Wednesday, June 8, 2011
The Trend Is Your Friend: How Moving Averages Can Improve Your Market Analysis
The Trend Is Your Friend: How Moving Averages Can Improve Your Market Analysis
June 06, 2011
By Elliott Wave International
Many traders and investors use technical indicators to support their analysis. One of the most popular and reliable also happens to be an indicator that has been around for years and years -- moving averages.
A moving average is simply the average value of data over a specific time period. Analysts use it to figure out whether the price of a stock or a commodity is trending up or down. It effectively "smooths out" the daily fluctuations to provide a more objective way to view a market.
Although simple to construct, moving averages are dynamic tools, because you can choose which data points and time periods to use to build them. For instance, you can choose to use the open, high, low, close or midpoint of a trading range and then study that moving average over a time period, from tick data to monthly price data or longer.
Moving Averages can help you identify the trend in a market, which is important since we all know that the trend is your friend. Yet certain moving averages can serve as support or resistance, and also alert you to trading opportunities.
This excerpt from EWI Senior Analyst Jeffrey Kennedy's free eBook, How You Can Find High-Probability Trading Opportunities Using Moving Averages, shows how a popular moving average setting identified trading opportunities in the stock of Johnson & Johnson.
A popular moving average setting that many people work with is the 13- and the 26-period moving averages in tandem. The figure below shows a crossover system, using a 13-week and a 26-week simple moving average of the close on a 2004 stock chart of Johnson & Johnson. Obviously, the number 26 is two times 13.
During this four-year period, the range in this stock was a little over $20.00, which is not much price appreciation. This dual moving average system worked well in a relatively bad market by identifying a number of buyside and sellside trading opportunities.
Learn to apply Moving Averages to your trading and investing by downloading Jeffrey Kennedy's free 10-page eBook. Here's what you'll learn:
Learn to apply Moving Averages to your trading and investing by downloading Jeffrey Kennedy's free 10-page eBook. Here's what you'll learn:
- How to apply the three most popular moving average techniques.
- How to decide which moving average parameters are best for the markets and time frames you trade.
- How to avoid several common but dangerous myths about moving averages.
Sunday, June 5, 2011
What Does a Fractal Look Like?
What Does a Fractal Look Like?
And What Does It Have to Do with the Stock Market?
May 26, 2011
By Elliott Wave International
If the word 'fractal' comes up at all in conversation, that conversation is probably being held in a mathematics department. However, anyone who is interested in the Wave Principle and how it applies to the stock market may have stumbled across the phrase "robust fractal."
If you want to know more about what it means in that context, here's an excerpt from Elliott Wave International's primer on fractals that explains the connection.
* * * * *
Excerpted from The Human Social Experience Forms a Fractal
by Robert R. Prechter
by Robert R. Prechter
In the 1930s, Ralph Nelson Elliott discovered that aggregate stock market prices trend and reverse in recognizable patterns. In a series of books and articles published from 1938 to 1946, he described the stock market as a fractal. A fractal is an object that is similarly shaped at different scales.
Although Elliott came to his conclusions fifty years before the new science of fractals blossomed, he took a step that current observers of natural processes have yet to take. He explained not only that the progress of the market was fractal in nature but discovered and described the component patterns. The patterns that Elliott discerned are repetitive in form but not necessarily in time or amplitude. Elliott isolated and defined a number of patterns, or "waves," that recur in market price data. He named and illustrated the patterns.
He then described how they link together to form larger versions of themselves, how they in turn link to form the same patterns at the next larger size, and so on, producing a structured progression. He called this phenomenon The Wave Principle….
The Stock Market as a Robust Fractal
A classic example of a self-identical fractal is nested squares. One square is surrounded by eight squares of the same size, which forms a larger square, which is surrounded by eight squares of that larger size, and so on.
A classic example of an indefinite fractal is the line that delineates a seacoast. When viewed from space, a seacoast has a certain irregularity of contour. If we were to drop to ten miles above the earth, we would see only a portion of the seacoast, but the irregularity of contour of that portion would resemble that of the whole. From a hundred feet up in a balloon, the same thing would be true.
Scientists today recognize financial markets' price records as fractals, but they presume them to be of the indefinite variety. Elliott undertook a meticulous investigation of financial market behavior and found something different. He described the record of stock market prices as a specifically patterned fractal yet with variations in its quantitative expression.
I call this type of fractal, which has properties of both self-identical and indefinite fractals, a robust fractal. Robust fractals permeate life forms. Trees, for example, are branching robust fractals, as are animals, circulatory systems, bronchial systems and nervous systems. The stock market record belongs in the category of life forms since it is a product of human social interaction.
How Is the Stock Market Patterned?
