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HHHOOOWWW DDDOOO YYYOOOUUU AAAVVVOOOIIIDDD TTTHHHEEE
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A Free Technical Analysis E Magazine for Traders of Financial Markets
Inside this issue...
Two examples of marketmanipulation at work and how toavoid being caught out by it.
The power ofMovingAverages in your tradingsystem.
Discover howContinuation Patterns can beone of the most profitable tradingtechniques of all.
AAnndd mmuucchh mmoorree......
www.EducatedAnalyst.com
Volume 2 Issue 4
JUL / AUG 2010
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Th e Edu cated An alyst | JUL / AUG 2010
THE EDU CATED ANALYSTJU L / A UG 2 01 0 - V OLU M E 2 Issu e 4
4 SOM ETHING STINKS IN THE U.SAlan Ol iver rev iews the Bear Stearns opt ions scanda l, and the m ore
recent t raders acc ident event w h ich cause the la rgest one day
d ro p in US M a rke t H isto ry . A la n th e n g o e s o n to sh o w yo u wh e reyou can go to escape th is k ind o f m arke t man ipu la t ion w hi le
contin uing to em ploy Gann and Fibonacci techniques (video).
7 SOM E OF THE M OST W IDELY TRADEDSTOCKS ON ASXWith th e cu r ren t vo la t i li t y in th e A u st ra l ia n Sto ck ma rke t Dale
Gilham rev iews som e o f t he b iggest s tocks in the Top 100 to see
wh a t t h e y are d o in g a n d d e mo n s t rate s ho w to a p p ly so me simp le
techn iques and make comm ent on ho w the s tocks have been
unfo ld ing .
12 Q& A RAY BARROSIn th is new sect ion of t he Educated Ana lys t M at thew Humphreys
f rom M arket Ana lyst Sof tw are poses a ser ies quest ions to Aut hor ,
T rader and M arke t Educator Ray Barros .
15 M OVIN G AVERAGES IN TH EORY AN DPRACTICEDespite man y innovat ions in technical analysis over the years, them ov ing average in a l l o f i ts fo rms rem ains one o f t he m ost
pow er fu l m ethods ava i lab le fo r ana lysing , t rad ing and pro f i t ingf ro m f in a n cial ma rke t mo ve me n ts . In th i s a r t i cle Asoka Selvarajah
w i l l rev iew some o f the system s w h ich can be im p lement ed usingthe granddaddy o f TA ind icator s.
21 POETRY IN M OTIONThis art ic le is a fo l low on fr om Daw n Bolton-Smi t hs p re vio u s i te m
LESSONS IN GEOMETRY. I t is not so m uch abo ut w ords bu t the
p ic tu res tha t the m arke t p rov ides and t rans la tes in to char ts, wh ich
at t im es can be pure geomet ry .
24 CONTINUATION PATTERNSCont inuing t he series of art ic les by Peter Varcoe th is issue we com e
to the bus iness end o f the ident i f icat ion process fo r w hat isundoubt ed ly , fo r m any, one o f the m ost p ro f i tab le t rad ing
techniqu es of a l l .
33 AN INTRODUCTION TO EXCHANGE-TRADED FUNDS (ETFS)M ike Smi th f rom Hor izon Pro fessiona ls rev iews the nu t s and bo l t s
of Exchange Trade Fund s as th ey becom e mo re popu lar wit h
t raders and investors fo r the i r versa t i li ty and w h ich can g ives you
exposure w i th r e la t ive ease to m arke ts and veh ic les w h ich maybe
otherw ise d i f f icu lt o r com pl ica ted to t rade.
39 EM OTIONAL STAGES OF A TRADEThe psychological states of traders rarely get a mention, yet thesehave an enormous impact on ind iv idua l t raders resu l ts . Chris
Col l ingwood exp lorers why emot ions in f luence our capac i t ies totake in inform ation, pro cess it and m ake functional decis ions.
CONTENTS
The Educate d An alyst is Changing!
Beginning f rom Septem ber th e Educated Analyst wi l l no
longer ex ist as a b i -m ont h ly PDF pub l icat ion.
Instead w e are conver t ing to a b log sty le web site w hich wi l l
begin wi t h weekly ar t ic le upd ates. The ar t ic le s ty les and
con ten t w i l l no t change, and our focus w i l l con t inue to be
qua l it y educa t ion fo r marke t t raders.
The change to a b log form at wi l l a l low us to react to curr ent
events (such as the imp act of th e RSPT) mu ch faster , and to
inc lude a w ider var ie ty o f cont ent such as v ideos, po l ls, user
comm ents , e tc.
Once the s i te is ready w e w i l l emai l a ll o f ou r ex ist ing
subscr ibers wi th the deta i ls.
W e look fo rw ard to see ing you in Sep temb er .
The Edu cated An alyst Team
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H i and welcom e to t he latest edit ion of The Educated Analyst.I t always amuses me ho w w e often h ave a recurrin g them e in the art icles w itho ut any script ing from us. This t im e we have
tw o art icles th at highlight som e of the m arket manip ulation t hat seem s to b e going on. Besides tho se given in the art icles,
anoth er example in recent t im es is the m anipulation o f the silver market, w here large players w ere allegedly manipulatin g
the pr ice by the sheer volume of contracts that t hey held. M any people wi l l cry foul over this - and r ight ly so, where th is is
found to b e happening i t should be p rosecuted.
In reality th ough, I take a very pragmatic view on this, w hile I do no t dou bt t hat m anipulation h appens, I think it is som eth ing
that h as been happen ing for as long as w e have had "Free" m arkets. From a purist Gann poin t of view, it could be said that
the m anipulation was necessary to h ave the m arket reach the r equired Gann levels... .. .. . but t hat is where m y min d struggles
too m uch with the paradox of "Does the m arket def ine the levels, or do the levels def ine the market" . I think that th at is a
philosophical discussion t o be h ad over a nice bott le of w ine.
Nevertheless, I do no t th ink manipu lation is a reason t o stay away from a m arket. The mo re you stud y a market and get t o
know i t , you wi l l be able to successful ly t rade i t no m atter i f the m oves are "natural" or m anipulated. In over f if teen years of
being involved in t he tr ading industry, the very best trader s that I have met are alw ays tho se that choose, stud y and test a
market thorou ghly.
In som e other new s related a bit m ore closely to The Educated Analyst, this will be the last t im e that w e present The
Edu cated An alyst as a large PDF file like t his. You see, man y of
the art icles in t his issue w ere actually received w eeks ago, andsom e of them w ere quite pert inent to what w as happening in
the market at that t ime. Rather than make you wait for us to
collate all the art icles and bu ild th em int o th is PDF, we are
going to release them as we receive them in a blog form at. I f
you are subscribed t o The Educated Analyst, w e'l l let you know
as soon as w e have changed the w ebsite so t hat yo u can
subscribe to th at service via em ail or RSS.
Well that 's i t f rom me, I t rust that you enjoy the art ic les and
that t hey give you some insights into t he market t hat assist you
with your t rading.
Stay safe with your t rading and remem ber to protect your
capital.
M athew Verdouw
Editor
The Edu cated Analyst.
EDITORIAL
Disclaimer:
The Educated Analyst, its staff, officers and contr ibut ing author s cannot be held liable for tr ading decisions that you m ake as a
consequence of education t hat you receive from the art icles.
Trading and Investing involves risk and has the p ot ential fo r large financial losses. The content provid ed in The Educated Analyst is of a
general nature and does not take your per sonal situat ion or financial objectives into consideration.
You should consult w ith you r bro ker or f inancial advisor before act ing on any of the cont ent in The Educated Analyst.
STOP THE PRESSES!
As an example of the im portant (and t im e
speci f ic) informat ion we re hoping the new blogform at w il l make avai lable to you, please cl ick the
image below to w atch a short video presentat ion
from Alan Oliver about the S& P500 Index.
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4/40Th e Edu cated An alyst | Som et h ing St inks in t he U.S JULY/ AUG 2010
ny t rade r w ho has been wa tch ing the marke ts
act ively in the last year or so could be
excused for th inking that the US has a real
corrupt ion prob lem, and th is has been h igh l igh ted on
several o ccasions.
Let s look a t the two most recent examples o f dub ious
behaviour.
In M arch 2008, som ebody unknow n to m arket
regulator s and off ic ia ls bought 1.7 mil l ion do l lars of put son Bear Stearns stock. I f you havent t r aded opt ions, th is
is a short t rade wi th a t ime l imi t and a pr ice that the
m arket must drop be low t o have a winn ing t rade.
Nothing unreal ist ic or suspicious about the trade, but
bear in m ind the o pt ions had st r ike pr ices betw een 50%
and 60% low er than the t rad ing price. Again, perhaps a
w i ld bet on m arket mo vement s, but consider ing the s ize
o f the t rade one w ou ld be fo rg iven fo r raising you r
eyebrow s. But i t gets better.
The options were due to expire in 9 days..
I don t t rade opt ions but I recogn ise a stup id t rade when
I see it. This was a ridiculous strategy unless you had
som e reason t o suspect tha t Bear Stearns was not go ing
to b e saved l ike the oth er banks w ere.
As i t turns out, Bear Stearns was not af forded a rescue
package l ike the others, and in 6 days th is t rade was
worth $270 mi l l ion do l la rs to the t rader. Not bad for a
w eeks w ork.
