Signals daily [1/2/2011]

GBP/USD  : SELL

	Value	Pair
Entry	1.6056	GBP/USD (Sell)
Stop Loss	1.6086
Take Profit	1.5996
High/Low 50pips	High

Read More

The Intelligent Investor: The Definitive Book On Value[MF]

Collins; Revised edition (July 1, 2003) | ISBN: 0060555661 | English | PDF | 640 pages | 1.37 MB

The Intelligent Investor by Benjamin Graham published in 1949, is a widely acclaimed book on investing. Famous investor and billionaire Warren Buffett describes it as "by far the best book on investing ever written", a sentiment echoed by other Graham disciples such as Irving Kahn and Walter Schloss.
Download Here

Read More

Energy Trading and Investing Trading, Risk Management and Structuring Deals in the Energy Market

Davis Edwards - Energy Trading and Investing: Trading, Risk Management and Structuring Deals in the Energy Market
Publisher: McGraw-Hill | 2009-10-13 | ISBN: 0071629068 | P | 400 pages | 2.92 MB

“The essential training manual for anyone who expects to profi tably engage the energy market while avoiding the devils lurking in the details.”
Kurt Yeager, former President and CEO of the Electric Power Research Institute and coauthor of Perfect Power
Shrinking fossil fuel supplies, volatile prices, deregulation, and environmental conservation have transformed the energy market into a major arena for making money. In response, an unprecedented amount of capital and investment manpower has fl ooded into the energy market. Older utilities are finding that their quiet, safe business has changed dramatically in a short period of time.
Now, Energy Trading and Investing provides a big-picture introduction to the industry along with the trading know-how and fi nancial details that every market participant needs for success.
This hands-on guidebook covers all types of energy markets—from the big-three markets of electricity, natural gas, and oil to the growing markets for liquefied natural gas, emissions, and alternative energy. It provides useful information on the interdependence of the different energy markets, who the major players are, and how Wall Street trades energy products.
Energy Trading and Investing features:
An overview of the entire energy market
In-depth descriptions of all of the major energy commodities
Financially oriented discussions of how chemistry, physics, accounting, and option pricing affect trading
Primers on load forecasting, tolling agreements, natural gas storage, and more
A practical introduction to risk management
Written by a pioneering quant in the energy market, Energy Trading and Investing provides a highly disciplined and organized approach to profi ting from energy investments. This potent combination of detailed, up-to-date information alongside expert know-how thoroughly prepares you to invest and trade with confi dence in the energy market.
If you’re a serious trader, you need to understand the energy markets, and Energy Trading and Investing is the only book you need to trade successfully in this growing sector.
Download Here

Read More

Trade the Trader: Know Your Competition and Find Your Edge for Profitable Trading By Quint Tatro

Trade the Trader: Know Your Competition and Find Your Edge for Profitable Trading By Quint Tatro
Publisher: FT Press 2010 | 224 Pages | ISBN: 0137067089 | P | 2 MB

Have you realized yet that when you trade you are not just trading stocks? You’re trading against expert traders who care about only one thing: taking your money. Most traders fail miserably because they never grasp this #1 reality of trading. Successful trading takes much more than just opening an online account and learning a few basic technical analysis patterns.

In Trade the Trader, top trader and hedge fund manager Quint Tatro shows you how to build a solid strategy to win consistently in the extremely competitive world of trading, where sometimes you can’t just trade the stocks before you, but you must trade the trader who’s trading against you. You’ll master the real psychology and gamesmanship of trading and learn how to outsmart your competition at every step--from choosing target investments to knowing when to move.

• Know your adversaries: “smart” money and “dumb”
• Beating the fools, surviving the geniuses
• Get beyond the basics with charts and patterns
• What amateur chart readers know--and how to play several moves ahead of them
• Plan your trade; trade your plan
• Optimize your entire trade, from entry point through exit strategy
• Be ready if you’re wrong
• Implement the disciplined stop system that’s crucial to consistent success
• Master the fine art of taking profits
• Expect gains, realize them, and keep them

Download HERE

Read More

Stochastic Oscillator

Developed by George C. Lane in the late 1950s, the Stochastic Oscillator is a momentum indicator that shows the location of the close relative to the high-low range over a set number of periods. According to an interview with Lane, the Stochastic Oscillator "doesn't follow price, it doesn't follow volume or anything like that. It follows the speed or the momentum of price. As a rule, the momentum changes direction before price." As such, bullish and bearish divergences in the Stochastic Oscillator can be used to foreshadow reversals. This was the first, and most important, signal that Lane identified. Lane also used this oscillator to identify bull and bear set-ups to anticipate a future reversal. Because the Stochastic Oscillator is range bound, is also useful for identifying overbought and oversold levels.

Calculation

%K = (Current Close - Lowest Low)/(Highest High - Lowest Low) * 100
%D = 3-day SMA of %K

Lowest Low = lowest low for the look-back period
Highest High = highest high for the look-back period
%K is multiplied by 100 to move the decimal point two places

The default setting for the Stochastic Oscillator is 14 periods, which can be days, weeks, months or an intraday timeframe. A 14-period %K would use the most recent close, the highest high over the last 14 periods and the lowest low over the last 14 periods. %D is a 3-day simple moving average of %K. This line is plotted alongside %K to act as a signal or trigger line.

Click here to download this spreadsheet example.

Interpretation

The Stochastic Oscillator measures the level of the close relative to the high-low range over a given period of time. Assume that the highest high equals 110, the lowest low equals 100 and the close equals 108. The high-low range is 10, which is the denominator in the %K formula. The close less the lowest low equals 8, which is the numerator. 8 divided by 10 equals .80 or 80%. Multiply this number by 100 to find %K %K would equal 30 if the close was at 103 (.30 x 100). The Stochastic Oscillator is above 50 when the close is in the upper half of the range and below 50 when the close is in the lower half. Low readings (below 20) indicate that price is near its low for the given time period. High readings (above 80) indicate that price is near its high for the given time period. The IBM example above shows three 14-day ranges (yellow areas) with the closing price at the end of the period (red dotted) line. The Stochastic Oscillator equals 91 when the close was at the top of the range. The Stochastic Oscillator equals 15 when the close was near the bottom of the range. The close equals 57 when the close was in the middle of the range.