Figure 1 shows Elliott's idea of how the stock market is patterned. If you study this depiction, you will see that each component, or "wave," within the overall structure subdivides in a specific way by one simple rule: If the wave is heading in the same direction as the wave of one larger degree, then it subdivides into five waves.
If the wave is heading in the opposite direction as the wave of one larger degree, then it subdivides into three waves (or a variation). These are called motive and corrective waves, respectively. Each of these waves adheres to specific traits and tendencies of construction, as described in Elliott Wave Principle (1978).
Waves subdivide this way down to the smallest observable scale, and the entire process continues to develop larger and larger waves as time progresses. Each wave's degree may be identified numerically by relative size on a sort of social Richter scale.
Want to Know More About Fractals and the Stock Market? Then read the whole special report, called "The Human Social Experience Forms a Fractal." It's free of charge, so long as you are a member of Club EWI, which gives you access to many free reports that explain Elliott wave analysis and the Wave Principle.
How to Put the Wave Principal to Work
How to Put the Wave Principle to Work
In the video below, EWI Senior Commodity Analyst Jeffrey Kennedy walks you
through a basic checklist of how to put the Wave Principle to work. This clip
was taken from The Wave Principle Applied webinar, originally recorded for Futures
Junctures subscribers.
through a basic checklist of how to put the Wave Principle to work. This clip
was taken from The Wave Principle Applied webinar, originally recorded for Futures
Junctures subscribers.
Would you like to learn more about trading with the Wave Principle? Get 45
pages of FREE practical lessons in Elliott Wave International's Best of Trader's
Classroom eBook .
Taken from Jeffrey Kennedy's renowned Trader's Classroom series, this
FREE 45-page collection offers 14 actionable lessons that will help you determine
entry points, stop levels and price targets for the markets you trade.
Download The Best of Trader's Classroom now
Friday, May 20, 2011
A New Blog On A Long Lost Hobby
Hello traders,
I hope you are doing well. I have setup a pool to find out how many people need forex training. I cannot guarantee success to any of you but with a little training you should be able to see what forex is and how it moves.
I would really like to ask for people to stop spamming this blog. I have lots of promotional comments which I deleted and will continue to delete in the future. So just dont do it.
I have also created a new blog on Remote Control Hobby. Used to play RC long time ago but stopped for a while. Now I am continuing this long lost hobby again. Do visit my RC Explorer blog. It will be like this blog but only a different topic. I do my logs on blogs.
Read More...
I hope you are doing well. I have setup a pool to find out how many people need forex training. I cannot guarantee success to any of you but with a little training you should be able to see what forex is and how it moves.
I would really like to ask for people to stop spamming this blog. I have lots of promotional comments which I deleted and will continue to delete in the future. So just dont do it.
I have also created a new blog on Remote Control Hobby. Used to play RC long time ago but stopped for a while. Now I am continuing this long lost hobby again. Do visit my RC Explorer blog. It will be like this blog but only a different topic. I do my logs on blogs.
Stocks Rally On the News of Bin Laden's Death, You Say? It's Not That Simple
Stocks Rally On the News of Bin Laden's Death, You Say? It's Not That Simple
Interest rates, oil prices, trade balances, corporate earnings and GDP: None of them seem to be important, or even relevant, to explaining stock price changes
May 3, 2011
By Elliott Wave International
On the morning of May 2, the financial headlines were abuzz with the news of Osama Bin Laden's death and its positive impact on the stock market:
"Stock Market Celebrates Killing of Bin Laden" (The Wall Street Journal)
But despite a positive open, stocks closed lower on May 2. Undoubtedly, in the days ahead we'll hear analysts explaining how Bin Laden's death is not that "bullish" of an event, after all.
On that same note, MarketWatch.com ran an interesting story on May 2 that quoted from a research paper which found "little evidence that non-economics events have a big effect on the stock market."
Here at EWI, we go one step further and say the following: Economic events have little impact on the stock market, too.
Don't believe us? Read this excerpt from a free Club EWI resource, the 50-page 2011 Independent Investor eBook, and judge for yourself.
The Independent Investor eBook, 2011 Edition
(Excerpt; full report here)
(Excerpt; full report here)
...Economists' Claim #5: “GDP drives stock prices.”
Suppose that you had perfect foreknowledge that over the next 3¾ years GDP would be positive every single quarter and that one of those quarters would surprise economists in being the strongest quarterly rise in a half-century span. Would you buy stocks?
If you had acted on such knowledge in March 1976, you would have owned stocks for four years in which the DJIA fell 22%. If at the end of Q1 1980 you figured out that the quarter would be negative and would be followed by yet another negative quarter, you would have sold out at the bottom.
