Technical Analysis for Beginners

[veluri1967]

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Dear Friends,

Welcome.

Its no wonder how a successful trader, is successful always and everytime.
Because his fundamental knowledge is STRONG and he keeps learning and refreshing them day in and day out.

In order to begin our successful trading, we need to strengthen our fundamentals first.

Fundamentals include study of trends, chart patterns, various technical indicators and finally a good trading strategy.

I will try to post these fundas one by one so that everyone especially beginners keep visiting the thread to refresh their fundas.

As the thread becomes voluminous, I will try to edit this post to include various topics covered in this thread so that we can have ready reckenor instead of going through allaround.

ADX

MACD (Just scroll down it is discussed in this same page)

Moving Average crossover (Just scroll down it is discussed in this same page)

Pivot Points (It is discussed in this same post, just scroll down)

Relative Strength Index (RSI) (just scroll down it is discussed in this same page)

Some tricks of fibonacci can be learnt here http://www.hardrightedge.com/wheel/hrefibtricks.htm

Is it make a sense?

Fibonacci trading strategy on a daily basis. Look at two key retracement lines: the 61.8% and 50% fib retracements. Call this zone the "hot zone". Pay close attention when prices retrace or pullback to this zone.

Uptrend strategy: In an uptrend, Let prices to retrace below the 50% fibonacci retracement but close above the 61.8% retracement. If the hot zone acts as a key support zone, enter a long position with a 3-5 tick stop below the 61.8% retracement line. Exit most of position at the previous swing high.

Downtrend strategy: In a downtrend, let price to retrace back to the 50% fibonacci retracement line but not close below the 61.8% retracement. Look for the hot zone to act as a key resistance level. Enter a short position using a 3-5 tick stop above the 61.8% retracement. Exit most of position at the previous swing low.

Just remember this: 61.8% for an uptrend & 50% for a downtrend. These are the two main levels.






My humble request to seniors to add and share their views on the indicator if any changes/improvements are needed.

Todays post is :-

Pivot Point Trading


You are going to love this lesson. Using pivot points as a trading strategy has been around for a long time and was originally used by floor traders. This was a nice simple way for floor traders to have some idea of where the market was heading during the course of the day with only a few simple calculations.

For beginners I would suggest this link before going further what I am going to say http://www.traderji.com/day-trading...-risk-reward-ratio-risk-less-profit-more.html (Thanks to Radha55)


The pivot point is the level at which the market direction changes for the day. Using some simple arithmetic and the previous days high, low and close, a series of points are derived. These points can be critical support and resistance levels.

The pivot level and levels calculated from that are collectively known as pivot levels.

Every day the market you are following has an open, high, low and a close for the day (some markets like forex are 24 hours but generally use 5pm EST as the open and close). This information basically contains all the data you need to calculate the pivot levels.



The reason pivot point trading is so popular is that pivot points are predictive as opposed to lagging. You use the information of the previous day to calculate potential turning points for the day you are about to trade (present day).

Because so many traders follow pivot points you will often find that the market reacts at these levels. This give you an opportunity to trade.

For Pivot calculator if you like then visit the following site(I personally use it on regular basis) :-

http://www.calloptionputoption.com/opivotpointcalc.html

Just by having the previous days high, low and close you eventually finish up with 7 points, 3 resistance levels, 3 support levels and the actual pivot point.

If the market opens above the pivot point then the bias for the day is for long trades as long as price remains above the pivot point. If the market opens below the pivot point then the bias for the day is for short trades as long as the market remains below the pivot point.

The three most important pivot points are R1, S1 and the actual pivot point.

The general idea behind trading pivot points is to look for a reversal or break of R1 or S1. By the time the market reaches R2,R3 or S2,S3 the market will already be overbought or oversold and these levels should be used for exits rather than entries.

A perfect set up would be for the market to open above the pivot level and then stall slightly at R1 then go on to R2. You would enter on a break of R1 with a target of R2 and if the market was really strong close half at R2 and target R3 with the remainder of your position.



This all looks pretty straight forward.

Unfortunately life is not that simple and we have to deal with each trading day the best way we can.


There are loads of ways to trade using pivot points but I shall walk you through a few of them and discuss why some are good in certain situations and why some are bad.

The Breakout Trade

At the beginning of the day we were below the pivot point, so our bias is for short trades. A channel formed so you would be looking for a break out of the channel, preferably to the downside. In this type of trade you would have your sell entry order just below the lower channel line with a stop order just above the upper channel line and a target of S1. The problem on this day was that, S1 was very close to the breakout level and there was just not enough meat in the trade. This cab be a good entry technique for you. Just because it was not suitable this day, does not mean it will not be suitable the next day.



The Pullback Trade

This is one of my favorite set ups. The market passes through S1 and then pulls back. An entry order is placed below support, which in this case was the most recent low before the pullback. A stop is then placed above the pullback (the most recent high - peak) and a target set for S2. The problem again, on this day was that the target of S2 was to close, and the market never took out the previous support, which tells us that the market sentiment is beginning to change.