Fast, Slow or Full

There are three versions of the Stochastic Oscillator available on SharpCharts. The Fast Stochastic Oscillator is based on George Lane's original formulas for %K and %D. %K in the fast version that appears rather choppy. %D is the 3-day SMA of %K. In fact, Lane used %D to generate buy or sell signals based on bullish and bearish divergences. Lane asserts that a %D divergence is the "only signal which will cause you to buy or sell". Because %D in the Fast Stochastic Oscillator is used for signals, the Slow Stochastic Oscillator was introduced to reflect this emphasis. The Slow Stochastic Oscillator smooths %K with a 3-day SMA, which is exactly what %D is in the Fast Stochastic Oscillator. Notice that %K in the Slow Stochastic Oscillator equals %D in the Fast Stochastic Oscillator (chart 2).

Fast Stochastic Oscillator:

• Fast %K = %K basic calculation
• Fast %D = 3-period SMA of Fast %K

Slow Stochastic Oscillator:

• Slow %K = Fast %K smoothed with 3-period SMA
• Slow %D = 3-period SMA of Slow %K

The Full Stochastic Oscillator is a fully customizable version of the Slow Stochastic Oscillator. Users can set the look-back period, the number of periods to slow %K and the number of periods for the %D moving average. The default parameters were used in these examples: Fast Stochastic Oscillator (14,3), Slow Stochastic Oscillator (14,3) and Full Stochastic Oscillator (14,3,3).
Full Stochastic Oscillator:

• Full %K = Fast %K smoothed with X-period SMA
• Full %D = X-period SMA of Full %K

Overbought Oversold

As a bound oscillator, the Stochastic Oscillator makes it easy to identify overbought and oversold levels. The oscillator ranges from zero to one hundred. No matter how fast a security advances or declines, the Stochastic Oscillator will always fluctuate within this range. Traditional settings use 80 as the overbought threshold and 20 as the oversold threshold. These levels can be adjusted to suit analytical needs and security characteristics. Readings above 80 for the 20-day Stochastic Oscillator would indicate that the underlying security was trading near the top of its 20-day high-low range. Readings below 20 occur when a security is trading at the low end of its high-low range.
Before looking at some chart examples, it is important to note that overbought readings are not necessarily bearish. Securities can become overbought and remain overbought during a strong uptrend. Closing levels that are consistently near the top of the range indicate sustained buying pressure. In a similar vein, oversold readings are not necessarily bullish. Securities can also become oversold and remain oversold during a strong downtrend. Closing levels consistently near the bottom of the range indicate sustained selling pressure. It is, therefore, important to identify the bigger trend and trade in the direction of this trend. Look for occasional oversold readings in an uptrend and ignore frequent overbought readings. Similarly, look for occasional overbought readings in a strong downtrend and ignore frequent oversold readings.
Chart 3 shows Yahoo! (YHOO) with the Full Stochastic Oscillator (20,5,5). A longer look-back period (20 days versus 14) and longer moving averages for smoothing (5 versus 3) produce a less sensitive oscillator with fewer signals. Yahoo was trading between 14 and 18 from July 2009 until April 2010. Such trading ranges are well suited for the Stochastic Oscillator. Dips below 20 warn of oversold conditions that could foreshadow a bounce. Moves above 80 warn of overbought conditions that could foreshadow a decline. Notice how the oscillator can move above 80 and remain above 80 (orange highlights). Similarly, the oscillator moved below 20 and sometimes remained below 20. The indicator is both overbought AND strong when above 80. A subsequent move below 80 is needed to signal some sort of reversal or failure at resistance (red dotted lines). Conversely, the oscillator is both oversold and weak when below 20. A move above 20 is needed to show an actual upturn and successful support test (green dotted lines).

Chart 4 shows Crown Castle (CCI) with a breakout in July to start an uptrend. The Full Stochastic Oscillator (20,5,5) was used to identify oversold readings. Overbought readings were ignored because the bigger trend was up. Trading in the direction of the bigger trend improves the odds. The Full Stochastic Oscillator moved below 20 in early September and early November. Subsequent moves back above 20 signaled an upturn in prices (green dotted line) and continuation of the bigger uptrend.

Chart 5 shows Autozone (AZO) with a support break in May 2009 that started a downtrend. With a downtrend in force, the Full Stochastic Oscillator (10,3,3) was used to identify overbought readings to foreshadow a potential reversal. Oversold readings were ignored because of the bigger downtrend. The shorter look-back period (10 versus 14) increases the sensitivity of the oscillator for more overbought readings. For reference, the Full Stochastic Oscillator (20,5,5) is also shown. Notice that this less sensitive version did not become overbought in August, September and October. It is sometimes necessary to increase sensitivity to generate signals.

Bull Bear Divergences

Divergences form when a new high or low in price is not confirmed by the Stochastic Oscillator. A bullish divergence forms when price records a lower low, but the Stochastic Oscillator forms a higher low. This shows less downside momentum that could foreshadow a bullish reversal. A bearish divergence forms when price records a higher high, but the Stochastic Oscillator forms a lower high. This shows less upside momentum that could foreshadow a bearish reversal. Once a divergence takes hold, chartists should look for a confirmation to signal an actual reversal. A bearish divergence can be confirmed with a support break on the price chart or a Stochastic Oscillator break below 50, which is the centerline. A bullish divergence can be confirmed with a resistance break on the price chart or a Stochastic Oscillator break above 50.
50 is an important level to watch. The Stochastic Oscillator moves between zero and one hundred, which makes 50 the centerline. Think of it as the 50 yard line in football. The offense has a higher chance of scoring when it crosses the 50 yard line. The defense has an edge as long as it prevents the offense from crossing the 50 yard line. A Stochastic Oscillator cross above 50 signals that prices are trading in the upper half of their high-low range for the given look-back period. This suggests that the cup is half full. Conversely, a cross below 50 means prices are trading in the bottom half of the given look-back period. This suggests that the cup is half empty.
Chart 6 shows International Gaming Tech (IGT) with a bullish divergence in February-March 2010. Notice how the stock moved to a new low, but the Stochastic Oscillator formed a higher low. There are three steps to confirming this higher low. The first is a signal line cross and/or move back above 20. A signal line cross occurs when %K (black) crosses %D (red). This provides the earliest entry possible. The second is a move above 50, which puts prices in the upper half of the Stochastic range. The third is a resistance breakout on the price chart. Notice how the Stochastic Oscillator moved above 50 in late March and remained above 50 until late May.

