How to properly use Technical Analysis

similar usage can also be used in square of 9 = 81. here is an example of yesterdays swing on eurusd m5

the most straightforward basic ever.


swing was 82 pips into resistance, square of nine is 81. why not u know? Pa showed exhaustion and momentum dying out



also use confluence of fib projections or fib retracments, bollinger bands as a gauge for range and volatility as redlion uses.

supply demand and PA of course is needed to project best results

buma can you, i don't know, maybe SHUT THE HELL UP?

i don't know why red wants to educate people a little with some actual concepts that may lead to actual small edges, but i sure as hell don't know why you so desperately feel the need to come in here and spam his thread with your tea-leaf bullshit and trash what started out as a scientific thread with your airy-fairy nonsense.

SHUT UP AND LET RED HAVE HIS DAMN THREAD!

i can say yes and no at the same time,

if you are looking for prediction in volatility the easiest way to do it in forex is by market hours.

Asia usually is low in volatility
while Europe open and Europe/America overlap bring more pronounced swings.
back to low volatility as America closes the day.

why i say that volatility prediction is not more important than price? because its interwoven, the faster and further the price moves the greater the volatility increases and when loss of momentum is evident volatility contracts again.

at the end of the day, even if trading by "line swaping" using reference points where price will accelerate from

pressing sell or buy puts you in directional prediction, so finding ways to position yourself in the right DAILY direction is imperative,
and finding ways to reduce probabilities against you is another important matter.

which is another topic, but if you are interested in volatility probabilities
besides standard deviations you can also use Range, or implied volatility calculations

my next post will be ATR and the derivatives i use to objectively read different statistical data

ATR is Average True Rage.
created to find what is the "true" range of the market in the commodities as they suffered a lot of gap up and gap down, so this formula was created, in forex there are not many gaps, and the usually the sunday candle contains these gaps, the sunday candle can be ignored is not very useful its more a part of the monday candle than anything (if you dont know what i am talking about then you are fine, your broker doesnt give you a sunday candle some do.

the idea behind the ATR is again not predictive in nature, but rooted in statistical analysis of what a normal range of the instrument is. in other words how far is it possible to expect the instrument to travel, and does the current move still has some fuel?

how to calculate it? it depends on what you are averaging, if averaging 20 periods initially you substract (high)-(low) of each day
now, add all the totals and divide by 20
*this is for forex as the open is usually the close we dont get many gap ups or down so i am not using the original formula to account for non existent gaps

however for the next day a smoothing formula is implemented
you take your last ATR and multiply by 19, find the current TR for today
add it, then take the total and divide by 20. you do this for every new day.

this calculation gives you statistical knowledge of possible max rage.
it is useful for swing positions to add stops away from volatility
it is also useful to compare the range the instrument is trading now in relationship to this mathematical average, keeping in mind that low volatility is followed by high volatility and vice versa.

as you are trading doing periodic excel calculations of the current average from current low to current high comparing it to the ATR can give you an idea if the instrument has more room to go or if its likely to range, correct ans so forth especially when combined with pivot points.

when calculating pivots, substract the current open from R1,R2 the Central, S1,S2 from the current open, it will give you a series of ranges from open price, take your ATR and see which are likely targets in relationship to daily price action, S/D,S/R areas, and if price is high or low in standard deviations, and what phase of price movement are you looking at? couple that with how the equities markets are performing for risk on, risk off. And you truly have a good overall analysis of the market.

another thing i like to do is get the Average displacement Range (displacement is a mathematical name for start point to finish point in its shortest route) open-close, statistically you see that price usually closes above or below open, and what is the usual distance.

you can get the Average low range and Average High Range
do the same to all the lows and all the highs,

so with the ATR you can add it to your open and get the maximum expected range and subtracted to your open for the maximum low range

add your Average Expected high to the open and do the same to the Average expected low.

i repeat the goal is not prediction but mathematical analysis of usual statistical ranges of the instrument traded, combining this analysis with pivot points, must MOST IMPORTANTLY price behavior and price action.

this eliminates emotions and brings more science to the analysis, because you know what is probable and what is possible to happen and you no longer let your greed hold positions too long turning them to a loss,

hopefully this brainstorming of my trading ideas are clear if not, ask me so i can make it more clear. that is what this thread is about to make my trading clear. i want to be able to teach my son when he grows up in a structured clear way. so thank you all for your contributions, and inputs

I have directional bias, the reason i say that the volatility is more important is because without it, even if my bias is correct it makes it much harder to profit. It also makes my trading alot less efficient. Should probably make the point that I don't usually stay in a trade for very long

At the moment for volatililty the main factors i use are
-time of day
-'sweet spots' as Scotty B put it (this kind of ties in with ranges and stuff covered in the orderflow threads)
-momentum
-news, for obvious reasons, but can also be used to predict low volatility when the market is waiting on some news/announcement (i am not a news trader)
-there is one more 'measurement' (for want of a better word) that i wont go into, it's nothing ground breaking but is probably the key for me and not dependant on past price data.

