Part 33 Technical Analysis – How and why use different time frames

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Book Review: Either Read Technical Analysis Using Multiple Timeframes By Brian Shannon Or Lose Money Trading

The vast majority of finance books written in the last decade are complete and utter shit. (I know this, you know this, hell, even our joke of an industry itself knows this, but nothing’s changin’ anytime soon cuz shitty books still make money due to the financial miseducation of the general public aka Watch TV and you won’t get rich, you’re just gonna get fat…or fatter!) Because they are written by marketers, fee-earners aka scum suckers, frauds, talking heads and sugarcoated / generalized to the point where we find our once great profession near-dead last in understandability/openness/excitement and widespread profitability.

Given these dark times, there are only a few wise choices—my book An American Hedge Fund (total openness/understandability) a few others, none of which come to mind right away, and these lists (HERE) of my 20 favorite finance/business books.

So you can imagine my surprise/delight when I discovered Brian Shannon’s (Alphatrends.net) debut book Technical Analysis Using Multiple Timeframes to be the single most accurate/honest/understandable book on charting since Steve Nison’s classic: Japanese Candlestick Charts.

That’s right, I want you to pick up a copy right the hell now and read in awe as Shannon explains how it’s not just about memorizing chart patterns—anybody who tells you that is a typically useless finance freak—it’s infintely more important to understand how variables, players and emotions align to create shockingly similar, repetitive, and, more importantly, predictable chart patterns.

Students of my Pennystocking DVD know this concept to be the main point around which I base my trading and what I go to great lengths to explain—at times better than others—Shannon pulls it off rather succinctly and effortlessly using graphics like these:

and then picking them apart, one variable at a time so the reader gets a total education in the differences between all the patterns.

More importantly, Shannon delves into the steps necessary to make sure you stay disciplined—whether that means cutting losses quickly, using stop losses, waiting for pattern confirmation etc.—and that’s the kind of stuff at which most traders—me included—suck aka it’s crucial to learn this stuff if you hope to be a successful trader.

God friggin love Shannon for putting together this 184 page MUST READ, being an infinitely better trader than me as his focus is not these little 5-20% gains (yeah TIMalert subscribers today on CNEH, detailed post coming tomorrow, whaaaaaat!), wanting and teaching others to want larger, longer-term gains on larger/more liquid names than PennyStocking. If he made a DVD of his strategies, it’d probly be called StockCharting because at that he is a master teacher.

So, you poor people, continue learning PennyStocking and expand your horizons with Shannon’s awesome charting book. Hell, it might even teach you a thing or two about PennyStocking itself as there are a great any overlaps. You middle-class people: learn it all, you’ve got the money and opportunity to really get ahead and make your non-trading friends look like dumbasses. And you rich people—understand technical analysis is not some crazy science, it’s life…cuz it’s based in human psychology and more importantly, and, more importantly, stop being so goddamn stuck up–money doesn’t make you any better, in most cases, it makes you far worse!

In short, you need to read this book (click HERE to see the entire website dedicated to it) , if you don’t, you’re just ignoring a greatly useful resource and that’s not cool.

Disclosure: I’m a Shannon affiliate so part of your purchase will go to help my sushi habit and I’m damn proud to have finally found a friggin finance product worthy of my unabashed-promotional-at-all-times-big-mouth…aka I’ll never promote anything this hardcore that I really don’t believe to be useful/helpful/worth its cost many times over.

More informed trading Technical Analysis: Trading Using Multiple Time-frames

    Stuart Spencer 3 years ago Views:

1 Technical Analysis: Trading Using Multiple Time-frames Intermediate Level

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2 Introduction 1 Stock markets worldwide function because, at any given time, some traders want to buy whilst others want to sell. Traders’ desires to buy or sell depends on their strategy, their objectives and their time-frames. Short-term traders usually watch 1-minute to 15-minute s, whilst long-term traders usually watch daily, weekly or monthly s. Trends, support and resistance lines, and technical indicators look different on a 1-minute than they do on a daily. For example, you may look at a 1-minute for Barclays (BARC:xlon) and see that the stock price appears to be in a downward trend. But, if you switch to a daily, you would probably see that the price has been in an upward trend for years. So a momentary reversal is unlikely to be of consequence. It is important to realise that, in this example, both s are rightdepending on your perspective and your trading time-frame. If you are a short-term trader, you should be focusing on short-term s and trends. If you are a long-term trader, you should be focusing on long-term s and trends. However, when the short-term and longterm trends are in agreement, you are probably right to be confident in an investment.