Chart 7 shows Kohls (KSS) with a bearish divergence in April 2010. The stock moved to higher highs in early and late April, but the Stochastic Oscillator peaked in late March and formed lower highs. The signal line crosses and moves below 80 did not provide good early signals in this case because KSS kept moving higher. The Stochastic Oscillator moved below 50 for the second signal and the stock broke support for the third signal. As KSS shows, early signals are not always clean and simple. Signal line crosses, moves below 80 and moves above 20 are frequent and prone to whipsaw. Even after KSS broke support and the Stochastic Oscillator moved below 50, the stock bounced back above 57 and the Stochastic Oscillator bounced back above 50 before the stock continued sharply lower.

Bull Bear Set-ups

George Lane identified another form of divergence to predict bottoms or tops. A bull set-up is basically the inverse of a bullish divergence. The underlying security forms a lower high, but the Stochastic Oscillator forms a higher high. Even though the stock could not exceed its prior high, the higher high in the Stochastic Oscillator shows strengthening upside momentum. The next decline is then expected to result in a tradable bottom. Chart 8 shows Network Appliance (NTAP) with a bull set-up in June 2009. The stock formed a lower high as the Stochastic Oscillator forged a higher high. This higher high shows strength in upside momentum. Remember that this is a set-up, not a signal. The set-up foreshadows a tradable low in the near future. NTAP declined below its June low and the Stochastic Oscillator moved below 20 to become oversold. Traders could have acted when the Stochastic Oscillator moved above its signal line, above 20 or above 50. Alternatively, NTAP subsequently broke resistance with a strong move.

A bear set-up occurs when the security forms a higher low, but the Stochastic Oscillator forms a lower low. Even though the stock held above its prior low, the lower low in the Stochastic Oscillator shows increasing downside momentum. The next advance is expected to result in an important peak. Chart 9 shows Motorola (MOT) with a bear set-up in November 2009. The stock formed a higher low in late-November and early December, but the Stochastic Oscillator formed a lower low with a move below 20. This showed strong downside momentum. The subsequent bounce did not last long as the stock quickly peaked. Notice that the Stochastic Oscillator did not make it back above 80 and turned down below its signal line in mid December.

Conclusions

While momentum oscillators are best suited for trading ranges, they can also be used with securities that trend, provided the trend takes on a zigzag format. Pullbacks are part of uptrends that zigzag higher. Bounces are part of downtrends that zigzag lower. In this regard, the Stochastic Oscillator can be used to identify opportunities in harmony with the bigger trend.
The indicator can also be used to identify turns near support or resistance. Should a security trade near support with an oversold Stochastic Oscillator, look for a break above 20 to signal an upturn and successful support test. Conversely, should a security trade near resistance with an overbought Stochastic Oscillator, look for a break below 80 to signal a downturn and resistance failure.
The settings on the Stochastic Oscillator depend on personal preferences, trading style and timeframe. A shorter look-back period will produce a choppy oscillator with many overbought and oversold readings. A longer look-back period will provide a smoother oscillator with fewer overbought and oversold readings.
Like all technical indicators, it is important to use the Stochastic Oscillator in conjunction with other technical analysis tools. Volume, support/resistance and breakouts can be used to confirm or refute signals produced by the Stochastic Oscillator.

Read More

Average True Range (ATR)

Developed by J. Welles Wilder, the Average True Range (ATR) is an indicator that measures volatility. As with most of his indicators, Wilder designed ATR with commodities and daily prices in mind. Commodities are frequently more volatile than stocks. They were are often subject to gaps and limit moves, which occur when a commodity opens up or down its maximum allowed move for the session. A volatility formula based only on the high-low range would fail to capture volatility from gap or limit moves. Wilder created Average True Range to capture this "missing" volatility. It is important to remember that ATR does not provide an indication of price direction, just volatility.
Wilder features ATR in his 1978 book, New Concepts in Technical Trading Systems. This book also includes the Parabolic SAR, RSI and the Directional Movement Concept (ADX). Despite being developed before the computer age, Wilder's indicators have stood the test of time and remain extremely popular.

True Range

Wilder started with a concept called True Range (TR), which is defined as the greatest of the following:

• Current High less the current Low
• Current High less the previous Close (absolute value)
• Current Low less the previous Close (absolute value)

Absolute values are used to insure positive numbers. After all, Wilder was interested in measuring the distance between two points, not the direction. If the current high-low range is large, chances are it will be used as the True Range. If the current high-low range is small, one of the other two methods would likely be used to calculate the True Range. The last two possibilities usually arise when the previous close is greater than the current high (signaling a potential gap down or limit move) or the previous close is lower than the current low (signaling a potential gap up or limit move). The high-low range is used as the TR for day one because it is impossible to use the previous close for the first day.

Example A: A small high/low range formed after a gap up. The TR equals the absolute value of the difference between the current high and the previous close.
Example B: A small high/low range formed after a gap down. The TR equals the absolute value of the difference between the current low and the previous close.
Example C: Even though the current close is within the previous high/low range, the current high/low range is quite small. In fact, it is smaller than the absolute value of the difference between the current high and the previous close, which is used to value the TR.

Calculation

Typically, the Average True Range (ATR) is based on 14 periods and can be calculated on an intraday, daily, weekly or monthly basis. For this example, the ATR will be based on daily data. Because there must be a beginning, the first TR value is simply the High minus the Low, and the first 14-day ATR is the average of the daily TR values for the last 14 days. After that, Wilder sought to smooth the data by incorporating the previous period's ATR value.