Great stuff so far, I'll stop hijacking your thread now

no high jacking at all friend.

i am actually very curious to know your views on things, and what calculations are mathematically important to you.

"trading is as old as the hills and what is being done now was done before, nothing is new under the sun" ----jessie livermore

so please dont feel as though you will lose the edge by disclosing it, i would like to have an intelligent discussion on the matter, exchange of ideas if you will

Beat me to it. I was about to say how great this thread could be, let Red do his stuff....

Your talk about ATR and ranges is key in my trading.

At the beginning of every day for me (I start around 9am) I will do the following:

Mark the daily pivot points on the chart
Mark the London open
Mark the Frankie open (not as important as LO)
I will note where price is in relation to the open

The only indicators I have currently are 3 SMAs:
4 SMA
32 SMA
96 SMA

These are all on a 15 min chart, do you see why I use these numbers?

I then look at the current high and low that have occured since Frankie open. I then mark on the chart the target high and low (subtract ATR from current high for the target low, and add ATR to low for the high)

I now have all my key levels.

I watch the 15 min candles for close price around these levels to then determine my entries. For example, price has fallen below S1, pulled back and then closed below S1, I would short the open of the next 15 min.

In a nutshell thats how I am trying to trade

Forget all those fancy indicators...

Let me take you on a journey

The very first epiphany in trading was the discovery of "Buy above the line and Sell below the line". It is the equivalent of the invention of the wheel. Although this discovery was and still remain a closely guarded secret and will never be fully revealed.

______________________________

This concept was then developed and incorporated into the bar graph.

The purpose of a bar is to create a reference point in time. Because the masters knew that price will always move away from any given reference point. And in doing so, only then a trader can take advantage of such movement to profit.

As time progress... the bar were added some blings and were pimped out. It then became the sexy bar known as candlestick.

Years had passed and information were handed from one to another, continually getting diluted as it was passed on. Then a new awakening gave birth to multiple reference points, called the candlestick patterns.

With ever growing complexity, a newer change was upon the horizon. As with life and nature, things evolve to produce a more superior organizational structure. Beneath the simplistic presentation lies the complexities... the Donchian Channel (aka: High/Low channel)

Fast forward >>>> to 2011 and.... not a lot of people knows the core of reading charts and trading charts. The dream chasers don't have a single clue of the power of a reference point... which stares at them every time they open a chart.

Sometimes it hits me, how far away the 95% of traders from the 5% money-makers. But that's how it'll always be with this business since we are dealing with money...
While the 95% here are FF are just warming up (actually, just stretching for a warm up) the 1% are already working on Multi-dimensional Donchian Channels

To Be Continued....

Wow hello CP I have read many of your posts and it has completely changed my way of thinking.

I am still struggling with the price will always close away from the open comment you made. Yes it will, but higher or lower lol. I guess if it's above the 'line in the sand' then higher, below then lower - in terms of probability.

Interesting modifications to the standard Donchian Channel you have there. I'll be interested to hear what else you have to say about it.

preemptive guess is that the multi-donchs are just for highlighting potential areas for different sessions / timeframe stops to try and push into. or at least to define a range that has proven able to be traded within.

if i'm right i want a pony!

http://www.hasbro.com/mylittlepony/e...ittle_Pony.png

Agreed, I don't think it's a great secret; looks like the lines are being plotted off candle highs and lows, which is little more than basic S/R.

Reference lines that are a closely guarded secret, candlestick secrets, secret ways of plotting Donchian channels that 95% of folk will never understand...... I can't help smiling to myself, and wondering what substance might lie beneath the expansive sales pitch.

hopefully ponies!!!

i believe there is more to it than simply bog-standard s/r. there is possibly a belief structure tied-into the use of the defined channel and what it's boundaries represent and frame (particularly when they are moved outward, and even more-so when there is confluence). but, this is just me spinning my own wheels.... so, yeah.

hi,

buma just few questions, i saw your charts and your comments, sorry but you dont have proper background and knowledge to teach others, such crazy nonsense charts with comments like "pinbar willing sellers with stops above" or "institutions capturing amateurs selling hanging man", it was just news driven movement sth with greece tranche and there were only a very little stoplosses probably....you dont have a clue how institutionals and guys trading big accounts place their stoplosses but i can tell you that in 95% cases its not above last high on 5m chart because when you trade prop in 50-100 you cant afford scalping with wider spreads. u can notice this when there are squeezes when market is extremely long/short and stop losess are getting filled and moving the market in oppossite direction when it runs at least 200 pips away.

and about the technique and magic numbers you are presenting, is that a real strategy with edge and you proven for yourself with consistent returns that it is profitable? if not then opened demo trades and "backtesting" which is bs anyway is just not enough.