3 Introduction cont 2 Different s will give you different information. Depending on what time frame you are trading to, you will gather this information from a combination of different accounts. The list below identifies the most common signal- time frames and identifies the most appropriate time frame to use for your trend : 1-minute signal 15- to 30-minute trend 5-minute signal 1-hour trend 15- to 30-minute signal 4-hour trend 1-hour signal 1-day trend 1-day signal 1-week trend 1-week signal 1-month trend The list of common signal- timeframes below identifies the ideal timeframe for your timing : 1-minute signal Tick timing 5-minute signal 1-minute timing 15- to 30-minute signal 5- minute timing 1-hour signal 15-minute timing 1-day signal 1-hour timing 1-week signal 1-day timing 1-month signal 1-week timing

4 Trend Charts 3 As its name suggests, the trend helps users to identify the predominant trend. If the price on the trend is in an upward trend, you should consider buying the stock or CFD. If the price on the trend is in a downward trend, you should consider selling. The optimum time-frame for your trend is determined by the time frame you typically use for your trading (signal) s. Once you have identified the ideal time frame for your trend, you can spot the prevailing trend using diagonal support and resistance levels or moving averages. You can see on the weekly for Royal Bank of Scotland (RBS:xlon ) that both the diagonal support and resistance levels, and the moving average show that its price is in an downward trend (right).

5 Signal Charts 4 The signal is your most important. It provides the trading signals that tell you when to look for buying and selling opportunities. Using a signal in conjunction with a trend enables you to more accurately identify potentially profitable trade signals. For example if your trend shows the stock price is on an downtrend, you should only be looking for sell signals on your signal (purple on below). If your trend shows the stock price is on a upward trend, you should only be looking for buy signals on your signal. In effect, the trend s allow you to ignore the less-profitable half of the trading signals you see on your signal. Since these trading signals are going against the long-term trend, they have a higher likelihood of performing poorly. Having identified your trading signals you need to decide when to enter and exit your trades using your timing.

6 Timing Charts 5 Timing s, as their name implies, help time entries and exits. Timing can be critical to profitability when you are a trader because even small swings in the price of individual stocks or CFDs could be very significant if you own or manage lots of them. You can use one of the following methods when pinpointing entry and exit signals on your timing s: Identify trend as well as its support and resistance If you see a buy signal on your signal, then you should be looking for an upward trend on the timing. Hopefully, the price is closer to support than it is to resistance. This tells you the stock or CFD has the potential to move higher before hitting resistance. Of course, if it has just broken up through resistance, it may continue to move higher. Using a technical indicator -if you use a technical indicator, such as the commodity channel index (CCI), on your signal to generate buy and sell signals, you can likewise use that same indicator on your timing to help confirm those signals

7 Trading Setup 6 We will look at Euro vs Pound Steling (EURGBP) using a weekly as the trend, a daily as the signal and a 1-hour as the timing First, look at your trend to see the current trend. On the EURGBP weekly, the stock price has been in a range trend for some time. It would be unwise to prematurely trade the currency pair without looking for signals and timing.

8 Trading Setup cont 7 Next, look at the signal to spot a buy signal for the EURGBP. This time we are using the slow stochastic to generate the trading signal. On the daily, the slow stochastic gave a sell signal on 4th September as the short term indicator line crossed below the long term indicator. The red horizontal line illustrates that the pair was already overbought (right). Lastly, look at the timing to see an appropriate time to invest in the EURGBP. On the 1-hour, the stock price has hit resistance at and appears a good time to sell Alternatively, the previous highs around could be used as a sell point as the price breaks below this level (left).

Technical Analysis

What Is Technical Analysis?

Technical analysis is a trading discipline employed to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity, such as price movement and volume.

Unlike fundamental analysis, which attempts to evaluate a security’s value based on business results such as sales and earnings, technical analysis focuses on the study or price and volume. Technical analysis tools are used to scrutinize the ways supply and demand for a security will affect changes in price, volume and implied volatility. Technical analysis is often used to generate short-term trading signals from various charting tools, but can also help improve the evaluation of a security’s strength or weakness relative to the broader market or one of its sectors. This information helps analysts improve there overall valuation estimate.

Technical analysis can be used on any security with historical trading data. This includes stocks, futures, commodities, fixed-income, currencies, and other securities. In this tutorial, we’ll usually analyze stocks in our examples, but keep in mind that these concepts can be applied to any type of security. In fact, technical analysis is far more prevalent in commodities and forex markets where traders focus on short-term price movements.

Key Takeaways

  • Technical analysis is a trading discipline employed to evaluate investments and identify trading opportunities in price trends and patterns seen on charts.
  • Technical analysts believe past trading activity and price changes of a security can be valuable indicators of the security’s future price movements.
  • Technical analysis may be contrasted with fundamental analysis, which focuses on a company’s financials rather than historical price patterns or stock trends.

Understanding Fundamental Vs. Technical Analysis

The Basics Of Technical Analysis

Technical analysis as we know it today was first introduced by Charles Dow and the Dow Theory in the late 1800s.   Several noteworthy researchers including William P. Hamilton, Robert Rhea, Edson Gould, and John Magee further contributed to Dow Theory concepts helping to form its basis. In modern day, technical analysis has evolved to included hundreds of patterns and signals developed through years of research.

Technical analysis operates from the assumption that past trading activity and price changes of a security can be valuable indicators of the security’s future price movements when paired with appropriate investing or trading rules. Professional analysts often use technical analysis in conjunction with other forms of research. Retail traders may make decisions based solely on the price charts of a security and similar statistics, but practicing equity analysts rarely limit their research to fundamental or technical analysis alone.