Current ATR = [(Prior ATR x 13) + Current TR] / 14

  - Multiply the previous 14-day ATR by 13.
  - Add the most recent day's TR value.
  - Divide the total by 14

Click here for an Excel Spreadsheet showing the start of an ATR calculation for QQQQ.
In the Spreadsheet example, the first True Range value (.91) equals the High minus the Low (yellow cells). The first 14-day ATR value (.56)) was calculated by finding the average of the first 14 True Range values (blue cell). Subsequent ATR values were smoothed using the formula above. The spreadsheet values correspond with the yellow area on the chart below. Notice how ATR surged as QQQQ plunged in May with many long candlesticks.

For those trying this at home, a few caveats apply. First, ATR values depend on where you begin. The first True Range value is simply the current High minus the current Low and the first ATR is an average of the first 14 True Range values. The real ATR formula does not kick in until day 15. Even so, the remnants of these first two calculations linger to slightly affect ATR values. Spreadsheet values for a small subset of data may not match exactly with what is seen on the price chart. Decimal rounding can also slightly affect ATR values.

Absolute ATR

ATR is based on the True Range, which uses absolute price changes. As such, ATR reflects volatility as absolute level. In other words, ATR is not shown as a percentage of the current close. This means low priced stocks will have lower ATR values than high price stocks. For example, a $20-30 security will have much lower ATR values than a $200-300 security. Because of this, ATR values are not comparable. Even large price movements for a single security, such as a decline from 70 to 20, can make long-term ATR comparisons impractical. Chart 4 shows Google with double digit ATR values and chart 5 shows Microsoft with ATR values below 1. Despite different values, their ATR lines have similar shapes.

Conclusions

ATR is not a directional indicator, such as MACD or RSI. Instead, ATR is a unique volatility indicator that reflects the degree of interest or disinterest in a move. Strong moves, in either direction, are often accompanied by large ranges, or large True Ranges. This is especially true at the beginning of a move. Uninspiring moves can be accompanied by relatively narrow ranges. As such, ATR can be used to validate the enthusiasm behind a move or breakout. A bullish reversal with an increase in ATR would show strong buying pressure and reinforce the reversal. A bearish support break with an increase in ATR would show strong selling pressure and reinforce the support break.

Read More

Commodity Channel Index (CCI)

Developed by Donald Lambert, the Commodity Channel Index (CCI) was designed to identify cyclical turns in commodities. The assumption behind the indicator is that commodities (or stocks or bonds) move in cycles, with highs and lows coming at periodic intervals. Lambert recommended using 1/3 of a complete cycle (low to low or high to high) as a time frame for the CCI. (Note: Determination of the cycle's length is independent of the CCI.) If the cycle runs 60 days (a low about every 60 days), then a 20-day CCI would be recommended. For the purpose of this example, a 20-day CCI is used.

Calculation

There are 4 steps involved in the calculation of the CCI:

1. Calculate the last period's Typical Price (TP) = (H+L+C)/3 where H = high, L = low, and C = close.
2. Calculate the 20-period Simple Moving Average of the Typical Price (SMATP).
3. Calculate the Mean Deviation. First, calculate the absolute value of the difference between the last period's SMATP and the typical price for each of the past 20 periods. Add all of these absolute values together and divide by 20 to find the Mean Deviation.
4. The final step is to apply the Typical Price (TP), the Simple Moving Average of the Typical Price (SMATP), the Mean Deviation and a Constant (.015) to the following formula:

CCI = ( Typical Price - SMATP ) / ( .015 X Mean Deviation )

(Click here to download an Excel spreadsheet that contains a example of the CCI being calculated.)

For scaling purposes, Lambert set the constant at .015 to ensure that approximately 70 to 80 percent of CCI values would fall between -100 and +100. The CCI fluctuates above and below zero. The percentage of CCI values that fall between +100 and -100 will depend on the number of periods used. A shorter CCI will be more volatile with a smaller percentage of values between +100 and -100. Conversely, the more periods used to calculate the CCI, the higher the percentage of values between +100 and -100.
Lambert's trading guidelines for the CCI focused on movements above +100 and below -100 to generate buy and sell signals. Because about 70 to 80 percent of the CCI values are between +100 and -100, a buy or sell signal will be in force only 20 to 30 percent of the time. When the CCI moves above +100, a security is considered to be entering into a strong uptrend and a buy signal is given. The position should be closed when the CCI moves back below +100. When the CCI moves below -100, the security is considered to be in a strong downtrend and a sell signal is given. The position should be closed when the CCI moves back above -100.
Since Lambert's original guidelines, traders have also found the CCI valuable for identifying reversals. The CCI is a versatile indicator capable of producing a wide array of buy and sell signals.

• CCI can be used to identify overbought and oversold levels. A security would be deemed oversold when the CCI dips below -100 and overbought when it exceeds +100. From oversold levels, a buy signal might be given when the CCI moves back above -100. From overbought levels, a sell signal might be given when the CCI moved back below +100.

• As with most oscillators, divergences can also be applied to increase the robustness of signals. A positive divergence below -100 would increase the robustness of a signal based on a move back above -100. A negative divergence above +100 would increase the robustness of a signal based on a move back below +100.

• Trend line breaks can be used to generate signals. Trend lines can be drawn connecting the peaks and troughs. From oversold levels, an advance above -100 and trend line breakout could be considered bullish. From overbought levels, a decline below +100 and a trend line break could be considered bearish.

Traders and investors use the CCI to help identify price reversals, price extremes and trend strength. As with most indicators, the CCI should be used in conjunction with other aspects of technical analysis. CCI fits into the momentum category of oscillators. In addition to momentum, volume indicators and the price chart may also influence a technical assessment.

Example

The 20-day CCI for Brooktrout (BRKT) provides an example using Lambert's guidelines. Even though a few signals are good, using crosses above and below +100/-100 resulted in plenty of whipsaws. In January, the stock broke resistance at 20, and proceeded to double in the next few weeks. The CCI moved above and below +100 several times, but the stock remained in a strong uptrend. The CCI did manage to remain above +50 for about 7 weeks (blue oval), but the whipsaws below +100 could have caused an early exit. Whipsaws do not make an indicator bad. However, traders and investors should learn to use the CCI in conjunction with other indicators and chart analysis. In addition, various time frames for the CCI should be tested, and you should test buy and sell points, as well. What works for one stock may not necessarily work for another stock. For Brooktrout, a buy point on a cross above and below +50 may have worked better.

