How to properly use Technical Analysis

Nobody knows anyway, so "how far higher/lower or lower/higher" would be the more interesting question I think...

Sales pitch? I think I made it clear since the beginning and I'll repeat it again: "Anyone who proclaims to be CrucialPoint is NOT me, DO NOT GET SCAMMED." but I can understand where you are coming from

Put your emotions aside... it is not about people not understanding these things. Its about NOT being released to the public, EVER. I will be the first to state that there will never be a price tag to these things and will remain underground. My posts are glimpse of the gap and nothing more.

250 posts woohoo!!!

Since i touched on the subject of probabilities a great part of having an edge by probable outcomes is, historical statistical data. just to accentuate the point regarding what Crucial Point and myself have been saying.

the euro has been in existence for 2,856 trading days as of 12/31/2011
and it has closed above open 48.21% of the time, that is 1,377 times
it has closed below open 51.12% of the time 1,460 times.

so as you can see, by objective mathematical facts price closes above or below open 99.33% of the time 2,837 out of 2,856 trading days.

now just by this simple fact alone, trading by:
using the open price as your reference is an edge in itself.

so the question becomes, will it close above or below open, not IF it will close above or below open.

this is a reason why Ranges are so important in Forex.

we attempt to understand what normal ranges are, thus having a baseline to judge when prices are trading below or above normal ranges.

donchian channels outline, previous days ranges (previous highs, previous lows)
pivot points are actually a form of structuring a chart in relation to previous days ranges as well. here is an example.

(high+low+close)/3= central pivot (it gives yesterday's average price, or fair market value [same principle as a moving average])

how to find the projected high by multiplying YESTERDAYS low by 2 and subtracting yesterdays high for possible exhaustion point via normal range.

now support 1 is done by (yesterdays high) x (2) - the central pivot or the average. This signals a projected exhaustion point via normal range.


actually contraire to popular belief where they say that LOGIC does not apply in the market, most studies are based upon logic.

the logic for traders to take positions is the fundamental macro economic environment, which in turn is recorded in a transaction record = the chart.

now regarding ranges and statistics here are some interesting statistical histograms.

i am of the belief that whenever you want to use a technical tool you have to ask yourself

1- why is it useful?
2-how is it calculated?
3-when would this work?

an example are the mystical fibonacci retracements and projections.

why do they work?

they are not mystical at all, they are pattern recognition via mathematical %

here is an example.

we all know that price moves in waves, impulse and corrective


--------------50% is the line in the sand.

anything above 50% is a strong continuation (logically if it wold not continue then it would fall alot more than 50% if something holds then it HOLDS)
68% retrace is still a continuation, you can measure the % or use your eyes, geometrically it looks like pattern that will resume its trajectory.

now 100% retrace looks like a range pattern, >100% and now it seems like a reversal.

so the fib projections are also logical. if you have a 50-68% retracement then the logical conclusion is that it will project >100% of its current value as or else it will not look geometrically correct in your chart (in other words it will not be a continuation, it is a mutation in formation that geometrically looks a reversal in the making)

let's explore, supply and demand zones, support and resistance areas, psychological numbers


why do they work? simply put, a chart is merely a record of transactions if no orders are seen below or above certain prices, that means that the consensus of market participants deem transactions below or above this to be risky.

however keep in mind that this areas, are SUBJECT TO CHANGE.

now i will post one of my charts, and i will explain to you exactly WHY everything is there and how it is important to me. and how to calculate by hand. with logic i can tell EXACTLY WHY, my chart looks the way it looks.

can you do the same?



this is a five minute chart which means that every candle is composed of transaction recorder every five minutes.

the blue line is the daily open= it lets me see how price is trading in relationship to it, and most importantly it lets me visualize the DAILY CHART (if price is below this line the daily shows a red candle, if price is above this line the daily shows a green candle) so i know how the daily chart look like by using my five minute chart.

the red line= previous days high why is this important? because if in fact we have the positive expectancy of trading above the daily chart we are likely to have today's high above this line. and here are some statistics for you.
64.84% of the time when price fails to break previous high closes below open.

the Golden line which is not visible here= is yesterdays low because 65.65% of the time when price falls below prev low it closes below open

now why the black line?= it is the central pivot or yesterdays average price (this to me is more useful than the R1,R2 or S1,S2)

but i have a 288 SMA with standard deviations of 2 why? well simply put
(5)(288)=1440 that is 24hrs, i am measuring the standard deviations of 24hr period.

well isn't the central pivot an average of yesterday? yes, but the sma in relation to that pivot signals trend (same principle as the 50 and 200 moving averages cross over system except mine is relevant to me)

now why the FAT red line? that is my money management strategy.

that is going to be my stop loss because as statistics indicate, the euro 61 pip low from open is statistically normal so mine is 62 pips from open, just one pip difference?

yes because 71% when price < 61 from open it closes above open and conversely only 16% of the time when price >61 from open, it manages to close above open.

here i was expecting close above open, so i was longing the dips.

now 61pip stop? isnt that a bit too much? depends on position size
1:3 leverage = 1.86% risk to my account so i cap my risk to max of 1.86% and why because my statistics on my win loss ratio indicate 65% so that means that 35% of my trades are loser at 1.86% max risk i still have capital left over after a maximum expectancy of 35 consecutive losing trades.
now if i decide to enter price above open, how do i manage my risk exposure by decreasing leverage to 1:2, or 1:1 as to never expose myself >1.86%.