Among professional analysts, the CMT Association supports the largest collection of chartered or certified analysts using technical analysis professionally around the world. The association’s Chartered Market Technician (CMT) designation can be obtained after three levels of exams that cover both a broad and deep look at technical analysis tools. Nearly one third of CMT charter holders are also Certified Financial Analyst (CFA) charter holders. This demonstrates how well the two disciplines reinforce each other. 

The Underlying Assumptions of Technical Analysis

There are two primary methods used to analyze securities and make investment decisions: fundamental analysis and technical analysis. Fundamental analysis involves analyzing a company’s financial statements to determine the fair value of the business, while technical analysis assumes that a security’s price already reflects all publicly-available information and instead focuses on the statistical analysis of price movements. Technical analysis attempts to understand the market sentiment behind price trends by looking for patterns and trends rather than analyzing a security’s fundamental attributes.

Charles Dow released a series of editorials discussing technical analysis theory. His writings included two basic assumptions that have continued to form the framework for technical analysis trading.

  1. Markets are efficient with values representing factors that influence a security’s price, but
  2. Even random market price movements appear to move in identifiable patterns and trends that tend to repeat over time. 

Today the field of technical analysis builds on Dow’s work. Professional analysts typically accept three general assumptions for the discipline:

1: The market discounts everything

Technical analysts believe that everything from a company’s fundamentals to broad market factors to market psychology are already priced into the stock. This point of view is congruent with the Efficient Markets Hypothesis (EMH) which assumes a similar conclusion about prices. The only thing remaining is the analysis of price movements, which technical analysts view as the product of supply and demand for a particular stock in the market. 

Technical analysts expect that prices, even in random market movements, will exhibit trends regardless of the time frame being observed. In other words, a stock price is more likely to continue a past trend than move erratically. Most technical trading strategies are based on this assumption. 

3: History tends to repeat itself

Technical analysts believe that history tends to repeat itself. The repetitive nature of price movements is often attributed to market psychology, which tends to be very predictable based on emotions like fear or excitement. Technical analysis uses chart patterns to analyze these emotions and subsequent market movements to understand trends. While many forms of technical analysis have been used for more than 100 years, they are still believed to be relevant because they illustrate patterns in price movements that often repeat themselves. 

How Technical Analysis Is Used

Technical analysis attempts to forecast the price movement of virtually any tradable instrument that is generally subject to forces of supply and demand, including stocks, bonds, futures and currency pairs. In fact, some view technical analysis as simply the study of supply and demand forces as reflected in the market price movements of a security. Technical analysis most commonly applies to price changes, but some analysts track numbers other than just price, such as trading volume or open interest figures.

Across the industry there are hundreds of patterns and signals that have been developed by researchers to support technical analysis trading. Technical analysts have also developed numerous types of trading systems to help them forecast and trade on price movements. Some indicators are focused primarily on identifying the current market trend, including support and resistance areas, while others are focused on determining the strength of a trend and the likelihood of its continuation. Commonly used technical indicators and charting patterns include trendlines, channels, moving averages and momentum indicators.

In general, technical analysts look at the following broad types of indicators:

  • Price trends
  • Chart patterns
  • Volume and momentum indicators
  • Oscillators
  • Moving averages
  • Support and resistance levels

The Difference Between Technical Analysis And Fundamental Analysis

Fundamental analysis and technical analysis, the major schools of thought when it comes to approaching the markets, are at opposite ends of the spectrum. Both methods are used for researching and forecasting future trends in stock prices, and like any investment strategy or philosophy, both have their advocates and adversaries.

Fundamental analysis is a method of evaluating securities by attempting to measure the intrinsic value of a stock. Fundamental analysts study everything from the overall economy and industry conditions to the financial condition and management of companies. Earnings, expenses, assets and liabilities are all important characteristics to fundamental analysts.

Technical analysis differs from fundamental analysis in that the stock’s price and volume are the only inputs. The core assumption is that all known fundamentals are factored into price; thus, there is no need to pay close attention to them. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use stock charts to identify patterns and trends that suggest what a stock will do in the future.

Limitations Of Technical Analysis

Some analysts and academic researchers expect that the EMH demonstrates why they shouldn’t expect any actionable information to be contained in historical price and volume data. However, by the same reasoning, neither should business fundamentals provide any actionable information. These points of view are known as the weak form and semi-strong form of the EMH.

Another criticism of technical analysis is that history does not repeat itself exactly, so price pattern study is of dubious importance and can be ignored. Prices seem to be better modeled by assuming a random walk.

A third criticism of technical analysis is that it works in some cases but only because it constitutes a self-fulfilling prophesy. For example, many technical traders will place a stop-loss order below the 200-day moving average of a certain company. If a large number of traders have done so and the stock reaches this price, there will be a large number of sell orders, which will push the stock down, confirming the movement traders anticipated.

Then, other traders will see the price decrease and also sell their positions, reinforcing the strength of the trend. This short-term selling pressure can be considered self-fulfilling, but it will have little bearing on where the asset’s price will be weeks or months from now. In sum, if enough people use the same signals, they could cause the movement foretold by the signal, but over the long run this sole group of traders cannot drive price.

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  • TERM Spring ’13
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