Read More

Parabolic SAR

Developed by Welles Wilder, the Parabolic SAR refers to a price and time based trading system. Wilder called this the "Parabolic Time/Price System". SAR stands for "stop and reverse", which is the actual indicator used in the system. SAR trails price as the trend extends over time. The indicator is below prices when prices are rising and above prices when prices are falling. In this regard, the indicator stops and reverses when the price trend reverses and breaks above or below the indicator.
Wilder introduced the Parabolic Time/Price System in his 1978 book, New Concepts in Technical Trading Systems. This book also includes RSI, Average True Range and the Directional Movement Concept (ADX). Despite being developed before the computer age, Wilder's indicators have stood the test of time and remain extremely popular.

Calculation

Calculation of SAR is complex with if/then variables that make it difficult to put in a spreadsheet. Feel free to skip to the interpretation section! These examples will provide a general idea of how SAR is calculated. Because the formulas for rising and falling SAR are different, it is easier to divide the calculation into two parts. The first calculation covers rising SAR and the second covers falling SAR.

Rising SAR

Prior SAR: The SAR value for the previous period. 

Extreme Point (EP): The highest high of the current downtrend. 

Acceleration Factor (AF): Starting at .02, AF increases by .02 each 
time the extreme point makes a new high. AF can reach a maximum 
of .20, no matter how long the uptrend extends. 

Current SAR = Prior SAR + Prior AF(Prior EP - Prior SAR)
9-Feb-10 SAR = 43.56 = 43.84 + .16(42.07 - 43.84)

The Acceleration Factor is multiplied by the difference between the 
Extreme Point and the prior period's SAR. This is then added to the 
prior period's SAR. SAR can never be above the prior period's low or 
the current low. Should SAR be below one of these, use the lowest 
of the two for SAR. 

Falling SAR

Prior SAR: The SAR value for the previous period. 

Extreme Point (EP): The lowest low of the current downtrend. 

Acceleration Factor (AF): Starting at .02, AF increases by .02 each 
time the extreme point makes a new low. AF can reach a maximum of .20, 
no matter how long the downtrend extends. 

Current SAR = Prior SAR - Prior AF(Prior SAR - Prior EP)
13-Apr-10 SAR = 48.28 = 48.13 - .14(48.13 - 49.20)

The Acceleration Factor is multiplied by the difference between the 
Prior period's SAR and the Extreme Point. This is then subtracted 
from the prior period's SAR. SAR can never be below the prior 
period's high or the current high. Should SAR be below one of these, 
use the highest of the two for SAR. 

Interpretation

SAR follows price and can be considered a trend following indicator. Once a downtrend reverses and starts up, SAR follows prices like a trailing stop. The stop continuously rises as long as the uptrend remains in place. In other words, SAR never decreases in an uptrend and continuously protects profits as prices advance. The indicator acts as a guard against the propensity to lower a stop-loss. Once price stops rising and reverses below SAR, a downtrend starts and SAR is above the price. SAR follows prices lower like a trailing stop. The stop continuously falls as long as the downtrend extends. Because SAR never rises in a downtrend, it continuously protects profits on short positions.

Step Increments

The Acceleration Factor (AF), which is also referred to as the Step, dictates SAR sensitivity. SharpCharts users can set the Step and the Maximum Step. As shown in the spreadsheet example, the Step is a multiplier that influences the rate-of-change in SAR. That is why it is referred to as the Acceleration Factor. Step gradually increases as the trend extends until it hits a maximum. SAR sensitivity can be decreased by decreasing the Step. A lower step moves SAR further from price, which makes a reversal less likely.
SAR sensitivity can be increased by increasing the step. A higher step moves SAR closer to the price action, which makes a reversal more likely. The indicator will reverse too often if the step is set too high. This will produce whipsaws and fail to capture the trend. Chart 6 shows IBM with SAR (.01, .20). The step is .01 and the Maximum Step is .20. Chart 7 shows IBM with a higher Step (.03). SAR is more sensitive in chart 7 because there are more reversals. This is because the Step is higher in chart 7 (.03) than chart 6 (.01).

Maximum Step

The sensitivity of the indicator can also be adjusted using the Maximum Step. While the Maximum Step can influence sensitivity, the Step carries more weight because it sets the incremental rate-of-increase as the trend develops. Also note that increasing the Step insures that the Maximum Step will be hit quicker when a trend develops. Chart 8 shows Best Buy (BBY) with a Maximum Step (.10), which is lower than the default setting (.20). This lower Maximum Step decreases the sensitivity of the indicator and produces fewer reversals. Notice how this setting caught a two month downtrend and a subsequent two month uptrend. Chart 9 shows BBY with a higher Maximum Step (.20). This higher reading produced extra reversals in early February and early April.

Conclusions

The Parabolic SAR works best with trending securities, which occur roughly 30% of the time according to Wilder's estimates. This means the indicator will be prone to whipsaws over 50% of the time or when a security is not trending. After all, SAR is designed to catch the trend and follow it like a trailing stop. As with most indicators, the signal quality depends on the settings and the characteristics of the underlying security. The right settings combined with decent trends can produce a great trading system. The wrong settings will result in whipsaws, losses and frustration. There is no golden rule or one-size-fits-all setting. Each security should be evaluated based on its own characteristics. Parabolic SAR should also be used in conjunction with other indicators and technical analysis techniques. For example, Wilder's Average Directional Index can be used to estimate the strength of the trend before considering signals.

Read More

Bollinger Bands

Developed by John Bollinger, Bollinger Bands are volatility bands placed above and below a moving average. Volatility is based on the standard deviation, which changes a volatility increase and decreases. The bands automatically widen when volatility increases and narrow when volatility decreases. This dynamic nature of Bollinger Bands also means they can be used on different securities with the standard settings. For signals, Bollinger Bands can be used to identify M-Tops and W-Bottoms or to determine the strength of the trend. Signals derived from narrowing BandWidth are discussed in the chart school article on BandWidth.

