Technical Analysis for the Trading Professional, Second Edition: Strategies and Techniques for Today’s Turbulent Global Financial Markets - Rilegato

Brown, Constance M.

Rilegato

ISBN 10: 007175914X ISBN 13: 9780071759144

Casa editrice: McGraw Hill, 2012

Riassunto

THE TECHNICAL ANALYSIS CLASSIC—REVISED AND UPDATED TO HELP YOU SUCCEED, EVEN DURING TIMES OF EXTREME VOLATILITY

“This book contains the most advanced methodology I’ve ever seen.”
—GEORGE C. LANE, from the Foreword

Required reading for certification in the Chartered Market Technician (CMT) program

Over a decade ago, when this groundbreaking guide was first published, the world of technical analysis had experienced vast change. Seemingly overnight, technological advances had utterly transformed the way market analysts performed their jobs. A growing army of professional technical traders, armed with global plug-and-play software, needed to improve their skills of price projection, timing, and risk management to weather the increasing market ranges and volatility.

Technical Analysis for the Trading Professional helped them achieve it. The word spread that this practical guide provided radical new uses and combinations of indicators and formulas—and it became an instant classic.

By comparison, today’s markets make those of 1999 look simple—so Technical Analysis for the Trading Professional has been expanded to reflect the author’s experiences over the past decade to bring you fully up to date. It provides comprehensive coverage of new techniques, as well as the timeless insight and tools that analysts will always need to maintain a competitive edge in the global financial markets, including:

• Explanations of why common oscillators do not travel between 0 and 100 and why signals develop in different ranges during bull versus bear market trends
• Expanded guidelines for the use of the Composite Index. Formulas are fully detailed for this custom oscillator that warn when the Relative Strength Index is failing to detect a trend reversal
• A comprehensive foundation of Gann analysis, with an explanation of howGann Squares, the Gann Fan, and the Square of 9 are geometrically related to one another
• Methods for calculating Fibonacci retracements and swing projections in rapidly expanding or contracting markets
• A more expansive discussion of cycle analyses and their asymmetrical properties

Each chapter presents the given topic as a separate building block, moving step-by-step through 150 charts that lead toward new methods of price triangulation. The result enables you to pinpoint a market objective—even in the most extreme and volatile trading environment.

Use Technical Analysis for the Trading Professional to establish the trading dominance you need to excel in today’s uncertain markets.

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Informazioni sull?autore

Constance Brown, CMT (Chartered Market Technician), founded Aerodynamic Investments, Inc., after working for more than 15 years as an institutional trader in New York City. She continues to actively trade and advises numerous financial institutions and banks around the world.

Dalla quarta di copertina

Now in its second decade, Technical Analysis for the Trading Professional is the number-one go-to guide for market technicians seeking to improve their market timing skills with the most up-to-date tools and techniques. This second edition provides an updated look at unique formulas and key indicators, while retaining all the foundational material that made the previous edition an instant classic.

Technical Analysis for the Trading Professional has been enhanced and expanded to bring you fully up to date on all the essentials, including:

• Dominant trading cycles
• Moving averages
• Fibonacci projections
• Gann Analysis
• Relative Strength Index and stochastics
• Dominant trend lines
• Price projections
• Elliott Wave Principle
• Volatility bands
• Composite Index

Estratto. © Ristampato con autorizzazione. Tutti i diritti riservati.

TECHNICAL ANALYSIS FOR THE TRADING PROFESSIONAL

Strategies and Techniques for Today's Turbulent Global Financial Markets

By CONSTANCE M. BROWN

The McGraw-Hill Companies, Inc.

Copyright © 2012 Constance M. Brown
All rights reserved.