Hi Red, and Happy New Year to you and your family. I was wondering if you have performed this kind of analysis on 4H and 1H charts, to put this 5M analysis/picture in "bankers perspective"?

i have done statistics on the 1 hour candles, however the data for the hour candles is not from inception is from one year worth of hourly candles.

happy new years to you too.

i hope your family is ok and all your wishes come true.

well essentially the chart looks the same and it SHOULD it is the same pair.

here is the same chart zoomed out to hourly time frame.

instead of 288 BB
its a 24h bb

they measure the same thing deviation for 24hr period

Hi Red. I have been scratching my head and I thought you would be a great guy to ask (in the context of this thread).

I was doing some work on USDCHF 1H and 4H. I was placing my TLs and fibs on 1H line chart (an attempt to remove the noise). When I changed to 4H from 1H the TLs and fibs were displaced because obviously the 4H closes are different than the 1H closes.

You can see in the charts below how much of a difference this displacement makes to perception. The 4H makes price look like it has hit 61.8 perfectly... whereas on the 1H that is not the case at all.

Would you say line charts are too ambiguous? Perhaps keeping the charts on candles or bars would be better? At least they are more consistent.

..

yeah it looks odd.

do the fibs by hand, that should solve the problem

there is no logical reason for the charts to be off so much. it is the same pair and the same prices should be in the charts regardless of, lines, bars, candles etc.

take the fibs from price not the line.


example, find what was the highest price it reached, and the lowest price it reached then calculate your fibs.

Here I drew out the horizontal lines and fib on 4H bar. I left them completely alone and only changed the TF on the others.

Top two are bars; 4h and 1h
Bottom two are lines; 4h and 1h

As you can see the bars (top two) stay consistent because they are drawn from all price movement, not just from the closes of the period.

The line charts are not consistent.

This is really making making line charts difficult to use knowing this.

..

now 61pip stop? isnt that a bit too much? depends on position size
1:3 leverage = 1.86% risk to my account so i cap my risk to max of 1.86% and why because my statistics on my win loss ratio indicate 65% so that means that 35% of my trades are loser at 1.86% max risk i still have capital left over after a maximum expectancy of 35 consecutive losing trades.
now if i decide to enter price above open, how do i manage my risk exposure by decreasing leverage to 1:2, or 1:1 as to never expose myself >1.86%

Hi Red, IMHO, the question about a 61 pip stop depends on your analysis of where the market is going. If you think its going 30 pips, then risking 61 is not a good idea. If you think there is a reasonalbe chance it will go 183 pips, then you are making a good trade. So the questions are: why would the market move in the direction of your trade to possible targets? What are the signs that the market is moving to your targets, and what are the signs that it is not? Does your analysis on the upper compressions support your analysis on the 5M? Where will you place your second trade?

An idea:
Maybe the slant of the fib is off, given that of the run on the left isn't accounted for in your charts.

How do you mean? The slant of the dotted silver line connecting the fib top and bottom?

No, the slant of the fib lines themselves. The lefthand run nearly takes over the entire chart, and thus does its angle, which is different than the fib retrace device's always-vertical angle.
As in, either use a pitchfork or draw it in by hand.

I don't use fib retrace much except maybe after a nearly vertical drop, because of this inability of the device to adjust angle.

Maybe the fib retrace is useful in a smaller area of the chart, I don't know.

actually the 61pip stop from open has to do more with statistic probability, hitting my stop area means that it will probably not close above open, as statistics indicate (it is not mechanical, where i enter on open and place as stop, i place a line and according to what is in front i will trade accordingly, but once that line is hit, i would be a fool to be going long).

the best way to further mitigate risk is a good entrance, (but the risk is capped at 1.86%)

i am not saying my way is the best, however this thread i want to explain why the tools we use were devised, and to get traders to Understand their tools.


you see, 1:3 leverage is the maximum prudent leverage (according to my studies) any time an entrance or entrances are made at open price or below open price, 1:3 leverage will be = or < 1.86%, if an entrance is attempted above the open price, the way to maintain this capp, is reducing the leverage 1:2.

this is my initial anchor position, if i am attempting a swing trade, the next trading day if continuation is expected i would use the gains from the previous day to buffer, the risk of the pyramiding as to now my risk be 0%.

if i am day trading the swing, then the mechanism for the anchor position is kept (hopefully i am making myself clear) i have found that this way my stop rarely gets hit and my risk is well controlled (if my stop is hit then as stated above only 16% of the time will the current bullish direction be maintain and close above open, meaning that i should probably re think my analysis) now going short i would just reverse and place a stop >average high range, and the probabilities are basically the same, statistically give or take a few %)


you are very welcome to see a flaw in this as any one reading the thread, it would help re strategize.

tyoon i am not sure why you find this difficult to grasp.

all you have done is plotted some math on one set of arbitrary CLOSE values, changed the timeframe, and then again tried to plot the same thing on absolutely guaranteed to be different CLOSE values again, compared the two and come to the conclusion that they don't align for some reason.

of course they don't. one is a 1H chart closing set of values and another the 4H chart closing values. they will rarely be the same peaks / troughs that you are using to derive this pointless magical math.