SharpCharts Calculation

* Middle Band = 20-day simple moving average (SMA)
  * Upper Band = 20-day SMA + (20-day standard deviation of price x 2) 
  * Lower Band = 20-day SMA - (20-day standard deviation of price x 2)

Click here for download this spreadsheet example.
Bollinger Bands consist of a middle band with two outer bands. The middle band is a simple moving average that is usually set at 20 periods. A simple moving average is used because a simple moving average is also used in the standard deviation formula. The look-back period for the standard deviation is the same as for the simple moving average. The outer bands are usually set 2 standard deviations above and below the middle band.

Settings can be adjusted to suit the characteristics of particular securities or trading styles. Bollinger recommends making small incremental adjustments to the standard deviation multiplier. Changing the number of periods for the moving average also affects the number of periods used to calculate the standard deviation. Therefore, only small adjustments are required for the standard deviation multiplier. An increase in the moving average period would automatically increase the number of periods used to calculate the standard deviation and would also warrant an increase in the standard deviation multiplier. With a 20-day SMA and 20-day Standard Deviation, the standard deviation multiplier is set at 2. Bollinger suggests increasing the standard deviation multiplier to 2.1 for a 50-period SMA and decreasing the standard deviation multiplier to 1.9 for a 10-period SMA.

Signal: W-Bottoms

W-Bottoms were part of Arthur Merrill's work that identified 16 patterns with a basic W shape. Bollinger uses these various W patterns with Bollinger Bands to identify W-Bottoms. A "W-Bottom" forms in a downtrend and involves two reaction lows. In particular, Bollinger looks for W-Bottoms where the second low is lower than the first, but holds above the lower band. There are four steps to confirm a W-Bottom with Bollinger Bands. First, a reaction low forms. This low is usually, but not always, below the lower band. Second, there is a bounce towards the middle band. Third, there is a new price low in the security this low holds above the lower band. The ability to hold above the lower band on the test shows less weakness on the last decline. Fourth, the pattern is confirmed with a strong move off the second low and a resistance break.

Chart 2 shows Nordstrom (JWN) with a W-Bottom in January-February 2010. First, the stock formed a reaction low in January (black arrow) and broke below the lower band. Second, there was a bounce back above the middle band. Third, the stock moved below its January low and held above the lower band. Even though the 5-Feb spike low broke the lower band, Bollinger Bands are calculated using closing prices so signals should also be based on closing prices. Fourth, the stock surged with expanding volume in late February and broke above the early February high. Chart 3 shows Sandisk with a smaller W-Bottom in July-August 2009.

Signal: M-Tops

M-Tops were also part of Arthur Merrills work that identified 16 patterns with a basic M shape. Bollinger uses these various M patterns with Bollinger Bands to identify M Bottoms. According to Bollinger, tops are usually more complicated and drawn out than bottoms. Double tops, head-and-shoulders patterns and diamonds represent evolving tops.
In its most basic form, an M-Top is similar to a double top. However, the reaction highs are not always equal. The first high can be higher or lower than the second high. Bollinger suggests looking for signs of non-confirmation when a security is making new highs. This is basically the opposite of the W-Bottom. A non-confirmation occurs with three steps. First, a security forges a reaction high above the upper band. Second, there is a pullback towards the middle band. Third, prices move above the prior high, but fail to reach the upper band. This is a warning sign. The inability of the second reaction high to reach the upper band shows waning momentum, which can foreshadow a trend reversal. Final confirmation comes with a support break or bearish indicator signal.

Chart 4 shows Exxon Mobil (XOM) with an M-Top in April-May 2008. The stock moved above the upper band in April. There was a pullback in May and then another push above 90. Even though the stock moved above the upper band on an intraday basis, it did not CLOSE above the upper band. The M-Top was confirmed with a support break two weeks later. Also notice that MACD formed a bearish divergence and moved below its signal line for confirmation.

Chart 5 shows Pulte Homes (PHM) within an uptrend in July-August 2008. Price exceeded the upper band in early September to affirm the uptrend. After a pullback below the 20-day SMA (middle Bollinger Band), the stock moved to a higher high above 17. Despite this new high for the move, price did not exceed the upper band. This flashed a warning sign. The stock broke support a week later and MACD moved below its signal line. Notice that this M-top is more complex because there are lower reaction highs on either side of the peak (blue arrow). This evolving top formed a small head-and-shoulders pattern.

Signal: Walking the Bands

Moves above or below the bands are not signals per se. As Bollinger puts it, moves that touch or exceed the bands are not signals, but rather "tags". On the face of it, a move to the upper band shows strength, while a sharp move to the lower band shows weakness. Momentum oscillators work much the same way. Overbought is not necessarily bullish. It takes strength to reach overbought levels and overbought conditions can extend in a strong uptrend. Similarly, prices can "walk the band" with numerous touches during a strong uptrend. Think about it for a moment. The upper band is 2 standard deviations above the 20-period simple moving average. It takes a pretty strong price move to exceed this upper band. An upper band touch that occurs after a Bollinger Band confirmed W-Bottom would signal the start of an uptrend. Just as a strong uptrend produces numerous upper band tags, it is also common for prices to never reach the lower band during an uptrend. The 20-day SMA sometimes acts as support. In fact, dips below the 20-day SMA sometimes provide buying opportunities before the next tag of the upper band.

Chart 6 shows Air Products (APD) with a surge and close above the upper band in mid July. First, notice that this is a strong surge that broke above two resistance levels. A strong upward thrust is a sign of strength, not weakness. Trading turned flat in August and the 20-day SMA moved sideways. The Bollinger Bands narrowed, but APD did not close below the lower band. Prices, and the 20-day SMA, turned up in September. Overall, APD closed above the upper band at least five times over a four month period. The indicator window shows the 10-period Commodity Channel Index (CCI). Dips below -100 are deemed oversold and moves back above -100 signal the start of an oversold bounce (green dotted line). The upper band tag and breakout started the uptrend. CCI then identified tradable pullbacks with dips below -100. This is an example of combining Bollinger Bands with a momentum oscillator for trading signals.

