TRENDLINE

John Murpy explains the trendlines in his book like that:

"The simple trendline is possibly the most useful tool in the study of market trends. And you'll be happy to know that they're extremely easy to draw. Chart analysts use trendlines to determine the slope of a market trend and to help determine when that trend is changing. Although horizontal trendlines can be drawn on a chart, the most common usage refers to up trendlines and down trendlines. An up trendline is simply drawn under the rising reaction lows. A down trendline is drawn above the declining market peaks. Markets often rise or fall at a given slope. The trendline helps us to determine what that slope is."[1]

Up trend is defined as a series of higher highs and higher lows in sequence. Downtrend is defined as a series of lower highs and lower lows in sequence. A trend line touches to the low and high point as show on the image below[4].



HOW TO DRAW TRENDLINES?

John M.Pring explains tells that trendlines can be drawn by connecting two or more peaks or throughs, othwerwise it is not a valid trendline[2]. He mentions the importance of the closing prices. Because it sperates those who are willing to take home aposition overnight or over a weekend from those who are not.Therefore closing prices are more important chart points than highs or lows. Dr. Elder supports this view in his book. He mentions that with the following sentence.

"Most chartists draw a trendline through extreme high and low points, but it is better to draw it through the edges of congestion areas. Those edges show where the majority of traders have reversed direction. Technical analysis is poll-taking — and polltakers want to track opinions of masses, not of a few extremists. Drawing trendlines through the edges of congestion areas is somewhat subjective. You have to watch out for the temptation to slant your ruler."[3]

RATING TRENDLINES

Dr. Elder consider following criteria to evaluate the importance of a trendline[3]

1. Timeframe: the long the time frame the important the trendline
2. Length: the longer the time frame the more valid it is
3. Number of time it touches: The more contacts between prices and trendline the more valid that line.
4. Its angle: The angle between a trendline and the horizontal exis reflects the emotional intensity of the dominant market crowd.
5. Volume: If volume expands when prices move in the direction of a trendline, it confirms that trendline; if volume shrinks when prices pull back to a trendline, it also confirms the trendlines. If volume expands when prices return to a trendline, it warns of potential break; if volume shrinks when prices pull away from a trendline, it warns that the trendline is in danger.

Resources:
[1] The Visual Investor, John Murpy
[2] Technical Analysis Explained, John M.Pring, p.136
[3] Trading for a living, Dr. Elder, p.88-92
[4] Most Of What You Need To Know About Technical Analysis, (02/04/03)Matt Blackman, www.workingmoney.com

Basics: Money management for traders

The amount that you lose as a percent of your trading account is called drawdown. The picture below shows a 10000$ account which suffers a series of losses. The difference between the equity high and loss is called drawdown. A trader must try to minimize drawdowns for the long term survival.


The table shows percent of drawdowns and percent of required to return to recover the drawdowns. As you can see exposing unmanaged risk to the market can ruin your account. Therefore money management is important for traders.

Money management is a part of the trader system. It answers the questions of "How many?" and "how much?".

1. How many units of your investment should you put on at a given time?
2. How much risk should you be willing to take?

money management techniques are


Risk 2% on every trade: Never risk more than 2% of your invested capital. If you invest 10000 €, do not lose more than 200€ of this investment in a single trade. For example if you identified your entry point as 40€ and exit point at 38€, you would risk 2 € per stock. If you can risk 200€ in total and 2€ per share, you can find the number of share that you can invest in by dividing the 200€/2€=100 shares. You can buy 100 shares. That means you can invest 100*40€=400 euro in total for this trade.[2]

This basic method or other money management methods can determine whether your are allowed to enter the trade or not. For example if your expected loss is grater than your allowed risk exposure, you are not allowed to enter a trade.[3] You can use the same method to find out the total capital that you need have.

If a trader is exposing his total capital to more risk than allowed, this is overtrading. Traders should avoid to overtrade[1].

Cost averaging and pyramiding are not money management techniques. Cost averaging suggests that a trader should add more contracts to a losing position to decrease the average cost of the total contracts. Pyramiding is opposite of the cost averaging. It suggests that a trader should add more contracts to his wining positions[1].

Resources:
[1] The trading game, ryan jones
[2] Money Management Strategies for Futures Traders, Nauzer J. Balsara
[3] Special report on money management, Dr. Tharp, www.forexfactory.com/attachment.php?attachmentid=2488&d=1133658244
[4] Money Management (Pt. I):Controlling Risk and Capturing Profits By Dave Landry

STOCK SELECTION STEPS

TOP DOWN ANALYSIS
- Determine the general trend of the market. Check the work markets as well. Trend represents price direction e.g. up, down, sideways. Oscilators are best utilized when trying to confirm or pinpoint trade entry/exit points within trading ranges
- assess the major market trends e.g. DOW, S&P500, NASDAQ
- assess the trends in specific industries, sectors including ETFs
- find stocks to buy during market and sector uptrends, or sell short during down trends

TRADING TIME FRAMES
- Long term "Position" trades: aim to capture extended price moves, lasting from week to several months. generally >12 months chart is usefull to analyse.
- Short term "Swing" trades: aim to capture minor price moves lasting from days to several weeks. generall last 3 months are relevant.
- intraday trading

STOCK SELECTION
1. Screen stocks based on the fundamental values
2. Use technical chart scanning tools to filter out this stocks
Find stock making new highs (parameters)
- price > short term high (1d,5d,21d)
- price > long term high (63d,200d,52w)
Find stocks in uptrend
- price > short term MA (1d,5d,21d)
- price > long term MA(63d,200d,52w)
- short term MA > Long term MA
3. Prepare a risk plan define entry, exit points.

Fibonacci, Fractals and Financial Markets

some other interesting application of the fibonacci
[1] Who is fibonacci? http://lumberjocks.com/jocks/David/blog/1639
[2] WOOD Magazine fibonacci Gauge Demo. http://www.youtube.com/watch?v=5Xgw84Kwrh8
[3] Trading Fibonacci Numbers. http://www.traderslog.com/fibonaccitrading.htm

MARKET TRENDS (DOW THEORY)

Bear Markets of the German DAX index

Bear markets are shown below. Decision point is using 6 and 10 MA (weekly 17-43MA, daily 20-50MA) average on the long term charts to identify bear markets[1][2].

Major bull and bear markets result from fundamental changes in supply and demand[3]. Long term(primary) trends are driven by fundamental factors.

See:
[1] http://www.decisionpoint.com/TAcourse/TAcourseIntro.html
[2] http://www.pring.com/movieweb/KST_MCM.htm
[3] Trading for a living, Dr. Elder, p.65

Fractal Trading

a fractal must contain at least 5 bars. the middle bar must the longest bar and the other 4 bars must be shorter than the middle bar.
prices are the last thing that changes. first momentum changes.