’s hefty demand for the nonferrous metal. Most household appliances today carry the ubiquitous “Made in China” label. The quest for understanding the growth in the copper market could almost end at this ever-familiar sticker, which is seen on just about anything that either plugs into an electrical socket or runs on batteries. The real focus, however, goes beyond China’s exports to its own national consumption of copper. Get the book to read more.

Supply
Currently, China is the world’s largest copper-consuming country, making it the heavyweight on the supply-and-demand teeter-totter. In 2002, China surpassed the United States in consumption, and based on graphs configured by the AME Mineral Economics firm, projections show that in 2008 China will consume 22.8 percent of the world’s copper supply—1.1 percent more than Western Europe and 9.4 percent more than the United States.

Wading through this rocky sea of speculations, conjecture, and contradicting figures, it is unclear whether the demand for copper has entirely tipped the teeter-totter to the demand side. What is certain, however, is that the world’s copper supply is taking a massive hit from China, and suppliers are reacting.

Chris Curfman, president of the global mining division at Peoria, Illinois-based Caterpillar Inc., has noted that the growth in the demand for copper is “testing the limits of a lot of capabilities” of suppliers. With China’s demand exhausting older and, at one time, plentiful mines, mining companies such as BHP Billiton are spending more on exploration and are pushing away from Chile (the world’s largest copper producer) into riskier territory for new copper prospects. Moving into harsher environments of Africa and politically unstable parts of Asia and Mongolia will mean more frequent disruptions in production in the mines and will effectively raise the price of copper, which already is continually rising due to diminishing supplies. Get the book to read more.

The Unique Nature of the Copper Market
The unique aspect of the nonprecious metal commodities is this: unlike many other commodities such as corn, wheat, cotton, and the like, it takes nonprecious metals to mine nonprecious metals. The clue to this phenomenon in the preceding paragraph is that both Antofagasta and Rio Tinto expressed concerns over shortages surrounding equipment availability, power and water supply, truck tires, and explosives—all of which use copper either as a component or an adjunct to processing. Like many other nonferrous metals mined, copper, in part, is a self-generating commodity. Get the book to read more.

Customer reviews for this book.

Fundamental and Technical analysis

noreply@blogger.com (Andy Law) — Tue, 12 Jul 2011 08:55:00 +0000

Get Warren Buffet's book
Read Customer Reviews

The first question at the start of an Outlook Seminar in Southern Minnesota in mid-February was, "What's the difference between fundamental and technical analysis?" The answer was part of my seminar.
I first look at fundamentals starting with a review of the weather, then the Global Supply-Demand tables for corn and soybeans, followed by the U.S. Supply-Demand tables, and the different acreage. I then usually provide technical analysis - a review of the Chicago Board of Trade (CBOT) monthly/weekly corn and soybean charts. This shows the long-term highs and lows, seasonal price patterns and long-term price cycles. After that I fine-tune the analysis using CBOT daily corn and soybean charts.
The next, more difficult question was, "Don't corn and soybean prices seem too high based on the current fundamentals?" My answer was "yes," but the market is always right in the long term. However, prices can move too high or too low as trade perceptions of the market change and fund managers buy and sell.
These are the three key factors that I evaluate when looking at the different Supply-Demand fundamental scenarios listed above.

1) Watch when usage is greater than earlier projections for two months in a row or more.
2) Watch when ending stocks drop or increase for two consecutive months.
3) Expect sharply higher prices any time projected ending stocks drop below one month's usage.
These are three chart signals that I use in my technical analysis:
1) Watch when prices rally after a negative report or break after a bullish report, showing that all of the bearish or bullish news is built into the market.
2) After the market has been in an extended down move, watch for the first time that prices close below the two previous weeks' high to confirm an important low.
3) After any market has been in an extended up move, watch for the first time that prices close below the two previous weeks' low to confirm an important high.
No one can give a weather forecast with 100% accuracy. With small differences in yields creating wide swings in price, producers need to be disciplined scale-up sellers who use all the marketing tools available. Those who have purchased the right crop revenue insurance, year in and year out, seem to make better new-crop marketing decisions.

Source: Fundamental and Technical analysis, by Alan Kluis.

Tom demark sequential

noreply@blogger.com (Andy Law) — Tue, 12 Jul 2011 07:51:00 +0000

Get Tom Demark's book
Customer Reviews

Most traders are trend followers. They accept the widespread belief that the trend is a trader’s friend. Many years of exhaustive research and trading experience have convinced us that this notion is flawed. For the sake of completeness, we have added a corollary to this premise—the trend is your friend, unless the trend is about to end.