Advanced

As I mentioned earlier, there are lots of ways to trade with pivot points. A more advanced method is to use the cross of two moving averages (post on moving averages will follow shortly)as a confirmation of a breakout. You can even use combinations of indicators to help you make a decision. It might be the cross of two averages and also MACD must be in buy mode.

When the market passed through S1 and then retraced to the S1 line again. It then formed a channel. At around this time we had a cross of the averages, MACD signaled buy and there was a breakout of the channel line. This gave a great signal to go long with a target of the original pivot line.

Mess around with a few of your favorite indicators to help determine an entry around a pivot level but remember the signal is a break of a level and the indicators are just confirmation.



We haven't even got into patterns around pivot levels or failures but that is not the point of this lesson. I just want to introduce another possible way for you to trade.

Good Trading


Yours
veluri1967
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[s.sriraam]

Good Start, Please continue............

 

[veluri1967]

:clapping:

After Pivot Point Trading, let me take this privilege to introduce you the most popular and powerful indicator MACD

Let us get in.

Moving Average Convergence-Divergence (MACD)​

History

(MACD) was originally constructed by Gerald Appel an analyst in New York. Originally designed for analysis of stock trends, it is now widely used in many markets.

MACD is constructed by making an average of the difference between two moving averages. The difference of the original two moving averages and the moving average of the difference can be plotted as two lines, one fast and one slow.

Uses

Most modern charting software now includes MACD as standard. Once selected to display in your charting software it normally shows up as two lines plotted on an open scale against the zero line. These two lines will normally be of different color or one line a solid line and the other a dotted line. Frequently used settings are 12 and 26 period exponential moving averages with 9 period exponential moving average as the signal line.

Although there are three moving averages mentioned you will only see two lines. The simplest method of use is when the two lines cross. If the faster signal line crosses above the slower line then a buy signal is generated and vice versa. It is also used as an overbought and oversold indicator. The higher above the zero both lines are the more overbought it becomes and the lower below the zero line both lines are the more oversold it becomes.

It may also lead to a stronger signal if the signal line crosses down when it is overbought and crosses up when it is oversold. The last common use of MACD is that of divergence.

If the MACD is making new lows and the price of the security is not making new lows that is one form of divergence (bullish divergence). Also, if the MACD has made a high and starts to head down but price continues up that is another type of divergence (bearish divergence) and may lead to an indication of a change in direction.

My Own Use Of MACD

I like to use the MACD as a trend indicator with parameters set at 8 and 18 period exponential moving averages with a 9 period exponential moving average as the signal line. All I am trying to do is establish a trend in a higher time period than the one I intend to trade.

If you were trading day charts you would be looking at the MACD on the weekly. If you were trading an hourly chart you might look at the MACD on the daily. As long as the signal line remains above or below the MACD line on the next higher time frame you know the trend is still in place.


PS :- Use MACD alongwith Bollinger Bands, RSI for better results.

Thanks
veluri1967:thumb::rofl:

 

[veluri1967]

Here is the guide on RSI (Relative Strength Index)

Tradingwith the RSI

Very basically, when trading the stock markets "buy" signals on the RSI are considered to be readings of 30 or less (the security is considered oversold) and "sell" signals are considered to be RSI values of 70 or greater (the security is considered overbought). Depending on the technician and price volatility, there are various other qualifiers and nuances that can be incorporated into a signal.

First Some History

Relative Strength Index was developed by J.Welles Wilder Jr. and first introduced in his book 'New Concepts In Technical Trading Systems'.

It is one of the most popular technical tools around and is plotted on a vertical scale of 0 to 100.

The 70% and 30% levels are used as warning signals. A relative strength index above 70% is considered overbought and below 30% is considered oversold.


An RSI above 70% is considered overbought and below 30% is considered oversold.

An overbought or oversold condition merely indicates that there is a high probability of a counter reaction. It is an indication that there may be an opportunity to buy or sell, but does not provide the final signal. RSI signals should always be used in conjunction with trend-reversal signals offered by the price itself.

Calculation

Relative Strength Index (RSI) measures the strength of all upward movement against the strength of all downward movement in a specified time frame.

The most common parameter for RSI is period 14, although users can pick their favorite period of time if they wish. It is one of the most popular oscillators that works well in range-bound market.

Signals

Tops and Bottoms

These are indicated when the readings go above 70 (top) and below 30 (bottom). RSI can form formations similar to Chart Formations. The RSI may form chart formations that may or may not appear on the actual bar chart e.g. you might see a head and shoulders formation on the RSI but not on the bar chart.

Failure Swings
When the RSI goes above 70 or below 30 this is a strong indication that the market is ready for a reversal.