So who is th is super t rader with mil l ions to r isk on very
doubt fu l t rades? W hat w as h is st ra tegy and how d id he
presume to know that one bank would not be saved
when o thers were rescued? Wel l , we wi l l never know
because the SEC, the Securities and Exchange
Commission charged with maintaining an orderly and
fa i r t rad ing m arket cant find t he trader or the money.
This must beggar bel ief to anyone that $270 mil l iondol lars can go missing or is untraceable. From my bank
em ployee days I know this is
untrue, so there is a def in i te
st ink brew ing here .
Now le t s look a t the la test
fiasco.
The US stock market had i ts
largest single day down in
history, fa l l ing over 1000
poin ts in one day. M any
stops would have been
knocked out as the market
f e ll t emp o ra r il y; in f act i t
on ly took a coup le o f hours
for the market to ra l ly back
up 700 p o in ts .
SOMETHINGSTINKS IN THE U.S
W ith Alan Oliver
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And no w , yes, you guessed i t , t he
NYSE exchange doesnt know
w hat caused it o r how it
happened. I t was rumoured that
a t rader m ade a mistake enter ing
an order, but th is wou ld have le f t
a paper t ra i l tha t cou ld be
co n f irme d . Th i s n o w s ee ms t o
have been ru led out .
Now you know why I am
imploring smaller, individual
t raders to t rade currency
markets on an intraday basis.
From my previous art ic les you
w i l l know t hat I am a b ig be l iever
in using bot h Gann and Fibonacci
techniques in my t rad ing . Gann
in part icular is probably most
famous for h is t rad ing oncom m odit ies, and to a lesser exten t eq uit ies, and as such
many t raders th ink that h is techn iques are on ly
app li cab le to t hose marke ts. W ha t I have found over
years of study is that you can apply al l the w orks of Gann
to currenc ies just as you would to commodi t ies or
e q ui t ie s, so me t ime s i t ev en wo rk s b e t t er . In f ac t I
be l ieve that where there is any " f ree market " tha t has
enough l iqu idity, you can apply these techniques.
I th ink th e best way to explain th is is to show you a videowh i ch d e mo n st ra t es h o w I u se b o t h Fibo n acci a nd G an n
techniqu es in the analysis of t he Euro t o $US. This is one
o f the fou r
weekly v ideos
based on M arket
Analyst that I
p roduce for
peop le who buy
m y co ur se. Th e
f i rst o f t he four isactual ly a free
w eekly v ideo that anyone can sign up for o n m y w ebsi te
(www.t rad ingwi thgods.com ).
Best w ishes to al l ,
Alan Oliver.
About Alan Oliver
Alan Oliver is a ful l t ime trader and private educator. Early in Alans
career he w orked for t wo major Austral ian banks where his interest in
the m arkets began. Aft er developing and successfully honin g the skills
of a ful l t ime tra der, Alan left the workforce to trad e ful l t ime which is
w hat he has been doing ever since. M ost recently Alan has writt en a
book on his favourite subject of Fibonacci and the Golden Harmonic
rat io. Alan has tra velled extensively, been invited as a key speaker to
ma ny countr ies including: Australia, Hong Kong, M alaysia, Singapore,
Thailand and China.
Alan also runs a web site (named after his book) to assist traders
www.tradingwithgods.com.
http://www.tradingwithgods.com/http://www.tradingwithgods.com/http://www.tradingwithgods.com/http://www.screencast.com/t/ZTk4ODk3OThttp://www.tradingwithgods.com/http://www.tradingwithgods.com/7/31/2019 The Educated Analyst Jul-Aug 2010
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W ith the cur ren t vo la t i li t y on the m arket w e thought i t w ou ld be a good t im e to look a t some o f t he b iggest s tocks inthe Top 100 to see what t hey are do ing . Heavy se l li ng has occur red across the broader m arket , and w i th i t w e have
seen the pr ice of stocks l ike CBA, AM P, BHP, TLS and WOW t rade low er to test levels of support below , and in som e
cases the s tocks have t r iggered s ignals to ex i t . Given th is, we t hought now w ould be an o ppor tun e t im e to apply
som e simple techn iques and make com ment on how the stocks have been unfo ld ing.
Comm onw ealth Bank Austr alia
Since fal l ing to a low in Januar y 2009 , CBA has r isen arou nd 149% in ju st sixty-fou r w eeks. This r ise is faster t han an y
prev ious upt rend over the sam e per iod of t ime. W hi lst i t is always impo rtant t o a l low you r prof i ts to ru n, it is equal ly
impo r tan t t o ensure tha t you are prepared fo r a change in t rend. Remem ber what goes up fast w i ll genera ll y com e
back at a m uch faster rate t han the p r ior r ise. Given th is, you need to kno w how you w i l l m anage your do w nside r isk
w hen condi t ion s do change.
CBA recent ly broke t hrou gh resistance at around $56.00 to b e t rading jus t below the A l l T im e High pr ice for the share
of $6 2.16 in Novem ber 2007 . This is a stro ng level capable of t urn ing or at least slow ing the r ise, and as expected, th e
stock form ed a high c lose to t h is pr ice at $60.00 on 21 Apr 10. As you can see, CBA has pul led back sw i f t ly f rom t hat
level to pro v ide tw o consecut ive w eekly closes below the curren t up t rend l ine, and th is w eek t r iggered a Gann swing
ex i t . Given th is , now is not t he t ime to consider CBA. That said, i f you al ready ho ld th e s tock you m ight cons ider
sel l ing to prot ect your capi ta l against any fu r th er dow nside r isk , in case the stock cont inu es to fa l l through suppo rt at
around $51.00 to the next level below at $46.00.
SOME OF THEMOST WIDELY
TRADED STOCKSON ASX MAY 10With Dale Gilham
Source: M arket Analyst 6 (www.Marke t -Ana lys t .com)
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AM P Ltd
AM P has nevert raded above i ts
open ing p r i ce , and
is one of the worst
per fo rmers in t he
A SX To p 20 ov er
the past 10 years . I t
is t h er ef o re no t a
stock suitable for
buy and ho ld ,
h ow ever it is a
good t rading s tock
tha t has more than
doubled in pr ice a
num ber o f t imes.
During the past s ix
months, whi ls t
other f inanc ia l
stocks cont inued to
rise, AM P has
mere ly t raded
sideways below resistance at $7.00 causing i t to also
break below i ts upt rend l ine. Pr ior to the fa l ls we have
seen over the p ast fe w w eeks, th is sidew ays m ove could
just hav e been a co nso li dat io n phase (as h igh li gh t ed by
the pennant pa t te rn) p r io r t o i t s nex t upward move.
How ever, as AM P recent ly broke below t he pat tern and
cont inued the dec line th is w eek to conf irm a dow nt rend
is in place, the r isk of a fur t her fa l l has increased. Giventhis , i t is now poss ib le to draw a downt rend l ine f rom
the h igh in Oct 09.
AM P has been in a bat t le against NAB for the
opportuni ty to takeover AXA. As a general ru le, the
share pr ice of t he com pany doing t he tak ing over is like ly
to f a l l, whi lst th e pr ice of the comp any being taken over
w il l r ise. Theref ore, i f AM P is successful, th e share pr ice
is l ike ly to be held back for som e t im e below t he current
dow nt rend l i ne . That sa id , i f AM P m oves up to comple tetw o consecut i ve closes above the dow nt rend l i ne , i t m ay
be t im e to m ove i t back on to your w atch l i st .
BHP Billit on
Fol low ing the long te rm low o f $20.00 in November
2008, BHP worked i ts way up s teadi ly to a recent
sign i f ican t h igh o f $44.93 on 6 Apr i l 2010, before
reversing and fa l l ing away to comp lete tw o consecut ive
w eekly c loses below the current u pt r end l ine at the end
of Apr i l . It is interest ing to not e that unt i l January 2010,
BHP enjoyed suppo rt f rom and t raded above an upt rend
l ine ( dashed l ine ) ancho red f r om N ov em ber 2008 .
How ever, in January BHP reversed f rom Point A and
broke dow n th rou gh the up t rend l i ne to f i nd suppor t a t
a round $40.00 before cont inu ing the up t rend to a new
high at Point B . This m ove to a new high enabled a new
upt rend l ine to be draw n (so l id li ne).
Historical ly BHP has resonated around part icular levels
of suppo rt / resistance; mul t ip les of $8.00 being $32.00,
$40.00 and $48.00, and also t he hal f w ay points
Source: M arket Analyst 6 (www.Marke t -Ana lys t .com)
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betw een these levels at $44.00 and $36.00. Tw o w eeks ago BHP gapped dow n at th e star t o f the w eek to c lose
st ro ngly below the $ 40.00 level , and is test ing support just abo ve the next level at $36.00. Given th is , it is l ike ly forBHP to slow th e curren t decl ine close to th is level.
If you w ere using t rend l ines to m anage your ex i t t hen you w ou ld be ou t o f t he t rade. However , if you are using
Gann swing or Dow Theory to m anage your dow nside r isk you w ould s t i l l be in the t rade. Rem em ber to set a stop
loss to pro tect capi ta l in case i t cont inues to fa l l . If you are look ing for an opp ortu ni ty t o t ake a pos it ion in BHP i t is
important to note that the weekly swing is s t i l l point ing down and therefore i t has not proven the fa l l is over .
Given th is , i t would be bet ter to wai t unt i l the s tock looks s t ronger technical ly , par t icular ly as the next level of
overhead res istance is not far aw ay at around $40.00.