Human nature is such that we are inclined to extrapolate current events into the future. Some expectations have outcomes that are immutable and universally applicable: The sun rises in the morning and sets in the evening. Cut your hand with a knife and you will bleed. Fall from an elevated level and gravity will pull you down. There are no exceptions. Other expectations may be disappointed: Flip a light switch and a dark room becomes bright—but what happens if the electricity is not in service?

Similarly, in terms of trading markets, as long as buying pressure is greater than selling pressure, a market’s trend is up, and, conversely, as long as selling pressure is greater than buying pressure, a market’s trend is down. To expect that buying pressure will continue to exceed selling pressure and extend an uptrend indefinitely or that selling pressure will continue to exceed buying pressure and extend a downtrend indefinitely is foolhardy. No market trend continues forever, just as no tree grows to the sky. Market dynamics are not dictated by the forces that govern human nature. Most traders are content to trade comfortably and with a trend, but what happens when buying and selling pressure move into equilibrium or when buying pressure overcomes selling pressure or when selling pressure overcomes buying pressure? During these transition periods of buying and selling pressure, market fundamentals, news, and expectations usually remain intact. However, under this veneer, the supply/demand dynamics are in fact being redefined. Maintaining a trading edge by anticipating these internal market changes is imperative to ensuring a trader’s good mental and financial health.

Source: Breakthroughs in Technical Analysis: New Thinking from the World's Top Minds, by David Keller.

Read customer reviews for this book

Ichimoku Clouds

noreply@blogger.com (Andy Law) — Tue, 12 Jul 2011 07:15:00 +0000

Cloud charting is the second Japanese technique I have incorporated into my method. Ichimoku Kinko Hyo—the correct name for cloud charting—was invented by a Japanese journalist, Goichi Hosoda (1926-1983), who wrote under the pseudonym Ichimoku Sanjin. (The Chinese characters that make up his name translate roughly as “at one glance…of a man standing on a mountain.”) On the Bloomberg terminal, cloud charts are called General Overview Charts (type in an instrument code and then GOC), which gives a much better feel for what these charts can do. The method was revived by Hidenobu Sasaki (1950- ) who updated it in the very successful book Ichimoku Kinko Studies (Toshi Raider Publishing, 1996). For the mathematically minded, or for those who would like to set this up on a PC, the formula for the different lines is detailed in Figure 3.2, page 45 of the book. For those like me with a pathological fear of algebra, whose eyes glaze as soon as they see a Greek letter, we shall work through step-by-step in plain English how these charts are set up and how they work. (Also, remember that the Bloomberg terminal will draw all the lines for you.)

There are five steps necessary to set up these charts. Get the book to learn these five steps.

Working with the Ichimoku Clouds
The edges of the cloud also act as support and resistance, both for trending and sideways markets. In an ideal bull market, Leading Span 1 will lie below the nine-day and twenty-six-day averages and above the Leading Span 2. These support you all the way up and everything is plain sailing. The opposite happens in a perfect bear market: all the lines feel top-heavy and grind the market down. This is a series of four lines which should limit any corrective move. Picture them as two pairs. In the first pair, the longer moving average is more important than the short one. In the second pair, Span 2 is of critical importance, whereas Span 1 may or may not stem the move. I think of this as an advance force versus rearguard action. If prices move through leading Span 2, then any position should be cut and probably reversed. If this one goes, watch out! As always, at support and resistance levels watch for reversal-type candles which will hint that the level will hold. These often break through Span 2 intraday and then close back inside the cloud, forming a good reversal pattern.
The most interesting thing about the clouds is that they are plotted twenty-six days ahead of today’s prices. They therefore indicate where support and resistance levels will lie over the coming month. The thicker the cloud, the more likely it will contain price action. If it is thin, and if the lines cross from bull to bear, then the odds increase that the trend will change. So looking forward, the cloud gives you some idea whether to consider reversing tactics. In this situation, price action will be nonexistent. If coupled with a reversal candle at this point, whether it confirms that the trend will hold or hints that it will change, extra attention to detail and willingness to go with the move is warranted. The distance between the current price and the cloud is not considered important. It does not indicate whether the trend is overstretched, as the relative strength index (RSI) or other oscillators that try and measure market excesses would do. However, if the price had say shot up suddenly and far faster than usual, meaning the clouds were an awful long way down, and an evening star or a hanging man candle formed, then it may be worth taking profits as the corrective decline might not stop until a very long way down. Get the book to read more about Ichimoku Clouds

Source: Breakthroughs in Technical Analysis: New Thinking from the World's Top Minds, by David Keller.