ISBN: 978-0-07-175914-4

Contents

Foreword
Acknowledgments
Disclaimer
Part | 1 DISPELLING SOME COMMON BELIEFS ABOUT INDICATORS
Chapter | 1 Oscillators Do Not Travel between 0 and 100
Chapter | 2 Dominant Trading Cycles Are Not Time Symmetrical
Chapter | 3 Choosing and Adjusting Period Setup for Oscillators
Chapter | 4 Dominant Trend Lines Are Not Always from Extreme Price Highs 
or Lows
Chapter | 5 Signals from Moving Averages Are Frequently Absent in 
Real-Time Charts
Part | 2 CALCULATING MARKET PRICE OBJECTIVES
Chapter | 6 Adjusting Traditional Fibonacci Projections for Higher 
Probability Targets
Chapter | 7 Price Projections by Reverse-Engineering Indicators
Chapter | 8 Price Objectives Derived from Positive and Negative Reversals 
in the RSI
Chapter | 9 Gann Analysis: Calculating Price and Time Objectives
Chapter | 10 Using Oscillators with the Elliott Wave Principle
Part | 3 NEW METHODS FOR IMPROVING INDICATOR TIMING AND FILTERING 
PREMATURE SIGNALS
Chapter | 11 Volatility Bands on Oscillators
Chapter | 12 The Composite Index
Chapter | 13 The Principles of Depth Perspective Applied to 
Two-Dimensional Charting
Credits
Appendix A
Appendix B
Appendix C
Index

Excerpt

CHAPTER 1

OSCILLATORS DO NOT TRAVEL BETWEEN 0 AND 100

"Why does it appear that conventional technical indicators are failing us as weapproach the twenty-first century? What has changed?" Thirteen years ago thiswas an opening which did not know the volatility changes that would be ahead.However, this method of describing oscillator movement to determine trend andentry/exits in volatile conditions has stood up to the test of time. I believestrongly that a method you favor should be able to handle market changes;therefore, the original text requires no revision. The only suggestion I wouldoffer is to stop reading occasionally and study how a 14-period RelativeStrength Index (RSI) has moved in your own charts. Take any time horizon ormarket. Study global indexes, Gold, Oil, Bonds, and Forex trend or trendlessmarkets, as the method described here will stand up to the challenge. The rangesdefined in this chapter remain valid and of value. However, the astute analystand trader will know there are times when the RSI will fail to give anydivergence warning of a coming major trend reversal. For this there is asolution: this time the chapter on the Composite Index will be fully disclosedand both the Composite Index and RSI will be displayed in more current charts.Therefore, this chapter will accurately describe the methodology for you andChapter 12 will continue the discussion in a more current marketenvironment.

I am asked these two questions by professional traders before a lecture orseminar far more frequently than any others. The implications are that thetechnical studies that brought a trader prior success have changed. Tradersemployed by major institutions throughout Europe, Asia, and the United Statesseem puzzled by this same phenomenon. The traders affected utilize both easternand western technical analysis; the problem is clearly widespread andundiscriminating. Have the indicators failed, or have the markets changed,making older methods obsolete? Neither suggestion is true. Technical analysishas proved that it will hold up to whatever the world puts in front of us. Buttechnology makes everything more tightly connected. We are waking up to the newawareness that for my country to do well, so must you. No one should look atmarkets in isolation.

How did this group become so tightly linked together when they were workingindependently with their own technical tools? All quote vendors use the samedefault variables within their analysis software; professional systems andretail software products alike still use the exact same defaults. Think aboutthat statement for a moment. Every quote system shipped to a new locationanywhere in the world with charting capabilities starts off with the exact samesetup periods and formulas. Less experienced traders rarely change these defaultvariables as they are overwhelmed with the long list of indicators available tothem by the click of a mouse button. It is all too easy to set up a chart andthen read a quick description in a manual that proclaims, "Sell your Stochasticswhen it rolls over and crosses the 80 line with divergence, and buy when youroll back up through the 20 line." In mass, the orders from the same signal pourin with instantaneous execution.