Telstra
Fol low ing the A l l T im e High of $9.20 in February 1999, TLS t raded dow n t o a low of $2.88 eleven years later in
M arch 2010. This represents a loss in value of 69%, making i t s im i lar to AM P as one o f th e w orst Top 20 stocks to
buy and ho ld. How ever unl ike AM P Telst ra is not a t rading sto ck. A l though TLS has paid a huge div idend, th is
m assive erosion of capi ta l adds l i t t le support for the buy and h old appro ach advocated by m any adv isors .
M arked on t he m ont hly char t b elow are impo rtant pr ice levels w hich have been calculated by t ak ing spec i f icFibonacci and Gann percentage levels of f Telst ra s $9.20 high. You can see that so far t he pr ice act ion has
respected t he levels at 38.2%, 50% and 61.8%, w ith t hese price divisions being supp ort / resistan ce.
Source: M arket Analyst 6 (www.Marke t -Ana lys t .com)
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Woolwor ths (WOW)
Follow ing th e Al l Tim e High (ATH) of $35.05 in Decemb er
2007, WOW fel l away sharply as investors ex i ted over
the next seven months to create a s igni f icant low of
$22.85 in July 2008 (Point A). Imp or tant levels of suppo rt
/ resist an ce ar e sho w n at $24 .20, $26.60 an d $29.2 0,
indicat ing i t h as a natural pr ice m ul t ip le aroun d $2.50.
I t is a lso inter est ing to note t hat w hi le in the gr ip of the
GFC, the signif icant low at Point A occurred about nine
m onths be fore mos t o f t he market bo t tom ed in M arch
2009. Since then W OW has been caught up in a s idew ays
t rading band bet w een $24.20 and $29.20, and in do ing
so has given investo rs a moder ately volat i le journey,
w i t h f l uct ua t ions r ang ing be t w een + / 9 .5%. Go i ng
forw ard, $29.20 is a very impo rtant resistance level and
as such, unt i l the stock breaks strongly above this level
and out of th e sidew ays m ove, I bel ieve there are bet ter
opp ort uni t ies e lsew here.
In term s of w here to f rom here for TLS, there is no indicat ion so far that the lon g term d ec line is comp lete.
Current ly TLS is t rading under a conf i rmed downt rend l ine on the monthly char t as shown. For me the s tockw ould need to m ove up conv inc ingly through this l ine to even indicate possib le future suppo rt around $2.90.
Given this, TLS is more l ikely to fal l to around $2.30 (75% price divis ion) before i t is ready to turn up in a
sustainable m anner and be cons idered for purchase.
Source: M arket Analyst 6 (www.Marke t -Ana lys t .com)
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About Dale Gilham
Dale Gillham, founder and chief analyst of Wealth Within
successfully trades $10s of millions on behalf of clients using
his proven and aud ited investm ent strat egy. His company also
specialises in delivering Australias f irst and only nationally
accredited Diploma and Advanced Diploma of Share Trading
and Investm ent as well as t he accredited Course in Contr acts
for Difference. For information about Wealth Within visit
www.wealthwithin.com.au . AFSL No. 22 634 7
Source: M arket Analyst 6 (ww w.M arket -Ana lyst .com)
http://www.wealthwithin.com.au/http://www.market-analyst.com/http://www.market-analyst.com/http://www.market-analyst.com/professional-editionhttp://www.wealthwithin.com.au/http://www.market-analyst.com/7/31/2019 The Educated Analyst Jul-Aug 2010
12/40
Q. How did you get into trading / investing?
A. My father was the investment manager for his company and I gravitated to the stock market during the
Poseidon Boom in Australia.
Q&A WITH MATTHEW HUMPHREYSQ & A I S A N E W R E G U L A R
S E G M E N T W E V E A D D E D I N
T H E E D U C A T E D A N A L Y S T
W H E R E W E P O S E A S E R I E S O F
Q U E S T I O N S T O T H E E X P E R T S ,
T O L E A R N F R O M T H E I R
E X P E R I E N C E A N D E X P A N D O U RO W N H O R I Z O N S . I N T H I S
E D I T I O N W E T A L K T O T R A D E R ,
A U T H O R A N D M A R K E T
E D U C A T O R R A Y B A R R O S .
Q. How long have you been trading the markets?
A. My first trade was 1969 (Australian Stock Market - Peerless Options). I became a full-time trader in 1980
when I sold my legal practice. My private hedge began in 1990.
Q. Were there any authors, market teachers that influenced your style of trading as you started?
A. Richard Wyckoff and Pete Steidlmayer
The Poseidon bubble was a stock market bubble in which the price of Australian mining shares soared in late 1969, then crashed in early 1970. It was
triggered by the Poseidon NL company's discovery of a promising site for nickel mining in September 1969. In the late 1960s, nickel was in high
demand due to the Vietnam War, but there was a shortage of supply due to industrial action against the major Canadian supplier Inco pushing the
price of nickel to a peak of 7,000/ton.
In September 1969, the mining company Poseidon NL made a major nickel discovery. Their shares had been trading at $0.80, but as information about
the discovery was released, the price rose until it was trading at $12.30 on October 1. After this, very little further information came to light, but the
price continued to climb due to speculation; at one point, a UK broker suggested a value of up to $382 a share. The price of Poseidon shares quickly
became too high for many investors, so some investors turned to other nickel stocks, stocks in other mines near Windarra, and eventually other mining
stocks in general.
As the price of mining shares grew, numerous new companies were listed by promoters looking to cash in. Some of these new listings did not even
have any mining leases, let alone viable mines. Many investors lost money on these shady listings, and this attracted substantial negative press. Thus
the image of mining stocks was tainted, and the prices began to fall. Mining stocks peaked in January 1970, then immediately crashed. Poseidon shares
peaked at an intraday high of $280 in February 1970, and fell rapidly thereafter. By the time Poseidon actually started producing nickel, the price of
nickel had fallen. Also, the nickel ore was of a lower grade than originally thought, so extraction costs were higher. Profits from the mine were not
sufficient to keep Poseidon afloat, and in 1976 it delisted.
Source: Wikipedia
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Q. What was one of the most common mistakes you made when you started trading the markets?
A. All the common ones and some that were unique: Looking for certainty and the Holy Grail - Confusing
Win Rate with Positive Expectancy - Overtrading in terms of Frequency and position size - Failing to pre-
define initial exit strategies (initial stops) - Trading without a Plan - Trading Without Risk Management -
Failing to keep a Psyche Journal and thus failing to learn from my mistakes......
Q. Which exchanges do you prefer to trade and why?A. FX (major crosses including AUDUSD and USDCAD), S&P futures, 30-year Bonds, Crude Oil Futures, Gold
Futures. At one point the basket offered diversification - not now but I do expect it will do so again in the
future.
Q. Are there any markets you wont trade and if so why?
A. Thin markets like Orange Juice, Heng Seng because of the slippage.
Q. What time frames do you aim for your trades (short term, mid-term, long term, combination of all 3?)A. I trade the monthly trend, the 18-day Barros Swing.
Q. What is the most important lesson youve learned as a trader so far?
2. The educational system by which traders learn to trade (similar to US Army pilots pre-1934) is partially
responsible for the dismal success rate (8%) of traders. It needs revamping.
Q. Do you utilise leveraged products such as CFDs?
A. I trade FXC and Futures because they are the most cost effective way to trade. I do not trade stocks in
bear markets.
Q. Do you utilise any hedging products such as Options?
A. No. Options are outside my realm of expertise.
Q. Do you utilise any fundamental analysis in your trading, or do you use Technical Analysis exclusively?
A. I use Austrian economics to provide a context to my trading but my trading entries and exits are based on
technical analysis.
Q. Can you give the details of one of your best trades (setup, entry, exit, etc).
A. On April 29 I said in my Forum Daily Free Service that I believed that the S&P had topped. I sold a full size position.
The next day, the S&P pushed past minor resistance, so I covered 1/4 of my positions. I was expecting the market to
head higher but on May 4, the S&P had a bearish-conviction bar down and I added to my shorts. By end of trading
May 4, I had twice my normal position. I covered all my shorts on May 6.
A. 1. Success comes from the consistent execution of my trading and risk management plans.
Austrian School economists hold that the complexity of human behaviour makes mathematical modelling of an evolving market extremely
difficult (or undecidable) and advocate a laissez faire approach to the economy. Austrian School economists advocate the stri ct enforcement ofvoluntary contractual agreements between economic agents, and hold that commercial transactions should be subject to the smallest possible
imposition of forces they consider to be coercive. In particular, they advocate an extremely limited role for government and argue for the
smallest possible amount of government intervention in the economy, especially in the area of money production (advocating instead a
commodity-money system).
7/31/2019 The Educated Analyst Jul-Aug 2010
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Q. With the debt problems in Europe, and the massive bail outs weve seen in Australia and across the
globe, what effect do you think this will have on the markets (if any)?
A. Add dark pools and quant trading, and you have the recipe for greater volatility. Success will depend
on knowing when to stay away from the markets as much as knowing when to take part. This will be a
function of our personality and trading methodology.
A. 1) The beliefs that, a) money can be made from the markets b) I can make money from the markets
c) I deserve to make money from the markets.
2) Honesty - to see what the market is telling us rather than fit the information to our preconceptions.
3) Integrity - to keep the promises we make to ourselves.
Q. The internet is flooded with claims market traders can see 1000s of percent profit each year which can
be very misleading to those just starting out. What would you consider to be an achievable average
return (p.a.) for people trading the markets?
A. That is a difficult question because it depends on the trader and where he is in his stage of a trader's
evolution. With low risk of ruin, probably around 15% to 20%.
