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Technical Analysis 101 : Session 2 Stanley Yabroff Val Alekseyev

Technical Analysis 101 : Session 2 Stanley Yabroff Val Alekseyev. Session 2 . Trending Indicators Parabolic Indicator Moving Averages Ichimoku Clouds Elliot Waves Bollinger bands Average Directional Movement Indicator . Oscillators and Studies. Trend Following

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Technical Analysis 101 : Session 2 Stanley Yabroff Val Alekseyev

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  1. Technical Analysis 101 : Session 2 Stanley Yabroff Val Alekseyev

  2. Session 2 • Trending Indicators • Parabolic Indicator • Moving Averages • Ichimoku Clouds • Elliot Waves • Bollinger bands • Average Directional Movement Indicator

  3. Oscillators and Studies Trend Following MACD = Moving Average Convergence Divergence SAR = Parabolic Stop and Reverse Momentum Indicators RSI = Relative Strength Index Slow Stochastic = %K and %D ROC = Rate of Change Timing Elliot Wave

  4. Parabolic • Parabolic (Para) • Welles Wilder's Parabolic study is a time/price reversal system. The letters "SAR" stand for "stop and reverse" meaning that the position is reversed when the protective stop is hit. It is a trend-following system. As prices trend higher, the SARs tend to start out slower and then accelerate with the trend. In a downtrend, the same thing happens but in the opposite direction. The SAR numbers are calculated and available to the user for the following day based on the following equation: • SAR (tomorrow)= SAR (today) + AF(EP trade – SAR today) • where: AF begins at 0.020 (default value) and is increased by .02 each bar that a new high/low is made (depending on the trend direction) until a value of 0.20 is reached; EP = Extreme Price point for the trade made so far (if Long, EP is the extreme high price for the trade; if Short, EP is the extreme low price for the trade). • Thus, the Parabolic Time/Price System rides the trend until the SAR price is penetrated. Then the existing position is closed out and the reverse position is opened.

  5. Parabolic Stop and Reverse (SAR) Trend Following System Time/Price Reversal System

  6. Moving Averages • Trend following indicator • Moving average is a smoothing indicator • Moving averages are lagging indicators which do not work well in non-trending markets. Results in trading whipsaws

  7. Types of Moving Averages • Simple Moving Average • Most commonly used – arithmetic mean • Gives equal weight to each price • Weighted Moving Average • Puts greater weight on the most recent activity. For example in a 5 bar weighted moving average the last bar is multiplied by 5, the next to the last bar is multiplied by 4 and so on. The total value is divided by the sum of the multipliers, i.e. the divisor to the 5 bar WMA is 15 ( 5+4+3+2+1=15) • Exponential Moving Average • Also puts greater weight on the most recent activity. • Percentage weight is used t give greatest weight to most recent activity. • Smoothed Moving Average • Similar to the simple moving average except the previous smooth average value is subtracted rather than the oldest value in a simple moving average.

  8. Simple Moving Average • For the following example the PERIOD = 3. • The first value for a Simple Average is determined by formula SIMPLE. It is plotted on the chart at the third bar from the left side of the screen. • SIMPLE = (PRICE 1 + PRICE 2 + PRICE 3) / PERIOD • The next value would be plotted at the fourth bar from the left side of the screen. • SIMPLE = (PRICE 2 + PRICE 3 + PRICE 4)/PERIOD • Subsequent values would be determined by eliminating the oldest PRICE from the calculation, and including the next more recent PRICE. • Most widely used of all technical indicators

  9. Weighted Moving Average • The CQG weighted moving average assigns weights linearly, assigning greater weights to more recent data points. • Example: • A 21 period weighted moving average would be calculated as follows: • [21 * Close (0)] + [20 * Close (-1)] + [19 * Close (-2)] +…….[1 * Close (-20)]

  10. Exponential Moving Average Calculation • Exponential Moving Average Calculation • For the following example the PERIOD = 3 and the PRICE = CLOSE. • To calculate an Exponentially Smoothed Moving Average, (ESMA), the user must enter an integer value for the PERIOD or a decimal value Smoothing Constant. • A decimal value Smoothing Constant must be greater than 0.0 and less than or equal to 2.0. Example: .5 • When an integer value is entered for PERIOD, the smoothing constant is converted by the system to a decimal value using the following formula: • Smoothing Constant: • = 2 / (PERIOD + 1) • = 2 / (3+1) • = 2 / 4 • = .5 • The Exponentially Smoothed Moving Average, ESMA, may be calculated after the Smoothing Constant is known. • The first ESMA value is initially set to the first PRICE before the calculation begins. The first PRICE is from the leftmost bar on the screen. • The formula for calculating the ESMA is as follows: • ESMA = pESMA - ( Smoothing Constant X ( pESMA - PRICE ) ) • In the above formula: • ESMA is the new Exponentially Smoothed Moving Average. • pESMA is the Previous ESMA value. • PRICE is the value of the PRICE used for each bar, e.g. CLOSE • Note: A decimal value Smoothing Constant equal to 0.0 stops the ESMA from being displayed, however, an ESMA will appear if the integer 0 is entered without the decimal point.