Read customer reviews for this book

Fundamental Analysis vs Technical Analysis

noreply@blogger.com (Andy Law) — Mon, 11 Jul 2011 11:28:00 +0000

When many people in the financial world refer to technical analysis, it is often in direct contrast to the other major school of market analysis, fundamental analysis. The contrast between the two is clear and distinct.

Fundamental analysis focuses on what the underlying reasons may be for market movement. In the stock market, this would consist of news and financial information (e.g. earning) that are directly associated with a particular publicly traded company. In the futures market, it would consist of substantive market information regarding a sepcific commodity (e.g. wheat or oil) or financial market/index (e.g S&P 500). In the foreign exchange, or currency, market, fundemental analysis would be primarily concerned with international economies, central bank policy, interest rates, and inflation.

Fundamental analysis stands in stark contrast to the world of technical analysis. Instead of concerning ifself with the underlying resons for price movement, technical analysis focuses on the price movement itself and how mass human behavior is manifested in price action. Technical analysts believe that all fundamental information and econimic factors that can cause price movement are already reflected in price action. Therefore, technical analysis purists generally avoid looking at earnings or crop reports or international econimic coditions. Instead, the two primary tools of price and volume as depicted on a financial chart are sufficient for most analysts of the technical persuasion. Of these two tools, price is univerally more important.

There is another way Chen, & James describe the distinction between fundamental analysis and technical analysis that you can find it in page 15 of the book.

You better read the customer reviews for the book first before you buy. Read customer reviews here.

What is moving average

noreply@blogger.com (Andy Law) — Mon, 11 Jul 2011 07:39:00 +0000

Moving average are the workhorses of technical analysis. Most traders start out in technical analysis with moving average, and some traders never see a need to look into any other technique. That's how successful moving averages can make your trading.

A moving average is an arithmetic method of smoothing price numbers so that you can see and measure a trend. A straight line is a good visual organizing device, but a dynamic line, the moving average, more accurately describes what's really going on. In addition, you don't need to choose starting and ending points, removing that aspect of subjectivity, although choosing how many periods to put in your moving averages is subjective. In this book, it will discuss several different ways you can calculate and use moving averages to get buy/sell trading signals.

Be careful not to attribute to forecasting capability to the moving average. Moving averages are trend-following. The moving average is lagging indicator as it can still be rising after your price hits a brick wall and crashes.

Source: Technical Analysis For Dummies, by Rockefeller, & Barbara
Read reviews for this book.

What is technical analysis

noreply@blogger.com (Andy Law) — Mon, 11 Jul 2011 05:34:00 +0000

Rockefeller, & Barbara said that:

Technical analysis is the study of how securities prices behave and how to exploit that information to make money while avoiding losses. The techincal style of trading is opportunistic. Your immediate goal is to forecast the price of the security over some future time horizon in order to buy and sell the security to make a cash profit. The emphasis in technical analysis is to make profits from trading, not to consider owning a security as some kind of savings vehicle. Therefore, techical analysis dictates a more active trading style than you may be used to.

Source: Technical Analysis For Dummies, by Rockefeller, & Barbara
Read reviews for this book.

Rafael Romeu and Umar Serajuddin stated that:

Technical analysis contains a strong interpretive component. The unfortunate situation in which two technicians looking at the same data but coming to completely different conclusions is all too common. Some technicians even suggest that the same person looking at the same chart but with the data inverted may come to a different conclusion than if the chart were held right side up. This sort of subjectivity is problematic for the process of learning technical analysis. It would not be beneficial for a beginner to learn technical analysis and at the same time learn the biases of the sources of their learning. The problem of bias in the presentation of a topic can be alleviated somewhat by presenting many different points of view.

Grab this book here
Read customer reviews for this book

Simple linear regression

noreply@blogger.com (Andy Law) — Sun, 03 Jul 2011 10:20:00 +0000

The linear regression does not take the place of support and resistance lines. It should be viewed as a supplement and confirming indicator to identify the trend. If you select a good starting point, the linear regression delivers pure trend. Unlike support and resistance lines, the linear regression line doesn’t have any trading rules associated directly with it, but visually, the linear regression line is the most informative.

If you draw a support or resistance line whose slope varies dramatically from your linear regression line, one of them is wrong. In a similar vein, if the line has a very steep slope and no other linear regression line on charts of the same security has such a steep slope, you can deduce that the price movement is statistically abnormal. It is unsustainably fast and likely to come to a sad end when traders start taking profit.