Q. Do you recommend your book, The Nature of Trends, for novice traders or does it require some
experience in the markets to be fully beneficial? What knowledge were you hoping to impart to your
readers?
A. The Nature Of Trends is aimed at the experienced trader. For most experienced traders, Nature of
Trends brings a fresh perspective with a robust edge. If you are a novice, it will take effort to master
the material. I am writing a new book with the target audience being the novice.
In Nature Of Trends I was looking to provide an approach that was statistically sound and one which
moved away from the normal set of Technical Analysis tools.
About The Nature of Trends
The Nature of trends draws on the
latest developments in theneurology, psychology, game
theory and complexity theory to
construct a written trading plan
with an edge. The books step by
step approach will assist traders in
their quest for investing and
trading success.
The Nature of Trends provides a template for a
successful trading plan. It assists the trader to answer
questions such as:
What are the conditions for low-risk entry?What is the trend of my time frame?Once in a trade, how can risk be managed?This practical guide to identifying trends and
determining their likelihood of continuing or changing is
an essential tool for traders looking to achieve their
About Ray Barros
Ray Barros is a professional
trader, fund manager, author,and educator with over 30 years
experience in the markets. Ray
has appeared on Singapores
Chanel News Asia, Bloomberg and
CNBC and has been regularly featured in regional
newspapers and publications like Sydney Morning
Herald, Your Trading Edge Magazine, Business Times,
and Smart Investor. The interviews have focused on his
trading strategies as well as his opinions on market
sentiment. They have also dealt with his track record,
trading philosophy, how and why he got into trading,
and what advice he would give to those wishing to
become traders/investors.
Ray can be contacted through his website
www.tradingsuccess.com
Q. If you had to pick 3 things no trader should be without, what would they be and why?
Dark Pool Liquidity is a term that refers to the trading volume created from institutional orders, which are unavailable to the public. The bulk of dark pool
liquidity is represented by block trades facilitated away from the central exchanges.Source: Investopedia.com
financial goals.Click here to purchase.
http://tradingsuccess.com/http://amazon.com/Nature-Trends-Strategies-Successful-Investing/dp/047082235X/ref=sr_1_1?ie=UTF8&s=books&qid=1274152393&sr=1-1http://amazon.com/Nature-Trends-Strategies-Successful-Investing/dp/047082235X/ref=sr_1_1?ie=UTF8&s=books&qid=1274152393&sr=1-1http://tradingsuccess.com/http://images.google.com.au/imgres?imgurl=http://4.bp.blogspot.com/_49PrmhLYWuI/SI0kX8aJsjI/AAAAAAAAATI/JrP5zA4Xd3g/s200/20080716_raybarros.gif&imgrefurl=http://yyklse.blogspot.com/2008/07/learn-from-mr-ray-barros-professional.html&usg=__P32TQUmU99NYA2ZKlGcJ8EjhGtw=&h=166&w=154&sz=13&hl=en&start=23&tbnid=rbimAOOev6VWgM:&tbnh=99&tbnw=92&prev=/images?q=ray+barros&gbv=2&ndsp=21&hl=en&sa=N&start=217/31/2019 The Educated Analyst Jul-Aug 2010
15/40Th e Edu cated An alyst | M ovin g Averages JULY/ AUG 2010
Despite many innovat ions in technical analysis over the
years, the m oving average in a l l o f i t s form s remains oneof t he m ost pow er fu l methods ava ilab le f o r analysing,
t rading and prof i t ing f rom f inanc ia l market movements .
M oving averages can be p ut to a w ide d iversi ty of uses
f rom assessing the major t r end of t he market w i th in any
t i m e f r am e , r i gh t t h r ough t o det ect i ng sho r t - t er m
overbought /oversold condi t ions. As a consequence,
m oving averages form a cr it ica l comp onent in m any high
qual i t y f ixed rules t rad ing system s.
There has been a lot of innovat ion in moving averagesover the years . However , the bas ic concept is that of
smoothing out shor t - term pr ice f luc tuat ions in order to
gain a bet ter p ic ture of the overal l t rend. The spec i f ic
calculat ion for achiev ing th is may di f fer according to the
type o f average used, but on ce th is sm oot hing has been
achieved, one or more such averages of d i f ferent
t i m e f r am es m ay t hen be c om par ed w i t h each o t he r t o
ga in add i t iona l i n fo rmat ion about marke t movements
and resu lt i ng t rad ing oppor tun i t i es.
Basic M oving Aver age Calculat ions
The simple moving average is calculated by adding the
prices (general ly c losing prices, but no t necessari ly) over
n t im e per iods, and then d iv id ing by the num ber o f t ime
per iods:
M oving Average (n) = Price(1) +Price(2) +Price(3)+ +Price(n)
__________________________________n*
This type o f m ov ing average is the m ost comm only used.I t has this fact as i ts chief advantage, in so far as i t fo rm sa ready basis of com par ison because so many p layers inthe market use i t . For example, a lo t of people l ike tot rack the 200 -day moving average because th ey knowthat many long- term players such as investment fundst rack i t s m ovements close ly and fo l low i t .
Other k inds of mo v ing average have been created,
usual ly wi th a v iew to correct ing some perceiveddef ic iency in the s imple average. The weighted movingaverage gives more recent pr ice act ion a progressivelylarger weight ing than more d is tant pr ice act ion at thebeginning of the sequence. The not ion is that morerecent pr ice act ion should be g iven greatercons iderat ion than pr ices that occurred fur ther back inthe past , par t icu lar ly in the case of longer movingaverages. Hence, i f w(n) is the weight of Price (n) inper iod n, th e calculat ion is:
W eighted M oving Average (n) = w(1)* Pr ice1 +w (2)* Price2+ . +w (n)* Price(n)
_________________________________ _____n * w ( n )
w here w (n) i s t he sum o f t he ind iv idua l we igh ts .
Usual ly , the w eights used are l inear ; for exam ple i f t hemos t recent pr ice is Pr ice1 and n=5, then w e m ight use:w(1)=5, w(2)=4, w(3)=3, w(4)=2, w(5)=1. This gives the
requi red heav ier weight ing to the most recent pr ice,Pr i ce1 , and cor respond ing ly less we igh t in l i near l yreduc ing fashion to o ther pr ices in the sequence.
Yet other k inds of moving average calculat ion exist . Forexample, the exponent ia l mov ing average uses weightsder ived f rom an exponent ia l sequence. Never theless,how ever these moving averages m ay be calculated, thepurp ose is u lt im ately the same. I t is to smo oth out noiseand random f luc tuat ions f rom t he pr ice ser ies in order togive the best poss ib le p ic ture of the main t rend in the
t imef rame being cons idered. From that point , th isin fo rmat ion may be used in con junc t ion w i th t ha t f romother moving averages or even other technicalindicator s a ltogeth er .
How M oving Averages Are Used
Al though the calculat ions used to obta in movingaverages may be som ew hat in t r icate, thei r use is ratherm or e s im p l e and i m m ed ia t e.
One m ay use a single m oving average to bot h deter m inethe general d i rect ion o f the t r end, as w el l to f ind suppo r t
and r esistance zon es in exact ly t he same m anner as you
MOVING AVERAGESIN THEORY AND PRACTICE.
With Dr Asoka Selvara ah
7/31/2019 The Educated Analyst Jul-Aug 2010
16/40Th e Edu cated An alyst | M ovin g Averages JULY/ AUG 2010
w ould fo r a standard t rend l ine. When pr ice is above the
single moving average and t he lat ter is point ing up w ard,
then th is is a clear indicat ion of an up t ren d. Conversely
when pr ice is below the average and the lat ter is
point ing down, then th is is c lear indicat ion of adownt rend. However , no te tha t s ince the mov ing
average is a lagging indicator , i t therefo re indicates w hat
the t rend has been up t o th is point , but no t necessar i ly
i n t o t he f u t u r e . Havi ng sa id t ha t , a sk il f u l t echn i ca l
analyst can integrate the moving average analysis with
ot her technical indicators to generate a h igh prob abi l it y
assessm ent of h ow pr ices are l ike ly to m ove.
The two moving average combinat ion is probably the
m ost com m only used because i t is very ef fect ive as w el las quick to in t erpret and un ders tand. It a lso readi ly lends
i tsel f to being incorporated into f ixed ru les t rading
systems.
With two moving averages, the shor ter average t racks
the shor ter term t rend whi le the longer average t racks
the longer term t rend. Consequent ly , when the shor ter
average crosses
above or below
the longer t e rmaverage, this
signif ies a
possible t rend
change. I f the
shor ter average
crosses below
the longer t e rm
average, it
means tha t t he
marke t may becommenc ing a
shor t - term
m ov e t o t he
downside, and
vice-versa.
This sort o f crossover characterist ic is com m on ly used in
creat ing automated setup condi t ions. When i t occurs ,
t he marke t i s se tup fo r a new up t rend or downt rend
according to the m oving averages, and consequent ly th et rader creates an ent ry condi t ion to then explo i t that
new s i tuat ion. The s implest ent ry condi t ion is no ent ry
condi t ion at a l l , i .e . one s imply buys or sel ls when the
two averages cross over. However, this sort of system is
highly vulnerable to fa lse moves, and consequent ly
bet ter t rading systems general ly employ a subsequentent ry condi t ion af ter t he m oving average setup has been
tr iggered. Examp les are (1) bu y/ sel l s ignal on candles, (2)
conf irm at ion s f rom oscil lators such as RSI, (3) t ren d l in e
breaks and so on.