Chart 7 shows Monsanto (MON) with a walk down the lower band. The stock broke down in January with a support break and closed below the lower band. From mid January until early May, Monsanto closed below the lower band at least five times. Notice that the stock did not close above the upper band once during this period. The support break and initial close below the lower band signaled a downtrend. As such, the 10-period Commodity Channel Index (CCI) was used to identify short-term overbought situations. A move above +100 is overbought. A move back below +100 signals a resumption of the downtrend (red arrows). This system triggered two good signals in early 2010.

Conclusions

Bollinger Bands reflect direction with the 20-period SMA and volatility with the upper/lower bands. As such, they can be used to determine if prices are relatively high or low. According to Bollinger, the bands should contain 88-89% of price action, which makes a move outside the bands significant. Technically, prices are relatively high when above the upper band and relatively low when below the lower band. However, relatively high should not be regarded as bearish or as a sell signal. Likewise, relatively low should not be considered bullish or as a buy signal. Prices are high or low for a reason. As with other indicators, Bollinger Bands are not meant to be used as a stand alone tool. Chartists should combine Bollinger Bands with basic trend analysis and other indicators for confirmation.

Read More

Average Directional Index (ADX)

J. Welles Wilder developed the Average Directional Index (ADX) to evaluate the strength of a current trend, be it up or down. It's important to determine whether the market is trending or trading (moving sideways), because certain indicators give more useful results depending on the market doing one or the other.
The ADX is an oscillator that fluctuates between 0 and 100. Even though the scale is from 0 to 100, readings above 60 are relatively rare. Low readings, below 20, indicate a weak trend and high readings, above 40, indicate a strong trend. The indicator does not grade the trend as bullish or bearish, but merely assesses the strength of the current trend. A reading above 40 can indicate a strong downtrend as well as a strong uptrend.
ADX can also be used to identify potential changes in a market from trending to non-trending. When ADX begins to strengthen from below 20 and moves above 20, it is a sign that the trading range is ending and a trend is developing.

When ADX begins to weaken from above 40 and moves below 40, it is a sign that the current trend is losing strength and a trading range could develop.

Positive/Negative Directional Indicators

The ADX is derived from two other indicators, also developed by Wilder, called the Positive Directional Indicator (sometimes written +DI) and the Negative Directional Indicator (-DI).
When the ADX Indicator is selected, SharpCharts plots the Positive Directional Indicator (+DI), Negative Directional Indicator (-DI) and Average Directional Index (ADX). With the Default color scheme on SharpCharts, ADX is the thick black line with less fluctuation, +DI is green and -DI is red. +DI measures the force of the up moves and -DI measures the force of the down moves over a set period. The default setting is 14 periods, but users are encouraged to modify these settings according to their personal preferences.
In its most basic form, buy and sell signals can be generated by +DI/-DI crosses. A buy signal occurs when +DI moves above -DI and a sell signal when -DI moves above the +DI. Be careful, though; when a security is in a trading range, this system may produce many whipsaws. As with most technical indicators, +DI/-DI crosses should be used in conjunction with other aspects of technical analysis.
The ADX combines +DI with -DI, and then smooths the data with a moving average to provide a measurement of trend strength. Because it uses both +DI and -DI, ADX does not offer any indication of trend direction, just strength. Generally, readings above 40 indicate a strong trend and readings below 20 a weak trend. To catch a trend in its early stages, you might look for stocks with ADX that advances above 20. Conversely, an ADX decline from above 40 might signal that the current trend is weakening and a trading range is developing.
another article about ADX:

Note: This indicator measures strong or weak trends. This can be either a strong uptrend or a strong downtrend. It does not tell you if the trend is up or down, it just tells you how strong the current trend is!
Let’s look at a chart:

In the chart above, the ADX indicator is the thick black line. The green and the red lines are the +DI and –DI (ignore these). The highlighted areas show how this indicator identifies trading ranges. ADX is showing a low reading and the stock is chopping around sideways.
Now look at what happens when the indicator gets into higher territory. A strong trend develops! These are the type of stocks that you want to trade.
On the right side of the indicator panel you will see a scale from 0 to 100 (only 10 through 50 are marked). Here are my guidelines for using the scale:

ADX Indicator Scale

If ADX is between 0 and 25 then the stock is in a trading range. It is likely just chopping around sideways. Avoid these weak, pathetic stocks!
Once ADX gets above 25 then you will begin to see the beginning of a trend. Big moves (up or down) tend to happen when ADX is right around this number.
When the ADX indicator gets above 30 then you are staring at a stock that is in a strong trend! These are the stocks that you want to be trading!
You won’t see very many stocks with the ADX above 50. Once it gets that high, you start to see trends coming to an end and trading ranges developing again.

Tips

The only thing I use the ADX for is an additional filter in my scans, so that I can find stocks that are in strong trends. I do not even have the ADX indicator on the charts that I look at when I am looking for setups. Since the ADX is already factored into the scans, I don't need it added to the chart itself.
I don't pay any attention to the rising and falling of the ADX indicator. Stocks can go up for long periods of time even though the ADX may be falling (indicating that the trend is getting weak). The ideal scenario is that the ADX is rising, but I don't find it necessary to take a trade.
I don't use any technical indicators on my charts. I found out that technical indicators just clouded my judgement. One technical indicator may indicate a buy and one may indicate a sell. Needless to say, this can be very confusing and it just takes you attention away from the only thing that matters - PRICE.

Read More

Leveraged Financial Markets: A Comprehensive Guide to Loans, Bonds, and Other High-Yield Instruments

William Maxwell, Mark Shenkman, "Leveraged Financial Markets: A Comprehensive Guide to Loans, Bonds, and Other High-Yield

Instruments"
Mg.H | 2010 | ISBN: 0071746684, 0071746692 | 416 pages | P | 2,4 MB

The most complete guide available to the high-yield and distressed-debt markets

Leveraged Financial Markets opens up a world where investors take short and long positions on the riskiest forms of debt financing. Through the eyes of the players and thinkers who live in the high-yield and distressed debt markets, this timely book gives you the background and strategies you need to successfully diversify your portfolio and capture a higher return on your investment.