This crash and burn is exactly what happened in the NASDAQ in March 2000, the “tech wreck.” Look at Figure 10-6.

The linear regression line from the low in October 1998 to the peak in March 2000 is so steep (and unprecedented) that anyone with an ounce of technical savvy could tell if was going to blow out and come crashing down – exactly as gurus were predicting. That doesn’t mean people shouldn’t take advantage of rising prices. It does mean that they shouldn’t have expected high and rising prices forever and should have placed trailing stops every day to lick in the extraordinary gains.

Here’s an interesting way to draw a linear regression:

1. When you suspect that the price is accelerating (in either direction) at an abnormally high speed, first you draw a true linear regression from the beginning of the data series but stop it at the point where the abnormality – the bubble – begins. You can see this only in hind-sight, but it doesn’t take a lot of hindsight.

2. Extend the line by hand, cutting off the bubble. The extension of the trendline becomes a more realistic forecast, because we know that bubbles always burst.

Anyone drawing this linear regression trendline extension before March 2000 (the market high) had a pretty good idea of where the market would land after the bubble burst. Yes, this is a highly subjective process, and it doesn’t always work. But it gets you thinking about the overall trend of the security or the market index.

Source: Page 178, Technical Analysis for Dummies. Authors: Rockefeller, & Barbara

Signs of ‘up’ & ‘down’ open

noreply@blogger.com (Andy Law) — Tue, 28 Jun 2011 11:55:00 +0000

When the open is up

If the open is up from the close the day before, you imagine that the first trader of the day spotted overnight news favourable to the security, or is expecting favourable news, or has some other reason to think his purchase will return a gain. If you, too, want to be a buyer today, his action reinforces your feeling. The first trade sets the tone. Sometimes a good opening is due to a practice named buy on open. You can’t automatically attribute optimism or hopefulness to an opening bounce, because

First, mutual fund and other professional managers have pre-set allocations to specific securities. When fresh money comes in the night before, these managers are going to distribute a certain percentage of it to all the securities in the fund selected by the new customer. To buy on open is the easiest way to top up a fund, but this action is not necessarily a judgment on that security that day.

Second, fund managers want to clean out stops from the day before. A stop is a pre-set sell order usually designed to prevent losses or otherwise exit the trade. A stop placed significantly beneath the close from the day before may be hit merely because all the market makers have not refreshed their bids at the time the market opens. This type of buying an open occurs particularly with more lightly traded issues, not the big names trading millions of shares a day. Fund managers and other professionals control far larger sums than individuals do, and you don’t know what proportion of opening trades are due to genuine research-based enthusiasm and what proportion is due to the mechanical buy-on-open effect. The market can take up to an hour to get down to new business. How do you know whether an opening bounce is due to fresh enthusiasm or just the mechanical buy-on-open effect? You have to study each security to see whether it normally displays the effect. Heavily traded, big-name securities (such as IBM stock) are less susceptible to an opening bounce than specialized securities with a narrower trader base (like cocoa futures).

When the open is down

If the opening price is below the close of the day before, look out! Maybe bad news came out after the close last night. The bad news may pertain to a political event, a change in interest rates, a bankruptcy in the same industry, or a zillion other factors. Some traders may have executed a sell on open, although to sell on the open is not a common practice. A sell-on-open order is just what it sounds like — an order given the night before to exit the trade at whatever the price happens to be, although hunting for stops at the open is widespread and can create either a buying or a selling surge (for more on stops, see the section, “When the open is up”).

What is market sentiment?

noreply@blogger.com (Andy Law) — Sat, 18 Jun 2011 05:47:00 +0000

In technical analysis, sentiment comes in only two flavours — bullish (the price is going up) or bearish (the price is going down). At any moment in time, a bullish crowd can take a price upward, or a bearish crowd can take it downward. When the balance of sentiment shifts from bullish to bearish (or vice versa), a pivot point emerges. A pivot point is the point (or a region) where an up move ends and a down move begins (or the other way around). At the pivot point, the crowd itself realizes that it has gone to an extreme, and it reacts by heading in the opposite direction. As far back as the early 1900s, traders observed that if they were patient and waited for a pivot point to develop, they could trade at the right psychological time — just as the crowd is beginning a new move. When the crowd is reaching an emotional extreme, the crowd is usually moving in the wrong direction. A reversal point is impending. You should do the opposite of what the crowd is doing, or at least get ready to.