W hen th e pr ice act ion i tse l f is inc luded w i th th e mo ving
averages, even m ore u sefu l in form at ion can be g leaned.
I f the pr ice is above th e shor t er m oving average which is
i tsel f above the lo nger m oving average, w e can infer that
the market is in an unambiguous bul l ish condi t ion, andone should be look ing pr imar i ly for buy ing oppor tun i t ies,
or for chances to add to ex is t ing long pos i t ions. I f the
pr ice is below the shor t er m oving average wh ich is i tse l f
be low the longer mov ing average, we in fe r t ha t t he
market is unambiguously bearish. In this case, we are
pr im ar i ly look ing for sel l ing oppo r tun i t ies, or for chances
to add to ex ist ing shor t t rades.
However , when pr i ce i s be tween the two mov ing
averages, the interpretat ion becomes somewhat less
obv ious. Under t h is si tuat ion, the t rader m ight not w ish
to in i t ia te any t rade at a l l bu t ra ther m igh t w a it un t i l t he
s i tuat ion resolves i tse l f c lear ly in to one of the twoscenarios just described above. I f the t rader already
holds an exist ing posit ion and then this neutral scenario
Source: M arket Analyst 6 (www.Market -Analys t .com)
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appears , th is might be inferred as an oppor tuni ty to
reduce th e pos i t ion (hopefu l ly by tak ing prof i ts ) or e lse
to c lose i t comp lete ly in ant ic ipat ion of a t rend reversal.
Of course, other forms of technical analys is would be
used to dec idewhich o f t hese
two poss ib i l i t ies
should be
favored. The
t rader m igh t
not necessari ly
do exact ly the
same th ing
under every
such scenario,unless a f ixed
rules t rading
system is being
used.
W i t h t h r ee
m ov i ng
averages, even more possibi l i t ies are introduced. In this
case, the unambiguous bul l ish (bearish) s i tuat ion is
w hen t he shor tes t mo v ing average is above (below) themedium term moving average, which is i tse l f above
(below) the longest m oving average. The next scenar io is
that the shor t average could cross below (above) the
m ed ium t e rm average, bu t t h e la t t e r m igh t s t i ll remain
above (below) the long moving average. This might be
used by the t rader as an ear ly signal of t rend change to
at least exit th e exist in g long or shor t . How ever, this k ind
of s ignal is also t he m ost vulne rable t o false breaks.
Another poss ib i l i t y presented by the three movingaverages is for t he shor tes t average to cross below the
medium term average, which i tse l f c rosses below the
long average. This scenario is a high p rob abi l i ty s i tuat io n
for d ef ini t ely closing ou t exist ing po sit io ns because w hen
both the shor t and medium-term averages cross below
the long- term average, i t means that i t is h ighly l ike ly
that the main t rend has changed. Al though noth ing is
guaranteed, there is much less chance of a whipsaw
when the middle average also conf i rms the s ignal f rom
the shor t average. However , the p r ice you pay for t h is is
that the s ignal takes that much longer to occur and
hence you ex i t your ex ist ing pos i t ion that m uch later .
Three m ov ing average com bina t ions a re o f ten used in
f ixed ru les t rading system s for the very reason t hat t hey
al low for a w ider var iety of respon ses comp ared to a oneor even two moving average combinat ion. The number
o f v ar iab le pa ram e t e r s p r i ce p l us t he t h r ee m ov ing
ave r ages i s g reat e r and becom es g reat e r st i ll if t he
system also includes other technical indicators such as
osci l lators.
In fact , i t is also possible to use four moving averages
(and doubt less more besides). In this case, t reat ing the
fou r as tw o p airs can yield very good results. The an alyst
employs the two longer moving averages to determinethe overal l t rend, using simple crossovers as previously
expla ined. Once the t ren d is def ined in t h is m anner, the
two shor ter moving averages c rossovers may then be
used to determine ent ry and ex i t s ignals with in the
overall direction of the m ain trend . For example, taking
the two longer term moving averages, i f the shor tes t of
th is pai r is above th e longer , then t he m arket is overal l
bul l ish. Given t hat th is is the case, one th en u ses bul l ish
crossovers of the two shor ter term moving averages to
enter long trends ONLY, and bearish crossovers to exit
those long pos i t ions. Out r ight shor t pos i t ions are not
Source: M arket Analyst 6 (www.Market -Analys t .com)
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entered unt i l the pai r of longer t erm averages cross into
bear mode. When they do, only shor t t rades are taken
thereaf ter , again us ing the shor ter moving average
crossovers.
M oving Av erages Used As Oscillator s
M oving averages comb inat ions may also b e used to
create osc i l la tors . This may be done in a number of
d i f ferent w ays.
In the famo us M oving Average Convergence Divergence
(M ACD) osci l lato r, the b asic idea is to t ake the difference
between 12-per iod and the 26-per iod exponent ia l
m ov ing averages, wh ich pro duces the f i rst l ine of tw o in
the osci l lator. The second l ine, cal led the signal l ine, iscalculated as the exponent ia l equivalent of the 9 -per iod
moving average. Of course, al l of these numbers can be
var ied.
Traders then u sed th e M ACD by look ing for (1)
crossovers of t he t w o l ines, (2) crossings of t he zero l ine,
(3) overbought /oversold condi t ions indicated by the
osc i l la tor when compared to prev ious values of i tse l f
dur ing past market ex t remes, (4) break ing of t r end l ines
draw n up on the M ACD l ine i tse lf , (5) osci l la tordivergences.
Actual ly , mov ing averages are used in many more
osci l lator s than jus t t he M ACD and can give value far in
excess of thei r usual means of in t erpret at ion.
Other Application s of M oving Averages
In addi t ion t o a l l o f the abo ve, there are s t i l l m ore uses
that m oving averages m ay be put to.
M any market par t i cipan ts l ike to f o l low cer ta in mov ing
averages on the bas is that they know that these are
popu la r and are keen ly watched by o ther marke t
par t ic ipants . A good example of th is is the 200-day
simple moving average. Since this is a very long term
moving average, i t fo l lows the long- term t rend of any
market , i .e . the investor t imef rame. Hence, manyinvestm ent and p ens ion fu nd m anagers keep an eye on
the market re lat ive to the 200-day moving average.
Closes below this average are deemed highly negat ive
and may lead to l iquidat ion of pos i t ions. Thus, a smart
t rader might a lso watch the same 200-day moving
average to gain an idea of what the large p layers are
l ike ly to be th ink ing. The 200-day average of ten g ives
excel lent support and resistance, part ly as a result of a
self - ful f i l l ing prophecy in so far as so many big players
watch this part icular average and make decisions based
upon i t .
One very popular
appl icat ion of
m ov ing averages i s
to pro jec t bands of
a f ixed percentage
above and below
the mov ing
average to f o rm a
pr ice envelope.
The best known
example of th is is
the Bol linger Band,
w hich is st ru c tured
to conta in 95% of
the pr ice act ion
w i t h i n t he
boundar ies o f t heb an ds. He nce , if
the pr ice penet rates the bands in e i ther d i rec t ion, theSource: M arket Analyst 6 (ww w.M arket -Analyst .com)
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19/40Th e Edu cated An alyst | M ovin g Averages JULY/ AUG 2010
t rader wou ld e i t her cons ider t he marke t
overbought /oversold and hence potent ia l ly r ipe for a
t rade in t he op pos ite d i rec t ion, or e lse ready to m ake a
breakout in to a new d i rect iona l move.
Percentage pr ice bands around a m oving average need
not be l imi ted to jus t two alone. Some systems have a
series of such bands projected around a single moving
average. When used ei ther a lone or in conjunct ion wi th
ot her t echnical indicators, such price envelopes can yield
very usefu l in form at ion regarding the p resent and l ike ly
fu tu re cond i t ion o f t he m arket .
Another appl icat ion of mov ing averages at tempts to
overcome thei r chief l imi tat ion, which is the fac t that
they are lagging indicators. Al l technical sof tware
packages nowadays a l low you to create a moving
average based upon the usual h isto r ical data, and t hen
displace i t for w ard a f ixed num ber of t im e per iods. The
Displaced M oving Average (DM A) creates an ef fect
s imi lar to pro jec t ing the moving average forward in
t ime, rather l ike hav ing tomorrows moving average
value today. The m ost comm on u se of t he DM A is as a
shor t - t e rm t rend ind ica to r .
One o f th e chief draw backs to a l l m ov ing averages is the
di f f icu l t of know ing which t im e per iod m oving average is
op t im a l t o use w i th w h ich m arket , and a lso w hether t he
analyst is bet t er of f look ing at one, tw o or m ore m oving
averages combinat ions. To overcome these problems,
Trading Systems exper t Perry Kaufman invented the
Adapt ive M oving Average, w hich is comm only avai lable
in pret ty wel l a l l technical analys is sof tware programs.
The Adapt ive M oving Average is a single average which
dynamical ly var ies i ts own length, typ ical ly f rom a 2-per iod to a 30-per iod average, according to the degree
of volat i l i t y and d i rec t ional ity in the m arket .
Hence, when the market is t rending s t rongly wi th l i t t le
volat i l i t y , the length of the average wi l l decrease
tow ards i t s m in imum va lue. However , w hen the marke t
trend eventual ly stal ls and a t rading range ensues, the
Adapt ive M oving Average w i l l grow longer , tending
to ward s i ts m aximu m value.
The secret to using this indicator is NOT to look for
crossovers between pr ice and moving average, but
s imply to cons ider the overal l d i rec t ion of the moving
average i tse l f . Hence, when the average points up, the
t rend i s up , and when i t po in t s down, t he t rend i s dow n.