sorry for the offence and dont take it bad but its maybe better to learn and do some homework before you start teaching others

It is just a development of the DC with 2 channels instead of one. One for bulls (green) and one for bears (red). When the 2 channels align, market is ranging, when they separate, either uptrend (green) or downtrend (red). CP has written about this before but this is the first time he has shown it. Thanks CP, very informative.

now Crucial point touched on the power of reference point, and statistically (as covered on a thread regarding TF's here in FF, i stated that price moves away from the open most of the time)
by ADR (average displacement Range) price usually closes at an average distance of 92 pips away or within open.

i mentioned picking a directional bias to trade, reducing the probabilities stacked against you.


but lets start with what is probability?

what event is likely to occur?
how certain are you of such occurrence materializing ?

so in order to calculate probabilities we need a sample space and a power set.
by reducing the power set you reduce the likelihood of error correct?

so our sample space is the probability of 2 events occurring.
1 = price will close above open
--------------
2 = price will close below open


= 50% of event occurring.


that is the power of the open as a reference point.

so the question here is, will price close above or below open next month?
find the days that price is trading above fair market value.
now do a risk assessment, not a profit hope.

if your entrance was to be wrong? what area would bring the least possible pain? before you realize your mistake?

now on to the hourly chart to get a clearer picture of this, and from here, how can i maximize profit, and reduce my risk? on to the five minute chart.

by the way i am a day trader, but my personal experience so far is to not lose sight of the bigger picture and when day trading aligned with the probability of my expected outcome in relationship with the daily candle

lets talk about RISK.

when initiating a position one must always take into account the risk exposure.
this is why i say that the hope for profit should be taken away from our trading psychology.

thinking " i got to enter now or i will miss a lot of money" usually gets you killed

what is risk R= (Probability of undesirable outcome)(expected loss)

so if proper analysis has been done, and you have an area of interest (this is an area that by virtue of whatever tools you utilize to arrive to your conclusion, is your uncle point, or if price falls below or moves above this point your theory has been dis proven) then it is only logical to enter a position at the least possible distance from this area. as your expected loss would be less than foolishly entering a position at a greater distance because of fear of missing the bus.

the hope for profit will leave you holding an undesirable entry that needs confirmation, in order to close if in fact you are wrong, so the expected loss will be much painful if the undesirable outcome materializes.

if you calculate the opportunity cost minus risk, you will realize that it is far more expensive to expose yourself from risk than to miss the bus.

and negative equity growth by % of account grows exponentially as to recover 50% of your account, you would need to make 100% profit from this point. and if one fails to adjust lot size to account size the risk exposure grows making the stacking the odds against you.

in simpler words, pick your entries wisely, and when trading, always look for probabilities and risks, never marry your bias, if there are more buyers than sellers and you are selling, no hope or rationalization in the world will save you from price turning against you.

Probability

P(A) probabilities lets us obtain real and predictable measures about random events. It gives meaning to seemingly random data, and helps us quantify possible outcomes.
We can assign a level of certainty about an the occurence or non occurance of an event measured from 0-1.

probability is measured as such (expected outcome) divided by (number of possible outcomes) Ʃ/n

the probabilities of rolling a dice n=6 sides and the probability of landing on 4 ( Ʃ=1) is
1/6= %16.67 and conversely we can say that we have 100-16.67= 83.33% probability against you.

In flipping a coin, Ʃ=1 possible outcomes / n=2 , if flipping 2 coins the probability of 2 heads landing is (1/2)(1/2)=1/4 = 25%

when flipping 10 coins the probability of getting 5 heads and 5 tails is = 50%,
of getting 10 heads in a row is 1/2*1/2*1/2*1/2*1/2*1/2*1/2*1/2*1/2*1/2=10%

the probability of X and Y event happening is written P(A∩B) = P(A)*P(A) OR
Ʃ/n * Ʃ/n= P(A∩B)

probability of X OR Y= P(AUB) = Ʃ/n + Ʃ/n

always go for "and" avoid "or"
you have a bottle of pills with 3 different types of pills
6 tylenol pills, 4 senokot, 4 compazine
what are the odds you will get the tylenol?

N=6+4+4 so that n= 14
so that Ʃ=6 tylenol= 6/14=3/7= 43%
so that to get a tylenol or a compazine P(AUB) = Ʃ/n + Ʃ/n = 6/14+4/14= 10/14= 5/7= 71% probability of pulling out a tylenol or compazine pill = P(AUB)= Ʃ/n + Ʃ/n
however the odds of pulling a tylenol and a compazine pill is = (6/14)(6/14)= 36/196=18%

so in conclusion reducing the power set and the sampling pool reduces negative probabilities

as to have OPEN as the reference point above or below = Ʃ=1 and possible outcomes n=2
as to have P(A)= Ʃ/n to 0.5=50%