I do not fear what the professional trader might do. Nor do I have strong viewsabout market realities such as S&P programs that are triggered when the spreadbetween the S&P Cash and Futures market becomes out of line. Now programs aretriggered because the German Dax and Dow Jones Industrial Averages are out ofline. The problem is not with the professional but with the growing mass ofnovice technical traders who operate as one large institutional wildcard. Theprofessional trader who fails to move forward beyond this group is unknowinglyoperating within this new technically armed and dangerous mass. The impact ofthis new breed of mass psychology is indicator failure and capital erosion.This group cannot only be avoided but also used to the professional'sadvantage. The time has come to change conventional thinking about technicalindicators. However, the professional faces a new risk. The buzzword is "alpha."With the collapse in the financial banking sector around the world, institutionsare farming out their research to third parties. Alpha is the new model and thismodel is of little value if the majority rely on the defaults that failed themin the past.

The 1990s brought dramatic changes to the way technicians and traders applytheir tools. At the same time the need for technical analysis grew because itbecame increasingly difficult to manage the global volume of fundamental factorsand cross-market ramifications. More people continue to discover the value ofcharting techniques. However, to evolve beyond the foundations of technicalanalysis, we must change the way we utilize technical studies.

Traders still working under the premise that there are two groups of technicalindicators—indicators for trending markets like moving averages and thenindicators for nontrending markets such as the oscillators MACD, RSI, andStochastics—are now very outdated. The books that segregated indicatorsinto two primary groups are not wrong. Do not lose sight of the fact that theoriginal works provided us with the foundation on which our industry is growingtoday. The important distinction is that early books on technical analysis willeventually be viewed as classics, but traders who fail to evolve beyond theseoriginal concepts face a far less pleasant fate: extinction.

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

In Figure 1.1 the standard default period of 14 is used for the RSI witha daily bar chart of Yen futures. The Yen is falling in a bear market withinthis time horizon. The graph showing the RSI indicator has an upper black bandmarking a range of resistance from 60 to 65. A lower band marks 23 to 28 tohighlight a support zone for the indicator. Study the indicator tops closely. Atno time is the Yen strong enough to push the RSI oscillator successfully throughthe 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 therange from 55 to 65, the Yen renews its former downtrend and establishes newlows against the dollar. The oscillator then declines to a support zone within arange 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 arange of 20 to 30 at the low end of the scale up to an upper resistance zone of55 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 markedby 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 timehorizon when the Yen is in a bull market or the dollar is weak. Each time theYen declines, the oscillator falls to a support zone near 40 to 50. The 40 levelis never broken. The strong Yen rallies push the oscillator into the 80s. Evenminor advances that lead to more complex consolidations allow the RSI to declineonly 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 been correctly defined. We willcover how to find the correct period in the next chapter, and we will readdressthe issue of buy and sell ranges as other oscillators are discussed. As anexample, in Chapter 14 a price projection method is described for the StochasticOscillator which gives the trader permission to buy a market when theStochastics indicator falls from an extreme high down toward the 75 area. Yes,buy, as the signal will warn the trader that the market could target anadditional move equal to the rally that preceded the minor pullbackwhich allowed the indicator to decline from its extreme high over 80. This isonly one example of instances when it would be incorrect to sell just becausethe Stochastics indicator has crossed the 80 range. Conversely a trader wouldhave permission from Stochastics to sell the market when the oscillator movesback up to the 25 zone as the market would then target a new price lowequal to the decline that preceded the minor rebound from the oversoldcondition. Examples for this price projection method from Stochastics will beoffered in their correct context in Chapter 14, but the point to make at thistime is that oscillators can be used to forecast market trends, which iscontrary to popular belief today.