W hen th e d i rect ion of t he Adapt ive M oving Average is
hor izonta l , the market is in a t rading range (at leastw i t h i n t he ov er a ll t im e f r am e da il y, w eek ly , m on t h l y
in which the Adapt ive Average has been
calculated).Thus, you only need ONE moving average,
no t two or more , t o very neat l y de te rm ine the overa l l
m arke t t rend .
Closing Summary
In conc lus ion, the moving average remains a very
powerfu l technical tool . I t g ives the analys t / t rader a
large range of possib le met hod s for det erm ining overall
market t rend across d i f ferent t ime f rames,
overbought /oversold condi t ions, t rade ent ry /ex i t
s ignals, and can of ten serve as excel lent zones of
suppo r t and r esistance. M oving averages a lso form a
cri t ical part of many excel lent rules-based technical
t r ading system s.
They are a crucial part of the arsenal of any serious
technical analys t / t rader and should be s tudied and
researched in depth in order to gain a l l o f the many
benef i ts that they of fer .
About Dr. Asoka Selvarajah
Dr. Asoka Selvarajah is a form er investm ent ban ker of 11 years
experience, as well as a f inancial markets trader/researcher
for many more. He worked as Technical Analyst for several
ma jor W all Street f irm s and w as a senior tradin g strat egist for
a mult i-bil l ion dollar investment fund in the UK. His work has
been featured on Reuters and he has been interviewed by
Technical Ana lysis Of Sto cks & Com m odit ies ma gazine.
Dr Selvarajah offers readers of Educated Analyst his critical
new report, The 7 Deadly M istakes Of Online Trading, ent irely
free. Which of these deadly errors do you regularly make in
your t rading? Download your f ree report now at
ht tp: / /www.onl inetradingrebel.com/EA
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21/40Th e Edu cated An alyst |
This ar t ic le is a fo l low on f rom the pre
LESSON S IN GEOM ETRY . It i s no t so much a
but t he pic tures that th e market prov ides andin to char t s, w h ich a t t im es can be pure geo
M ARKET ANALYST 6 Sof tw are is a wo nderfu l
some of the hand drawn char ts of the var io
he lp y ou t rade w i t h t he t r end .
I consider t he h al f hour ly char t on the ASX 2
the m ost im por tan t one you shou ld main ta in
w or th t he e f fo r t a long w i th a 2 p t . P& F char t
the same t ime as the pr i ce act ion . I do m ine
Tic data wi th 4 screens 2 char ts of SPI & indata be low .
I t i s m ak ing my l i fe so m uch easier t o fo
exci t ing and vo lat i l e markets in t raday w here a
detai l is so im port ant .
The prev ious ar t i cle conta ined the i ll ust ra t ion
hour ly a lm ost up to t he Apr i l 2010 h igh o f t h
mark et . It p rov ided some w onde r f u l t r ends,
us ing Gann square over lays. The current charM ay show s how quick ly the bear can take hol
The met hodo logy w h i ch I have been t eac hin
prod uces excel lent resul ts .
This was described in detai l in the last i
D i rect ional M ovem ent System has been out
recent w eeks, prov id ing th e crossover sell s ig
mark et t opped , con f i rm ing a marke t t o be t r
t he sho r t si de. When t he -DI c rossov ers t he
take the shor t t rades. A t rend ing ADX, usua l
leve l as the new t rend gets underw ay , i s a
the s t rength o f t he t rend and no t t he d i rect io
ADX is a t rend ing market and th is eventua ll y
signa l t ha t the t rend has run i t s course . Com
a Parabol ic Stop to take you out of the
excel lent ex i t level for a very pro f i table t rade.
t o l eve ls o f +50 p lus. I alw ays cau t ion aga
posi t ions when the ADX is t rending s t rongly .
POETRY INMWit h Dawn Bolton-Smit h
Poe t ry in M ot ion
v ious one
ou t w o rds
translateset ry. Th e
back up to
s styles to
0 index as
. It is w e ll
p lo t ted a t
f r om M A 6
ex and t ic
l low these
t t en t i on t o
o f t h e ha l f
e then bu l l
, especial l y
t up t o 20t h
again.
g f o r y ea rs
ssu e. Th e
tanding in
nals as the
aded f rom
+DI you
ly at a low
easure of
n . A r isin g
prov ides a
b ined w i th
t rade, an
It can rise
inst taking
M y f av ou r it e comb ina t ion a ft e
s imple crossover of 3/5 per iod
need to fo l low DM on the var iof o r y ou rse lf how w e l l it f unct i
char t .
I t ry to leave the fundamen
yesterdays news) and concent
Bo a rd in g u p t he w i n d ow s i s n
w ho bought in to the recent top
now jo ined the losers, hav ing
sense of secur i ty m ost ly f rom pr
Whether we have jus t had a b
M arch 2009 low , o r a bu l l ma
now . It pa id t o f o ll ow t he c ha r t
w ay . If y ou a re t r ad i ng t he st oc
maintain char ts which show th
and ha lf hour ly t rends. The BIG
par t o f your ana lysis. Up to -dat
necess i ty in th is env i ronment
Get t ing in ear ly in any t r end of f
th e least r isk.
M oney managemen t , i f no t p ra
to ru in espec ia l ly in fu tures and
Dologa is m ost adamant about
t rading.
H is b o o k Volume III INTEGRAT
shou ld be in your l ib rary . I f i rm
knowledgeable person on the
technical indicator s, w hich of co6 . The Gann and Jenkins Too l s
now to advantage, and a lso the
I bel ieve Gann w as 90% astro log
SPI t raders cont inue t o b e at t h
most ly d ic tates the opening t re
overnight ranges can b e ext raor
do techn ica l work on the
part icularly S&P 500, Nasdaq 1
the mos t quoted index on th
ar t i cle w i thout t he benef i t o f ac
TION
JULY/AUG 2010
r strong accelerat ion is
mov ing ave rages. You
us t ime f ram es to checkns even on a 1 minute
t a ls t o o t h er s (m o st l y
ra te on the pr i ce t rend.
t a bad idea. Investors
area o f t he m arket h ave
been lu l led into a fa lse
ess and radio com m ent .
ear mark et r a ll y o f f t he
rket is most ly irrelevant
s t echn i ca ls pav ed t he
m arket i t is advisable to
e monthly , weekly , dai ly
PICTURE is an im po rt ant
e cha rt s a re an abso lu t e
of increasing volat i l i ty.
e rs the best rew ards and
c t i ced, can to be a road
de r iv at i ves. D r . M i rcea
M M and p repa ra t ion f o r
D PITCHFORK ANALYSIS
ly bel ieve he is the most
lanet when i t comes to
urse are avai lable in M Aare the on es to b e us ing
stro sect ion .
ical.
m ercy of SYCOM w hich
n d o f o u r m ar ke t . Th ei r
d inary. I t i s adv isab le to
Overseas Bourses and
00 and t he D ow Jones
gl o be . A s I w r i t e t h is
ion to com e in Thursday
Wit h Dawn Bolton-Smit h
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night 20 t h M ay, m y three t rusty P& F charts show these
ind ices to be just ho ld ing UPTRENDS. Counter t rend
ral l ies can come out o f the blue and be sharp and nasty
and t he t r ade r needs t o be p repared , bu t ov era ll it i s
i m p o rt a nt t o t r a de t h e m ai n t re n d. I v ie w m o v in g
averages as one of the simplest f o rm s o f t rad ing w i th thet r end . Li kew i se t he P& F cha rt s shou t w hen t he o t he rs
stu t t e r . The open ing and c losing sessions o f t he SPI are
w or th p lo t t ing P& F char t s, especial ly t he session 4 .00-
4 .30 pm w hich show s the num ber o f cont racts t raded a t
the var ious pr ice levels. This can give a lead for the next
day or cont inu ing in to th e overn igh t Sycom w here the
smar t and i n fo rmed m oney comes in t o t he mark et . The
late P&F can give rel iable targets for what eventuates in
Sycom . I pu t t h e overn igh t range as a red bar on m y
char t i t can be very he lp fu l.
I t i s a daunt ing exper ience to be caught on t he w rong
side o f any fu tures m arkets but using the r igh t char t s w i l l
assist in p rov id ing the t r igger po in ts. I recal l Dr .
Ale xan der Eld er , au t ho r o f TRADING FOR A LIVING ,
st a t ing i n one o f hi s sem inars t ha t w hen he en t e rs h i s
deal ing roo m , he alw ays says a l it t le prayer please don t
let m e be a loser to-day .
I cons ider i t a pr iv i lege to be assoc iated wi th theM ARKET ANALYST TEAM . Al l Aust ra l ian and t horo ughly
pro fessional at al l levels, I especial ly value t heir excel lent
suppor t t eam .
On a personal note, I am eagerly await ing a vis i t by Dr.
M i r cea D o loga f r om Pa r is as he has p rom ised me m ore
lessons wi th Gann and Jenk ins Tools in M A 6. I hopeful ly
w i l l be ab le t o r epo r t on t hese i n a f u t u re a r t icl e. O n t he
occas ion of my recent 80 t h b i r t hday , D av id Fu l le r o f
Ful lerm oney (a P& F enth usiast & expert to o) sent m e anema i l w i t h a hug , st a t ing t ha t i f he ev e r mee t s M arga ret
Thatcher he w i l l te l l her she is the Dawn Bol ton-Sm ith o f
po l it i cs! H e d id say t ha t st i ll l ea rn ing at 80 o r h i s more
m odest learn ing at 68 , i t i s wo nder fu l and what keeps
the bra in ale r t . I nvestm ent ana lysis i s, o r shou ld be , a
cont inuous learn ing curve unt i l we run out o f t im e. He
concluded by saying just t h ink how m uch more I w i ll
know a t 100! There i s a message in th is fo r a l l t raders
coming f rom one o f t he best in the w or ld .