Suppose you were to possess perfect knowledge that next quarter’s GDP will be the strongest rising quarter for a span of 15 years, guaranteed. Would you buy stocks?
Had you anticipated precisely this event for 4Q 1987, you would have owned stocks for the biggest stock market crash since 1929. GDP was positive every quarter for 20 straight quarters before the crash and for 10 quarters thereafter. But the market crashed anyway. Three years after the start of 4Q 1987, stock prices were still below their level of that time despite 30 uninterrupted quarters of rising GDP.
Figure 10 shows these two events.
Suppose that you had perfect foreknowledge that over the next 3¾ years GDP would be positive every single quarter and that one of those quarters would surprise economists in being the strongest quarterly rise in a half-century span. Would you buy stocks?
If you had acted on such knowledge in March 1976, you would have owned stocks for four years in which the DJIA fell 22%. If at the end of Q1 1980 you figured out that the quarter would be negative and would be followed by yet another negative quarter, you would have sold out at the bottom.
Suppose you were to possess perfect knowledge that next quarter’s GDP will be the strongest rising quarter for a span of 15 years, guaranteed. Would you buy stocks?
Had you anticipated precisely this event for 4Q 1987, you would have owned stocks for the biggest stock market crash since 1929. GDP was positive every quarter for 20 straight quarters before the crash and for 10 quarters thereafter. But the market crashed anyway. Three years after the start of 4Q 1987, stock prices were still below their level of that time despite 30 uninterrupted quarters of rising GDP.
Figure 10 shows these two events.
It seems that there is something wrong with the idea that investors rationally value stocks according to growth or contraction in GDP. ...
Claim #6: “Wars are bullish/bearish for stock prices.” ... (continued)
Claim #6: “Wars are bullish/bearish for stock prices.” ... (continued)
Keep reading the 50-page Independent Investor eBook now, free -- all you need is a free Club EWI password.
EUR/USD: Falling on "Risk Aversion"? Let's Look at the Timeline First
EUR/USD: Falling on "Risk Aversion"? Let's Look at the Timeline First
It's not the "bad news" from Europe that has been pushing the euro lower
May 19, 2011
By Elliott Wave International
From the May 4 top near $1.4950, the EUR/USD (the euro-dollar exchange rate and the most actively-traded forex pair) has fallen as low as $1.4050 on May 16.
In other words, the dollar has gained 9 full cents on the euro in less than two weeks. That's a huge move, and people want explanations. And what the media offers boils down to "risk aversion," in light of "the bad news from Greece." And that sounds good -- until you check the timeline.
The latest wave of trouble in Europe started on May 3, when Portugal asked for a bailout. If you think that event is what pushed forex traders towards "risk aversion" -- think again. The euro happily gained against the U.S. dollar the following day, May 4, pushing the exchange rate to that high near $1.50.
And if you think the trouble in Greece pushed the EUR/USD lower -- again, please reconsider. Greece made a splash in the news on May 9, when its credit rating was downgraded. But by then the EUR/USD had already fallen some 700 pips, to the mid $1.42 range.
So, as good and logical as all the mainstream stories sound about "risk aversion" and "bad news from Europe," the timing of events doesn't fit. What then gave the dollar the strength -- and at a time when almost everyone expected it to only fall further?
Believe it or not (and it's easy to believe it, because, as this example shows, there's no better explanation) the news doesn't set broad trends in forex. Collective emotions of forex traders do. In early May, the majority was betting against the dollar. When everyone places their bets and there is no new money left to push the price further, it has no choice but to reverse.
That's why it pays to be extra cautious in the financial markets when everyone takes the same side of a trade. True, markets can stay overbought or oversold for a while, but the reversal inevitably comes -- and the stronger the one-sided conviction, the bigger the reversal.
The advantage Elliott wave analysis gives you is this: Wave patterns in forex charts track the collective mindset of the market players. By anticipating the price points where the Elliott wave pattern should end, you get a pretty good idea of where the trend should stop and reverse.
See for yourself how it works -- FREE -- during EWI's Forex FreeWeek now through May 26. Learn more >>
See for yourself how it works -- FREE -- during EWI's Forex FreeWeek now through May 26. Learn more >>
 | Don’t Miss Forex FreeWeek! Now through Thursday, May 26 you'll have full and free access to our Intraday Currency Specialty Service. Dig deeper into the forex action with 24-hour-a-day forecasts, charts and analysis for dollar, euro, yen and more. All you need to access FreeWeek is a FREE Club EWI profile. Set yours up today and don’t miss a moment of FreeWeek. Learn more>> |
Friday, May 13, 2011
5 Ways the Wave Principle Can Improve Your Trading
5 Ways the Wave Principle Can Improve Your Trading
May 12, 2011
By Elliott Wave International
Jeffrey Kennedy brings more than 15 years of experience to his position as Elliott Wave International’s Senior Analyst and trading instructor. He knows firsthand how hard it can be to get simple explanations of a trading method that works -- so he shares his knowledge with his subscribers each month in the Trader's Classroom lessons.