Let's build on the introduction of the range rules for RSI by moving on toFigure 1.3 showing a weekly Dow Jones Industrial Average chart. Thechart shows clearly that the market corrections in 1996 and 1997 all pressed theRSI down to the lower support zone defined for a trending bull market. Theindicator holds the 40 to 50 support zone and signals correctly that the marketwill rally toward new highs. The oscillator moves to the upper range for a bullmarket in each follow-up advance and then finds resistance at the 75 level orhigher. Asian, European, and North American equity indexes will all display thischaracteristic of predetermined range rules that help to define a market'strend. A dramatic example can be seen in Figure 1.4, which charts HongKong's Hang Seng Equity Index in both a daily and monthly time horizon. Thismarket entered a sharp decline in 1997 when the Asian currencies had to contendwith a weakening Yen. The Hong Kong dollar peg and concerns about the strengthof the fixed Chinese renminbi triggered a chain reaction which was ultimatelyfelt throughout the Asian stock markets. The Asian woes contributed to theglobal equity correction that unfolded in late October 1997 in Europe and NorthAmerica. The daily chart in Figure 1.4 shows the decline in the HangSeng Index from March to June of 1998. The range rules warn that the decline isincomplete as of June 3, 1998, when this chart was captured for this book. TheRSI oscillator fails to exceed the 55 to 65 resistance level throughout theadvance in February and March. A market that can press the RSI only to the 55 to65 zone is indicating a topping formation within a bear market.

The monthly chart shows a brighter picture as the severe decline is within thecontext of a larger bull market. The RSI in the monthly chart has fallen only tothe 40 to 50 support zone. It can be said about the Hang Seng that the dailychart in Figure 1.4 warns that a price bottom is not in place as of June3, 1998, and a sharp freefall in the daily time horizon could occur, but in thecontext of the monthly chart such a capitulation spike down could then form akey bottom as the 45 zone is being tested a second time now and a third testseems required.

How can you tell when the trend is about to change? The bear market illustratedin the daily Hang Seng chart allows the RSI oscillator to travel between 20 and65, consistent with the range rules for a bear market. When the market's trendis about to reverse, so too will the oscillator ranges. In the case of the HangSeng daily chart, the oscillator will develop the following RSI pattern when itis ready to trigger a transition from a bear market to a bull market (notpresently shown in the current chart data offered in Figure 1.4). Afteran RSI failure at the upper boundary for a bear market, 55 to 65, the marketwill then decline. The first indication of a trend reversal will come when themarket moves the RSI only to the lower support zone reserved for a bull marketbetween 40 to 50. That is why this market does not have a bottom in place withinthis chart. When a bottom is forming, the RSI will not break 40. True, sharpsecondary declines that fail to make a new price low can produce a similarindicator formation. Elliott wave traders would call such a decline a "deepsecond wave down" or a "fifth wave failure," depending on the internal structureof the decline, but in both the market would fail to establish a new price low.

Regardless of a new price low or only a double bottom, the market decline willmove the RSI to the support zone near 40 only if it is ready to reverse itsformer trend. An actual price projection method will be discussed in Chapter10, so let's not stray from this discussion about trend reversals at thistime. An RSI indicator that declines to 39 or 38 will still fit this transitionphase, so use some common sense. Use the market's past history to define moreaccurately the range that will be tested in the transition. If the support rangefor this market was 37 to 45 in prior bull market trends, use that as yourguide. The market that is making a transition will clearly find support for thefirst time at this prior zone. The rally that follows will likely beinsufficient to press the RSI through the upper resistance range defined for abear market. The failed attempt to exceed 65 will be met with another pricedecline that moves the RSI oscillator back to support within the 40 to 50 rangeonce again. Should the market produce an RSI oscillator decline thatsuccessfully holds the 40 to 50 support zone a second time, it should beinterpreted as a clear warning to a sleeping bear–biased trader thatconditions are changing. The market is attempting to reverse and will eventuallyproduce a price rally from this oscillator position that is strong enough topress the RSI into the upper resistance range reserved for a bullmarket—75 to 85 and higher. It is not necessary for a market to test thenew lower boundary more than once before successfully breaking out into thehigher range, but it is a common occurrence to see double bottoms develop,especially in longer horizon charts such as weekly, monthly, and quarterly timeintervals. The reverse would be true for a market preparing a transition from atrending bull market to a bear market. It is so important to know how tointerpret an approaching trend reversal that we will go through this transitionstep by step with the next chart.