The var ious char ts accom panying th is ar t ic le wi l l prov ide
t he accu ra t e i n fo rma t i on t o copy dead l ine , and a re
w or th s tudy ing . The spec ia l P& F Char t on ASX 200 20
p t one box is t he simp lest , and at t imes p rovi des t he
ear ly and def in i t ive signals par t icular ly w hen th ere is a
m ajor change o f t rend. I used Gann 144 Square over lay
on th is char t and last w eek there was som e impor tan t
geometry , a set up which I had learnt f rom the latePhyl l is Kahn i .e. when price is at a 45 degree angle
junct u re an d is 2/ 3 in t im e (h o r izo nt al Ax is) an d 2/ 3 in
p r i ce w hen t h i s b reak s, expect a M O MEN TU M M O VE
DOWN. Th is happened th is week w i th the index at c lose
4316 on 7 t h M ay 20 10 t h e r o w o f 0 s d o w n f o r a 43 20
p lo t . O u r mark et has b rok en ma jo r suppo r t t he bear
come t h aga in ! Look s simp le in h i ndsi gh t , bu t ex ci t ing if
you not iced i t w i th fores ight . I suggest a l l ser ious t raders
keep th is char t . I f you wou ld l ike a scanned copy wh ich
you cou ld t ransfer t o a sheet o f char t paper , you cou ld
send m e an emai l : dawnbo l tonsmi th@optusnet . com.
This char t wi l l prov ide a valuable par t of your roadmap
f o r t he f u t u re . By pu t t i ng t he p lo t s on by hand , y ou hav e
an awareness o f t h e prevai li ng t rend. It i s t he o ldest
fo rm of char t ing in th is day o f soph ist i ca ted b lack box
system s, and at t imes tends to ou t sh ine them.
Chart No. (1) ASX 200 Half Hour ly to 20/ 5/ 10
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(2 ) ASX 200 Ha lf Hour ly a recent example o f a Gann
Square 144 over lay - pure Gann and Geomet ry f rom the
7 t h M ay low w h ich prov ided a sizeab le bounce in the
market .
( 3) A SX 200 20 Pt 1 box P& F t o 20/ 5 / 10
(4 ) BH P 5 m i n ut e ch ar t f ro m M A 6 scr ee n d um p ( t h e
p r in t er do es n o t do it j ust ice ). O ne of t he big
heavyweights in the index. A se l l signa l f rom DM on 20 t h
Apri l at 42.80 +DI 29 DI 38, ADX 16.
20 t h M a y - 36.75 +DI 9 DI 36 . ADX 49. So m e nice
signals there fo r day t raders. So far a t rou ble f ree r ide
for t he shor t s and put op t ions . The Resources Tax news
a t 39 .5 3 t h e m a rk et w a s al re ad y in d o w n t r e nd . A b lu e
p r i nt o f t h i s me t hodo logy t o p ro t ect and p rese rve
capital .
Good Trading.
Dawn Bol ton-Sm ith
About the Author
Dawn Bolt on-Sm ith is th e mat riarch of technical
analysis in Austra lia, wit h a career spanning 43 years. A
fem ale pioneer of t rading in Austra lia, Daw n
successfully predicted t he 1974 share crash and called
the bott om of the market to wi t h in four points .
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ow w e are get t ing tow ards the bus iness end
of th is ident i f icat ion process for what is
undoubted ly , f o r many , one o f t he mos t
prof i table t rading techniques of a l l.
W hy wo u ld I say tha t? Because, un l i ke many o ther
techn iques, cont inuat ion pat te rns w ork equa ll y w e l l
w heth er going long or going shor t .
Therefore, because the combined t rending t ime going
up plus going down is longer than the t ime they go
s ideways, the informed and pract iced t rader ispresented w i th more pa t te rn en t ry oppor tun i t ies than
m any o ther en t ry techn iques.
Dur ing the Bu l l run f rom M arch 2003 to December 2007,
there were approx imate ly 10 pa t te rn en t ry
opportuni t ies to every t rend change opportuni ty . Now
while this seems logical in hindsight, i t wasnt unt i l late
2005, ear ly 2006 that i t w as real ised th at w e w ere in the
biggest Bul l run, in Austral ia anyway, since the run into
1987.
Dur ing November & Decem ber 2007, there were a large
number of d i rect ional change (Trend Change) ent r ies
w h i c h p r esen t ed t hem se lv es. Si nce D ecem ber 2007 ,
how ev e r t hese con t i nuat i on pat t e r ns have al so
presented a la rge numb er o f en t ry oppor tun i t ies dur ing
the downward run, and have cont inued to do so s ince
the m arket changed di rect ion in M arch of 2009.
At th e r isk of repeat ing mysel f , I th ink i t impo rtant hereto re-state a view I have long had, which is also backed
by many successful t raders Price is King Indicators
are confirmation only. The share p rice i tself wi l l tel l you
everyth ing you need to know about w hen to ge t in and
w h e n t o ge t o u t t o o m a n y p e op le lo o k f o r t he la te st ,
you beaut , you can t bend i t indicator wi th a 100%
success rate .
Please do n ot fa l l in to th is t rap, i t is an easy one to fa l l
into. Why is this? The answer is s imple, the abovedescr ibed indicator means that we don t have to spend
count less hours researching, test ing, applying in real
t ime, before we get to make squi l l ions f rom the market
w i th very l it t l e e f fo r t .
This is no more t rue than wi th cont inuat ion pat terns.
Pr ice is what te l ls you whether i t is a cont inuat ion
pat tern or ret racement . Pr ice te l ls you when to get in
and when to ge t ou t .
Now w e have establ ished t hat p r ice is k ing, let u s look at
how w e c an u t il ise w ha t w e have cov e red so f a r w ha t
does a pattern actual ly tel l us? I t tel ls us which direct ion
the pr ice is expected to t ravel and gives us a minim umdest inat ion point o r target for the pr ice to reach.
Research has shown that a cont inuat ion pat tern, as
discussed in th is ser ies of ar t ic les, has a probabi l i ty o f
d i rect ional cont inuat ion of in excess of 80%, and once
that d i rect ion has been conf i rmed, target probabi l i ty in
excess of 90 %. In oth er w ord s, on ce a correct ly iden t i f ied
pat te rn has broken out in t h e expec ted d i rec t ion , t here
is a 90% or greater pro babi l i ty that i t w i l l reach i ts target .
This is very exc i t ing news as we not only know the
intend ed di rect ion, but a lso th e distance to be t ravel led,
or in o ther words , t he m in imum expec ted pro f i t f rom
the transact ion. This aids us enormously as i t then tel ls
us immediately , wi th a >=90% probabi l i ty what reward
to r isk we are l ikely to achieve should we enter the
t ransact ion.
M any of t he no v ice t r aders amo ngst u s are, at th is stage
wonder ing why we should be exc i ted by th is , as manyare not aw are of wh at good r isk m anagem ent st rategies
m ean, or how they are an in tegral par t o f t he i r surv iva l
as a t rader .
Let m e digress for a m om ent .
Rew ard: Risk
I f you were to r isk $1.00 per share on a t ransact ion
($1.00 being the di f ference between your ent ry f igure
and your Stop Loss ot herw ise know n as Trade Risk persha re ) w ou l d y ou li ke t o see a po t en t i al re t u r n o f
$1.00?
CON TINUATION PATTERNSCONTINUED....
W ith Peter Varcoe
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Or w ould you l ike to see a poten t ia l return o f $2.00 per
share for e ach $1.00 r isked?
Or w ould you l ike to see a poten t ia l return o f $3.00 per
share for every $1 .00 r isked?
Or wou ld the po tent ia l re tu rn wh ich you wou ld l i ke to
see, be l inked to w hether com pany involved w as a blue
chip, midcap or speculat ive com pany?
Personal ly I l ike to see a potent ia l return as fo l lows:
Blue Ch ip 2 :1
M id Cap 3:1
Specu lat ive 5:1
The major advantage wi th cont inuat ion pat terns in
regard to r isk management is that they immediately
show you what you R:R ( reward to r i sk rat io ) i s,
therefo re a l low ing greater f lex ib i l i t y in dec ision m aking.
I w i l l go int o t h is in greater det ai l in later ar t ic les, but I
w as taught t o take in to considerat ion severa l r i sk
m anagem en t pa r am e t e r s by m y m en t o r Rob Lennox
(also a cont r ibut ing author t o Educated Analyst ) . I owe a
great deal for a ll the ext ra t im e, ef for t and energy he put
into me as I was a s tudent under h im learning,
essent ial ly, f rom scratch.
The basic r isk m anagem ent paramet ers Rob taught then
w ere , in com binat ion :
Capi ta l Exposure how m uch capi ta l exposed to a single
t rade.
Cap it a l Al loca t ion how m uc h c ap i t al exposed t o BC
M C S.
2% rule M ax of 2% of capi ta l exposed as a t rade r isk .
Rew ard to Risk param ete rs.
These guidel ines have stoo d bot h m ysel f , and m y fe l low
students who fo l lowed them, in very good s tead over
the last 10years Thanks Rob.