Support and Resistance
It is sometimes more apparent that support or resistance is forming in the RSI than can be seen on the bar chart.

My Use Of RSI

My favorite use of RSI is that of divergence as suggested by Wilder himself.. When the security you are trading makes a new high and the RSI turns down that is bearish divergence.

The same is true of bullish divergence. When price makes a new low (red line) and the RSI turns up (blue line) that is bullish divergence.


We also prefer to see divergence at major tops and bottoms. That is to say, if we have been in a down trend for some time and price has gone past a reading of 20 on the RSI AND we see divergence then we are a lot more confident that price has in fact bottomed.

We don't like to use RSI as a sole trigger for a new position but rather like to use it in combination with other indicators to help build a picture.


In most cases of divergence the security makes a low as does the RSI, then the RSI begins to turn up but the security continues down.

We wait for the security to make a new low and the RSI to come down but not as low as the previous low and that is the point where action can be taken. The fact that the RSI has not dropped lower than its previous low and the price has, is the point of recognition.


If we also have a break of a trendline or it has reach a projection or some other confirming analysis then we would enter a trade. For the purposes of this illustration we will use a break of a trendline to confirm that trend direction has indeed changed.



Advanced

A more advanced method is to use Bollinger Bands for your target and exit strategy after your entry. Set RSI set at 14, and Bollinger Bands at 20.




Trading Rules (Going long):

Identify divergence between the security and RSI.
Confirm oversold conditions with a reading below 20 on the RSI.
Draw a trendline and enter when price breaks the trendline.
Exit when price retraces back to the middle Bollinger Band line.
Your stop loss will be whenever price hits the lower Bollinger Band line after your entry.

Conclusion

The RSI is a momentum indicator, or oscillator, that measures the relative internal strength of a market (not against another market or index).
As with all oscillators, RSI can provide early warning signals but should be used in conjunction with other indicators.
Divergences are the most important signal provided by RSI.


Happy & profitable trading

Thanks for being with me

veluri1967:thumb::rofl:

 

[veluri1967]

Thanks. With encouragement like u, I am delighted. I will do my best to educate fellow members on this thread. Thanks once again.

 

[veluri1967]

Dear S.Sriraam,

Thank you for your encouragement.
Please find additional posts i have created in the thread in continuation of earlier ones.

veluri1967:thumb:

 

[annu]

thanks veluri for starting this thread. its going to be very helpfull for the beginners like me.

 

[sachinhanswal]

I have gone through it really buddy its very good to get into technicals.........please be in touch sir........ I think u could be a good teacher for me............thank you........please keep teaching with the lessons.......I really need it........

 

[veluri1967]

Before understanding Bollinger Bands, a knowledge about moving averages is of paramount importance.

Definition, explanation and basics of moving averages is deliberately ommitted as the same can be learned by browsing any technical indicators site.

Think differently and BE A WINNER. Make exploration of basics by practising and observing.

So, friends, here is the next post.

A Different Type of Moving Average Cross ​

Virtually every trader has dabbled with or experimented with some sort of moving average. What I want to introduce you to in this lesson is a different sort of moving average cross method, which I have found to be very good at identifying short term trend changes.


As we know a moving average is normally plotted using the close of a bar e.g. if you were plotting a 3 period moving average, then you would add the last three closes and divide the total by three to get a simple moving average.

This is where I want you to think a little differently.

I have always been an advocate of taking traditional thinking and changing it around.

What if you used the open instead of the close? What if you used the close of one period of a moving average and the open of another?

First, most charting packages will allow you to use the open, high, low or close to plot a moving average.

I use a 5 period exponential moving average of the close and a 6 period exponential moving average of the open on daily, hourly charts. My experience shows that it catches the short term trend changes really nicely.

Of course you will go through periods of consolidation with any market and any moving average method you use will be whipsawed. To get around this you need some sort of filter or approach that helps you keep out of the low probability trades.

You could use ADX, Stochastic or MACD to help filter the noise but I also like to add a time frame.

To help identify better entry points you can drop down a few time frames to the 30 minute chart.

There are lots of ways to trade this but a neat little trick is to wait for the signal on a higher time frame and then drop down a few time frames and wait for a pullback.

The first signal after the pullback on the lower time frame is normally a pretty good entry point e.g. If there were a cross up on the large time frame then drop down to a lower time frame and wait for the market to retrace and then give another buy signal (cross up). The opposite is true for short signals.

Once you get the signal on the shorter time frame depending on where support is you can usually place your first stop loss under the nearest support area (valley). If the market begins to make progress you can move your stop so that it trails the market by moving your stop to just under the most recent support area.


Here I used only an exponential moving average but as said earlier experiment with different types of average such as weighted, smoothed or simple. You can also experiment with different lengths of moving average.

Happy Experimenting & Learning

Thanks for sparing your valuable time to be with me.

veluri1967:thumb::rofl:

 

[tvrssvk]

keep going----great job

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