You’ll hit the ground running with this book’s proven models and formulas for implementing covered strategies in the real world. Leveraged Financial Markets features perspectives from the world’s top authorities on high-yield bonds, credit derivatives, and other forms of distressed debt. It’s a must-have for every investor who wants to:

•Diversify risk in a meritable asset class
•Lock in an excellent risk return profile
•Develop significant annual cash flows
From the nuts and bolts of leveraged finance to the differences between CLOs and structured finance CDOs to common pitfalls of high-yield assets—Leveraged Financial Markets helps you master one of the riskiest yet most profitable markets in finance today.

Table of Contents

Part I: Market Structure
Chapter 1. The High Yield Market
Chapter 2. The Globalization of the High-Yield Market
Chapter 3. Bond Ratings

Part II: High-Yield Bonds
Chapter 4. High-Yield Bonds as an Asset Class
Chapter 5. The Issuers and Investors in the High-Yield Bond Market
Chapter 6. Bond Indentures and Bond Characteristics
Chapter 7. Default and Migration Probabilities of High-Yield Bonds
Chapter 8. Analyzing a High-Yield Debt Issuance
Chapter 9. Valuation of Callable, Floating and PIK High Yield Instruments
Chapter 10. Analytical Model of Default Probabilities

Part III: High-Yield Bonds at the Portfolio Level
Chapter 11. Managing a High-Yield Portfolio
Chapter 12. Monitoring a High-Yield Portfolio
Chapter 13. High Yield Index Products
Chapter 14. Aggregate Market Valuation

Part IV: Leveraged Loans and CDOs
Chapter 15. Leveraged Loans as an Asset Class
Chapter 16. The Issuers and Investors in Leveraged Loans
Chapter 17. Collateralized Debt Obligations and Securitization

Part V: Distressed Debt
Chapter 18. Recovery Rates on Defaulted Bonds
Chapter 19. Analyzing the Credit Risk of Distressed Securities
Chapter 20. Debtor-in-Possession Financing
Chapter 21. Vulture Investing

Part VI: Credit Derivative Swaps
Chapter 22. Credit Derivative Swaps
Download Here

Read More

Williams %R

The Williams %R is an indicator developed by Larry Williams and is similar to the Stochastic Oscillator in calculation but where the Stochastic compares the close to the lowest low over a specified period, the Williams %R compares the close to the highest high over a specified period.

The Williams %R is sometimes called Williams Overbought/Oversold Index.

When prices are trending, Oscillators like the Williams and Stochastics should be viewed with a careful eye when looking at overbought and oversold signals. Generally, when the oscillator is in overbought territory, a crossover into the middle range for the indicator is a signal that prices may fall near term.

When the oscillator is in oversold territory, a crossover into the middle range from below is often viewed as a buy signal leading the expectation of higher prices near term. However this type of interpretation works poorly when price is in a trending environment. In the graph above during the period of October to November, 7 sell signals were given through normal interpretation of the oscillator, where only 2 would have been successful indications of near term price action.

Oscillators also lend themselves to interpretation when divergences between the indicator and price occur.

A divergence of the peaks of price and the peaks of the indicator warns of potential reversal of price trend. A divergence between the troughs of price and the troughs of the indicator also warns of a potential reversal of price trend. On the graph the numbers 1,2,3 and 4 are placed above the period when a divergence in the peaks occurred. The number 5 and the lower part of number 3 show a divergence of the troughs. The price trend from October to mid December is down. You can see that although some of the divergence signals occur prior to a change in direction of the price trend, not all are tradable and some lead to whipsaws. It is important to build a wide body of evidence in support of any trade decision.

To the right technical studies are examined in more detail to provide a sense of conformational evidence for traders of the critical day. Click on any of the terms to take a closer look at a technical discussion on that topic. All formations, patterns, indicators and technical tools fail at various times and so should only be used to build a body of evidence in forming a trading decision rather than being solely relied upon. There are a number of valuable studies that lead to intuitive understandings about price and volume but a strong compliment to technical analysis is an understanding of the trends and changes in the fundamentals and economic activity that ultimately lead valuation levels in the markets

Read More

Forex Support and Resistance Indicator Explained

Knowing the major support and resistance levels is very important in forex trading and the best way to do this is through the use of several forex support and resistance indicators.
Most of you have heard of major swing points as support and resistance and do not know anything about indicators that can provide you with the same information. Therefore in this article, I will be sharing with you some of the best forex support and resistance indicators that I have used and proven to be pretty powerful.
1) Fibonacci Indicator – I guess most of you have heard of Fibonacci indicator, it is a powerful tool that is able to help you predict where the market might retrace to and then revert back to its original trend.
The Fibonacci is made up of retracement and extension, the important retracement support and resistance levels are 0.382, 0.500 and 0.618 and you will usually find the market respecting them. As the forex market is moving in waves of retracement and extension, you can then make use of these levels to help you to enter a trade in the direction of the trend.



Another powerful feature of the Fibonacci is its ability to predict the likely extension and this information can be used to help you in your exit.

2) Forex Pivot Point – The pivot point is a tool that is commonly used by those big dog traders and thus it is a very reliable support and resistance level. Try plotting pivot point on your chart and you will see how many times the market get repelled by it or how many times the market move tremendously after breaking through it.

Personally, I always plot a daily point point on my 15 minutes charts. In fact, you can plot an hourly pivot or even weekly pivot depending on your preference. I often use the pivot points as entry and exit targets in my trading and you can also do the same thing.

3) Bollinger Bands Indicator – Other than the above 2 indicators, you can also make use of the Bollinger bands upper and lower bands as support and resistance. Similarly, you will find the market respecting the bands as they are often repelled by it.

There are some traders who have trading plan that simply trade the repulsion of the bands. This is especially effective when you are in a range. When you are in a ranging market, the price will always fluctuate up and down. When you see the price hitting the upper band, you can enter a SHORT trade (SELL) to profit from the repulsion. Similarly, you can enter a LONG trade (BUY) when you see the price hitting the lower bands.

The above are 3 effective forex support and resistance indicators that you should use in your trading as they are able to help you in your entry and exit. However you have to try each of them out on your demo account before you plunge into live account. Spend sometime to practice with them and make sure that they are able to fit into your trading plan.

Read More