Get t ing back on t rack the ta rge t a llows us to p re p lan ,
w i th g reat accuracy , more so than d i rect iona l change
t rades, our R:R and ther efore conf i rm w hether t he t rade
is viable .
Lets get m ore specif ic shal l w e?
Pat tern ident i f icat ion guidel ines:
Al l cont inuat ion pat terns need to f i rst ly be ident i f ied by
the format ion being a consol idat ion. Af ter that we get
m ore speci f ic for each type of pat t ern.
Flag: Ascend ing
Descending
Tr iangle: Ascend ing
Symmetr ical
Descending
Pennan t s: Ascend ing
Symmetr ical
Descending
W i th f lags, we need to be ab le to p lace a pa ir o f para lle l
l ines around the consol idat ion (we wi l l cal l these
momentum l ines ) , w i th at least 2 touches on each of
the l ines. The upper momentum l ine needs to be very
accurate to ensure highest p robabi l i ty fac tor .
The low er m om entu m l ine can be a line of best f i t , but i t
needs to have very l i t t le over lap and under lap, which
w i l l make mo re sense wi th a pract ical exam ple.
In the case of f lags, the target is determined in the
fol lowing way. The dis tance (pr ice di f ference) between
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W e are going to look at a pot ent ia l f lag form at ion as i t form s in real t ime, wi t h real pr ice bars, then w e w i l l apply th e
target ident i f icat ion to i t and th en determ ine whet her i t reached i ts target or not .
Supercheap is the com pany w e w i l l look at in th is i l lust rat io n.
W e can see that Supercheap changed di rect ion in June 2006, and then had a st ro ng upw ard run, w i th a coup le of
pauses dur ing that ru n.
Is th is pause anoth er of w hat w e saw ear l ier in August & Septem ber??
Tim e w i l l te l l.
The f i rs t th ing we need to look at is whether we can apply our paral le l l ines around the pause at the top of the
upw ard run, and th e current answer is yes w e can.
Source: M arket Analyst 6 (www.Marke t -Ana lys t .com)
Source: M arket Analyst 6 (www.Marke t -Ana lys t .com)
http://www.market-analyst.com/http://www.market-analyst.com/http://www.market-analyst.com/http://www.market-analyst.com/http://www.market-analyst.com/http://www.market-analyst.com/7/31/2019 The Educated Analyst Jul-Aug 2010
28/40
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Using the ver t ical l ine funct ion , w e can see where the
breakout , i f i t happens next
week, wi l l prov ide our ent ry . I
do bel ieve in calculat ing this
exactly, as I have seen some
very large discrepancies basedon the use of cursors and
assumpt ion that the l ine was
correct ly drawn exact ly where
i t should have been.
In th is case th e ent ry, sho uld i t
o ccu r ne xt w e ek , w i ll b e
approx im ately $2.84.
As we can see in the next
char t , our pr ice penet rated
t he uppe r m om en t um l i ne ,
bu t no t t he en t ry p r i ce .
H ow ev er w e now have t o r e l oca t e ou r upper and low er
m om entum l ines to keep to our ident i f icat ion cr i t e r ia, as
show n be low .
Som et imes at t h i s po in t we cannot ge t a paral le l low er
m om entum l ine to work proper ly w i th m in im al under &
over lap. Should th is be the case, be prepared to d iscard
t h i s as a t r ad ing pa t t er n . O bse r va t ion i nd ic at es t ha t a t
th is t ime the pa t te rn i s
no longer v iable wi th in
t h e sam e pr o bab ilit ie s
wh ich we have come to
expect .
I t m ay be as sim ple as us
being too enthus iast ic in
the f i rs t p lace and
ident i fy ing something
w hich wasn t really there
Desperat ion, self
conf idence, enthusiasm
made us see th ings which weren t there in the f i rs t
p lace. I know that I have been gui l ty of t h is same t h ing in
the past .
This week our ent ry pr ice is approx imately $2.83, wi th
our s top around $2.70.
So w hat do es next w eek br ing?
M ore d isappo in tment as our p r i ce ac t ion fai led to h i t ou r
ent ry . Damn, th is is get t ing f rust rat ing isn t i t?
Source: M arket Analyst 6 (www.Marke t -Ana lys t .com)
Source: M arket Analyst 6 (www.Marke t -Ana lys t .com)
http://www.market-analyst.com/http://www.market-analyst.com/http://www.market-analyst.com/http://www.market-analyst.com/http://www.market-analyst.com/http://www.market-analyst.com/7/31/2019 The Educated Analyst Jul-Aug 2010
30/40Th e Edu cated An alyst | Co n t in u at ion Pat t ern s Co n t in ued JULY / AUG 2010
Or is i t? For every week our pr ice act ion does not h i t our ent ry pr ice, the ent ry pr ice fa l ls does i t not? The
quest ion w e need t o ask here is, what has happened to o ur t arget pr ice, has it fa l len, or is i t s t i ll the sam e?
The fact is that t he target has not changed, and every week th at our ent ry pr ice fa l ls w i thou t being t r iggered isincreasing the distance betw een our ent ry and the target , al lowing us to expect a h igher am ount of pro f i t is i tno t ?
There is no need to w orry yet , wh at happens next week????
Source: M arket Analyst 6 (www.Marke t -Ana lys t .com)
Source: M arket Analyst 6 ( www.Marke t -Ana lys t .com)
http://www.market-analyst.com/http://www.market-analyst.com/http://www.market-analyst.com/http://www.market-analyst.com/http://www.market-analyst.com/http://www.market-analyst.com/7/31/2019 The Educated Analyst Jul-Aug 2010
31/40Th e Edu cated An alyst | Co n t in u at ion Pat t ern s Co n t in ued JULY / AUG 2010
Hooray, our ent ry is t r iggered, we are in the t rade and
expect ing to reach our target of $3.96 f rom our ent ry
pr ice of$2.82, which should show us a n ice prof i t of
$1.14 per share, thank you very much. Go you good
th ing gooooo.
Let us jump a few weeks ahead to see what actual ly
happens.
Supercheap reached i ts target in 10 weeks. We would
have made $1.14 prof i t f rom a $2.83 ent ry or 40.28%
pr o f it f r om ou r en t r y p r i ce .
This is not a nor m al prof i t to b e expected f rom a pat tern
ent ry . Rea li t y needs to s tep in here and br ing us back to
ear th. This w as a cont inuat ion pat tern ent ry dur ing w hat
w as to become t he biggest Bul l Run in l iv ing mem ory for
m ost of us . These w ere except ion al ci rcumstances and
shou ld no t be expected to be repeated w i th in the near
fu ture .
M ake no mistake, how ever , t hese sor t o f si t ua t ions w i ll
r epea t t hem se lv es. M ark et s have cy cl es, t hey hav eboom s and busts , and those who do the w ork now , who
are cons is tent ly accurate in thei r determinat ions, who
spend the t ime necessary to become very prof ic ient in
the use and appl icat ion of t hese, and ot her t echniques,
wi l l be in the best pos i t ion to make large prof i ts f rom
these si tuat ions as they ar ise in the futu re.
M y ow n exper ience has show n tha t w i th pa t te rns, when
they are correct ly ident i f ied, they usual ly reach thei r
t a rgets w i th in 10 w eeks. The norm al p ro f i t seems to fal l
in t o t he 17 22%
range per t ransact ion
as an aver age.
There is not hing wro ng
w i th these figures, and
t h e y a re v er y go o d i f
you are able to
cons is tent ly ident i fy
co r r ect l y co n t in u at i o n
patterns in excess of
80% of the t im e. Let us
also b ear in m ind, that
even those pat terns
which do not reach
the i r t argets st i l l g ive
you an oppor tun i t y t o
m ake a pro f i t .
Imagine wi th Supercheap i f it only reached $3.50 and
then fe l l away, an ef fect ive t ra i l ing s top would have
locked in some p rof i t , a lbeit no t as m uch as w e ended up
w i th, but s t i l l a good p rof i t .
Cont inuat ion pat terns are a h ighly re l iable, very
prof i t able ent ry technique.
Nex t t ime w e w i l l exp lo re t r iangu lar pa t te rns. These
pa t t e rns hav e t he ir ow n un i que qu ir k s, and w e w i ll
explore th ese in d etai l .
U n t i l t hen m ay t he m ark e t s go w i t h y ou (t hanks f o r
that say ing Rob), and have an aw esom e t im e.
Pete
Source: M arket Analyst 6 (www.Marke t -Ana lys t .com)
http://www.market-analyst.com/http://www.market-analyst.com/http://www.market-analyst.com/7/31/2019 The Educated Analyst Jul-Aug 2010
32/40Th e Edu cated An alyst | Co n t in u at ion Pat t ern s Co n t in ued JULY / AUG 2010
About Peter Varcoe
Peter s tar ted learning about t rading wi th Wal ls t reet Group
from M elbourne in 1999. He then jo ined the com pany to head
up t he Queensland Branch in M arch 2000. He lef t W al lst reet
Group dur ing 2002 and Joined Stock M arket Investors Group t o
help wi th thei r program of educat ing Pr imary Producers, and
for the next 2 years was educat ing Pr imary Producers in
Victor ia, Queensland and Western Austra l ia.
Peter joined A ustral ian College of Finan cial Educat ion a s Senior
Lecturer in 2005 and cont racted to them fo r educat ion , a
posi t ion which he st i l l holds today.
Peters experience is mainly in shares and CFDs but Forex is
f i l ter ing i ts way into h is t rading for future incorporat ion. He