Here's an excerpt from The Best of Trader's Classroom, a free 45-page eBook that gives you the 14 most critical lessons every trader should know. Download the full eBook free here.
Every trader, every analyst and every technician has favorite techniques to use when trading. But where traditional technical studies fall short, the Wave Principle kicks in to show high-probability price targets. Just as important, it can distinguish high-probability trade setups from the ones that traders should ignore.
Where Technical Studies Fall Short
There are three categories of technical studies: trend-following indicators, oscillators and sentiment indicators. Trend-following indicators include moving averages, Moving Average Convergence-Divergence (MACD) and Directional Movement Index (ADX). A few of the more popular oscillators many traders use today are Stochastics, Rate-of-Change and the Commodity Channel Index (CCI). Sentiment indicators include Put-Call ratios and Commitment of Traders report data.
Technical studies like these do a good job of illuminating the way for traders, yet they each fall short for one major reason: they limit the scope of a trader's understanding of current price action and how it relates to the overall picture of a market. For example, let's say the MACD reading in XYZ stock is positive, indicating the trend is up. That's useful information, but wouldn't it be more useful if it could also help to answer these questions: Is this a new trend or an old trend? If the trend is up, how far will it go? Most technical studies simply don't reveal pertinent information such as the maturity of a trend and a definable price target -- but the Wave Principle does.
How Does the Wave Principle Improve Trading?
Here are five ways the Wave Principle improves trading:
1. Identifies Trend
The Wave Principle identifies the direction of the dominant trend. A five-wave advance identifies the overall trend as up. Conversely, a five-wave decline determines that the larger trend is down. Why is this information important? Because it is easier to trade in the direction of the dominant trend, since it is the path of least resistance and undoubtedly explains the saying, "the trend is your friend."
2. Identifies Countertrend
The Wave Principle also identifies countertrend moves. The three-wave pattern is a corrective response to the preceding impulse wave. Knowing that a recent move in price is merely a correction within a larger trending market is especially important for traders because corrections are opportunities for traders to position themselves in the direction of the larger trend of a market.
3. Determines Maturity of a Trend
As Elliott observed, wave patterns form larger and smaller versions of themselves. This repetition in form means that price activity is fractal, as illustrated in Figure 2-1. Wave (1) subdivides into five small waves, yet is part of a larger five-wave pattern. How is this information useful? It helps traders recognize the maturity of a trend. If prices are advancing in wave 5 of a five-wave advance for example, and wave 5 has already completed three or four smaller waves, a trader knows this is not the time to add long positions. Instead, it may be time to take profits or at least to raise protective stops.
4. Provides Price Targets
What traditional technical studies simply don't offer -- high-probability price targets -- the Wave Principle again provides. When R.N. Elliott wrote about the Wave Principle in Nature's Law, he stated that the Fibonacci sequence was the mathematical basis for the Wave Principle.
Elliott waves, both impulsive and corrective, adhere to specific Fibonacci proportions, as illustrated in Figure 2-2. For example, common objectives for wave 3 are 1.618 and 2.618 multiples of wave 1. In corrections, wave 2 typically ends near the .618 retracement of wave 1, and wave 4 often tests the .382 retracement of wave 3. These high-probability price targets allow traders to set profit-taking objectives or identify regions where the next turn in prices will occur.
5. Provides Specific Points of Ruin
At what point does a trade fail? Many traders use money management rules to determine the answer to this question, because technical studies simply don't offer one. Yet the Wave Principle does -- in the form of Elliott wave rules.
Rule 1: Wave 2 can never retrace more than 100% of wave 1.
Rule 2: Wave 4 may never end in the price territory of wave 1.
Rule 3: Out of the three impulse waves -- 1, 3 and 5 -- wave 3 can never be the shortest.
A violation of one or more of these rules implies that the operative wave count is incorrect. How can traders use this information? If a technical study warns of an upturn in prices, and the wave pattern is a second wave pullback, the trader knows specifically at what point the trade will fail -- a move beyond the origin of wave 1. That kind of guidance is difficult to come by without a framework like the Wave Principle.
Technical studies can pick out many trading opportunities, but the Wave Principle helps traders discern which ones have the highest probability of being successful. This is because the Wave Principle is the framework that provides history, current information and a peek at the future. When traders place their technical studies within this strong framework, they have a better basis for understanding current price action.
Don't miss the rest of the 14 most critical lessons that every trader should know. Download the free 45-page eBook The Best of Trader's Classroom.
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