  11. Smooth Moving Average • A Smoothed Moving Average is similar to a simple moving average. However, in a smoothed moving average, rather than subtracting the oldest value, as in a simple moving average, the previous smoothed average value is subtracted. • For the following example the PERIOD = 3. • First value is ready when Period first bars are accumulated. • First value SMOOTH(1) = AccumulatedPrice / Period where AccumulatedPrice is a sum of Period input prices. • Next value (say SMOOTH(N)) is calculated as: • SMOOTH(N) = SMOOTH(N-1) + (Price(N) - SMOOTH(N-1)) / Period • The next value would be plotted at the fourth bar from the left side of the screen. • SMOOTH2 = (PREVIOUS SUM - PREVIOUS AVG + PRICE 4) / PERIOD • For the second calculation of SMOOTH, PREVIOUS SUM is the sum of PRICE 1 + PRICE 2 + PRICE 3; and PREVIOUS AVG is the initial value of SMOOTH. • The next value would be plotted at the fifth bar from the left side of the screen. • SMOOTH = (PREVIOUS SUM - PREVIOUS AVG + PRICE 5) / PERIOD • Subsequent values would be determined by subtracting the PREVIOUS AVG from the PREVIOUS SUM, adding the next more recent PRICE, then dividing by the PERIOD. • Example: • If the values 1,2,3,4 and 5 were reported for the first 5 bars the 3-period smoothed moving averages for those bars would be calculated as follows: • (1+2 +3)/3 = 2 • This is the first value and would be plotted on the 3rd bar from the left. • (6 - 2 + 4)/3 = 2.67 • This second value would be plotted on the 4th bar from the left. • (8-2.67+5)/3 = 3.44 • This third value would be plotted on the 5th bar from the left.

  12. Single Moving Average Cross

  13. Two Moving Average Cross

  14. Three Moving Average Cross

  15. Ichimoku Cloud • Trend following tool. Used heavily by Japanese traders, especially currency traders. It is gaining popularity in the United States. • Ichimoku cloud system is comprised of five moving averages. • Kijun (Trend) Line: (highest high + lowest low)/2 calculated over last 26 periods • Tenkan (Signal) Line: (highest high + lowest low)/2 calculated over last 9 periods • Chikou (Lagging) Span: Most current closing price plotted 26 time periods back • Kumo (Cloud) • Senkou Span A: (Tenkan line + Kijun Line)/2 plotted 26 time periods ahead • Senkou Span B: (highest high + lowest low)/2 calculated over past 52 time periods, sent 26 periods ahead.

  16. Advantages of the Ichimoku Clouds • Trend identification • Displays multiple levels of support and resistance, both currently and projects into the future. • Comprised of moving averages with its strengths and weakness. • Thickness of the cloud represents both the strength of the support or resistance and volatility. • Thin cloud is little support or resistance . • Thick cloud is strong support or resistance. • Price closes above the cloud, the trend is up. • Price closes below the cloud, the trend is down. • Price closes in the cloud, the market is sideways.

  17. Ichimoku Cloud Chart

  18. Elliott Wave • A trend moves in five waves. • A trend can be in either direction. • A correction occurs in three waves. • Wave 1 • In a bullish trend wave 1 is accumulation stage and the very beginning of the new trend. Look for a bullish divergence between price and RSI. • Volume is declining as the previous trend comes to an end. • Wave 2 • First retracement, retraces wave 1 but does not violate the low of wave 1. This retracement should not retrace more than 61.8% of the original move.

  19. Ichimoku Cloud with Japanese Candlesticks

  20. Elliot Wave Elliot Wave: Impulse wave formation followed by a Corrective wave. Impulse wave: Three waves in the direction of the trend Corrective wave: Three waves against the trend

  21. Elliott Wave 2 • Wave 3 • Usually the longest, strongest wave in the direction of the trend. • Higher than wave 1. • Volume and open interest accelerates • Wave 4 • Countertrend trend wave. • Wave 4 should not go lower than the low of wave 2. • Wave 5 • Wave 5 is in the direction of the trend. • Wave 5 is either the longest, strongest wave or second to wave 3. • Wave 3 and Wave 5 are the strongest waves in the direction of the trend. • A wave • In a bull market, A wave is bearish.

  22. Elliott Wave 3 • Wave B • Wave B is an up wave. • Should not take out the high of Wave 5. • Wave C • Wave C is a down wave. • Should take out the low of Wave B. • Most often there is a 5 wave structure within the major 5 wave structure. • The placement of the wave identifiers moves if new highs or lows are made. They can’t be used in trade systems. • They are timing indicators and can identify which moves can be the ultimate high or low, but must be confirmed by other indicators such as RSI, MACD or slow stochastic. • Elliott Wave works well with the Imoku Clouds.

  23. Stan Yabroff stan@cqg.com Val Alekseyev valekseyev@cqg.com 1 800-525-7082 www.cqg.com

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