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

Read more >>

Trend following trading strategies

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

                                 DFFRENTIATORS
Factors that distinguish techical training from non-technical training

What are differentiators

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

The power of compounding

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

Source: Pattern Recognition and Trading Decisions, by Chris Satchwell

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

What is cash flow

How did Wall Street begin? What is the history of Wall Street? Wall Street takes its name from a wall of brush and mud that was built alongside the street’s original pathway. The Dutch settlers built the wall shortly after establishing a trading post on the island of Manhattan in 1609. In 1626 the Ducth purchased the entire island from the local Indians with trinkets and beads worth the equivalent of $24. After they purchased the island, the Dutch improved the wall to keep their cows in and the Indians out. The path knowns as Wall Street quickly bacame the center for commercial and community activity that connected the docks serving the Hudson River on the west and east rivers allowed for importing of goods between the different mercants who then built their homes and businesses close by.

Read more >>

History of Wall Street

THREE TYPES OF DIVERSIFICATION

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

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

Read more >>

Types of Diversification

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

What is volume

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

Read more >>

Oscillators do not travel between 0 and 100

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

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

Read more >>

Preferred Stocks

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

Bollinger bands: An invaluable indicator

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

Read more >>

Trading secrets for traders

Get this book
Read Customer Reivews

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

Read more >>

Trading with the Elliott Wave Theory

Get this book
 Read Customer Reviews

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

—Edwin Lefèvre

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

Read more >>

Stop loss orders

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

In Wikipedia, it said that:

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

 Read more in Wiki.

and another opinion from factmonster

Read more >>

What is stock market

Get this book
 Read Customer Reviews

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

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

Read more >>

Types of Chart

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

Read more >>

Navigating the Labyrinth

Get Warren Buffet's book
Read Customer Reviews

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

Read more >>

Fundamental and Technical analysis

Get Tom Demark's book
Customer Reviews

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

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

Read more >>

Tom demark sequential

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

Read more >>

Ichimoku Clouds

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

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

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

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

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

Fundamental Analysis vs Technical Analysis

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

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

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

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

What is moving average

Rockefeller, & Barbara said that:

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

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

Rafael Romeu and Umar Serajuddin stated that:

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

Grab this book here
Read customer reviews for this book

What is technical analysis

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

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

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

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

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

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

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

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

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

Simple linear regression