Our discussion about trend reversals using the RSI indicator will now focus onone of the largest markets in the world: Deutsche Marks per U.S. Dollar (DMK/$).The weekly DMK/$ chart in Figure 1.5 covers a five-year time intervalwhich includes a trend reversal from a bear market for the dollar prior to April1995 to the bull market that follows into 1998. The levels at 40 and 80 aremarked with a double line that denotes the approximate range the RSI will travelwithin a trending bull market. The 30 and 65 levels have solid single lines thatmark where the RSI will travel within a bear market. The discussion that followsaddresses each of the oscillator pivot levels that are numbered on the RSI inFigure 1.5:

Point 1. The RSI pivot at point 1 has occurred near the upper resistancezone reserved for a trending bear market. The dollar declines and moves theoscillator down to point 2.

Point 2. The market finds support, allowing the RSI to form a doublebottom near the 40 level. The ability of the RSI to stay above 40 should warn usthat the dollar has sufficient strength to attempt a new high and that the priortrend remains in force. At this point we would not know that a trend reversalwas developing unless the support zone at point 2 was broken. The dollarproceeds to rally and makes a marginal new high relative to the high thatoccurred when the RSI topped at point 1.

Point 3. As the dollar squeaks past the prior high, the RSI forms abearish divergence pattern. Point 3 in the oscillator is lower than point 1though the dollar closes at higher levels. While the less experienced technicaltrader will likely catch the divergence between price and the oscillatorsuggesting that another minor correction could develop in the dollar, the traderwith more experienced judgment should see that point 3 is an oscillator peakthat occurs within the 55 to 65 resistance zone denoting a bear market. This isof far greater value and significance. The dollar then begins to weaken, or itmight be more favorably stated that the Deutsche Mark becomes stronger, as theRSI oscillator declines to the 40 level. The RSI tests the 40 level three timesbefore it is finally broken and declines to the 30 level, which is normalsupport for this indicator in a bear market.

Point 4. The dollar attempts a rebound from point 4 in Figure1.5, and the oscillator becomes trapped between the 30 and 40 levels as amarket consolidation occurs. The market actually forms a bearish contractingtriangle over this same period of time, and the fact that the RSI was unable tobreak above the lower boundary used for a bull market is extremely bearish. Adownward resolution could have been favored, and the chart shows that the dollarmakes a new low as the RSI forms a second test of the 30 level just beyond thepivot low that was labeled point 4. If you do not see the small contractingtriangle in the price data, do not worry at this time, as we will be introducingother tools and indicators that will be far more obvious. Just focus on theoscillator ranges.

Point 5. The dollar then rebounds, allowing the RSI to form an M patternwell below the upper resistance zone defining a bear market. This particularindicator pivot at point 5 is occurring at an extremely interesting level. Somereaders will see it with just the naked eye. Measure the distance between thetwo single black lines that denote a bear market oscillator range. The pivothigh in the RSI at point 5 is a 0.618 Fibonacci retracement of the zone. Do notmeasure the oscillator high at point 3 and then take the oscillator low at point4 to determine the Fibonacci relationship as we would with price data; instead,use the range itself. The oscillator is also forming a very bearish M pattern atthe peak that is forming at a precise Fibonacci retracement level within thebear market range. The chart is signaling to traders to sell dollars forDeutsche Marks immediately.

(Continues...)

(Continues...)

Excerpted from TECHNICAL ANALYSIS FOR THE TRADING PROFESSIONAL by CONSTANCE M. BROWN. Copyright © 2012 by Constance M. Brown. Excerpted by permission of The McGraw-Hill Companies, Inc..
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Dettagli dell'edizione

• Editore: McGraw Hill
• Data di pubblicazione: 2012
• Lingua: Inglese
• ISBN 10: 007175914X
• ISBN 13: 9780071759144
• Rilegatura: Copertina rigida
• Numero edizione: 2
• Numero di pagine: 464
• Contatto del produttore: non disponibile
• Persona responsabile: Ufficio Anagrafiche Messaggerie; 0039 0245774342; ufficio.anagrafiche@meli.it; ; Via Verdi, 8.; Assago Milano; 20090; Italia