Traditional Methods of Technical Analysis and Day Trading

Since traditional technical analysis has been so popular for so many years, many futures traders are very familiar with the application of such principles as chart formations, Trend Line penetrations, price patterns, and the many different methods of interpretation associated with these formations. Many of these patterns have been used with great success by traders over the years; however, there has been a steadily growing belief in recent years that these chart patterns are not necessarily reliable and that they are, in many cases, subject to considerable interpretation. Traders who claim to be objective and scientific reject any method or trading technique which cannot be fully tested.

Clearly, the primary cause of the growing tide of counter-chart-analysis sentiment is that many of the chart formations and patterns cannot be fully or thoroughly tested by computer. Nor can hypothetical results be sufficiently quantified to instill the degree of confidence which so many contemporary traders demand. My personal opinion on this matter, as you may well have gathered from my comments throughout this text, is that computer testing is considerably overrated and that, in the final analysis, it does not necessarily guarantee profitable results.

I have deemphasized the value of computer testing and reemphasized the value of individual traders skill as a critical variable in the formula for profitable day trading. In fact, it is certainly not an unacceptable extrapolation to extend these comments to all types of trading. With this in mind, I cannot include myself among the many who denigrate the value of traditional technical indicators. I believe that there are many short-term and day-trading tools which are derived from traditional chart analysis. This book is not intended to serve as a compendium of traditional tools applied to day trading. So many excellent books have been written on the subject that anything I could add might be redundant. I will spend just a little time, however, illustrating some of the methods to you so that you may make your own decisions and/or be prompted to do your own research, whatever form that may take.

The most supportive aspect of traditional chart analysis for day trading rests in the face that many day traders on the exchange floor use traditional chart indicators in their trading. Experience and keen observation have taught me to be a traditionalist with respect to market analysis and trading.

Although this may seem, to many of you, to be incompatible with the tasks and objectives of the day trader, my work suggests that there may be many profitable opportunities to apply traditional charting principles in the day trading. As long as you are the type of individual who is willing to accept visual evidence as opposed to hard scientific validation, then this chapter may be very helpful to you. If, however, hard science and definitive answers are what you seek, then I suggest you skip this chapter and move onto something else.

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Trend Line Applications-Chart Formations

As Ive indicated above, I feel that the use of Trend Lines, although seen by many as too simple, can, in fact, be a very effective day-trading method. Many very large intraday price moves have given Trend Line signals. I recommend the use of Trend Line analysis as both an effective as well as time-tested method. While there is clearly some art to the science of Trend Line analysis, it is a technique which few traders use during these days of high-tech trading.

Flags and Pennants. A flag or pennant chart formation is exactly what its name implies. Figure 12-4 shows a few flags on intraday charts. As you can see, the narrowing portion of a flag usually develops into a breakout up or down. The trader using such formations will be alert to the possibility of a breakout as the flag narrows, and he or she will trade with the direction of the breakout.

Rounding Tops, Rounding Bottoms. Yet another classical chart formation is the rounding top or bottom. Figures 12-5 and 12-6 show such patterns on intraday charts. Day traders will want to sell short or exit long positions when the lowest portion of the rounding top has been penetrated. Day traders will want to buy when the highest portion of the rounding bottom has been penetrated. In practice such formations are rather rare on intraday charts. Study intraday charts and see how many of these formations you can spot.

Breakaway Gaps. Typically such a pattern is a good one; however, the majority of research on such gaps has been on daily price charts. In practice, breakaway gaps rarely occur on intraday charts. Figure 12-7 shows such a formation. Chartists feel that such gaps, if in the up direction, are very bullish and, if in the down direction, are very bearish.

Key Reversals. A key reversal up occurs when a market trades below the low of its last price bar, above the high of its last price bar, and closes above the close of its last price bar. My research has shown such patterns not to be too effective on daily bar charts, but they appear to be much more significant on intraday charts. Figure 12-8 shows such a formation and its consequence.

A key reversal down occurs when the market trades above its last price bar, below its last price bar, and then closes below the close of its last price bar. Figure 12-9 shows such a formation.

Reversals tend to be good signals for day trading, apparently much better than they are for short-term or position trading.

Congestion and Breakouts. These are very important patterns on intraday charts. Congestion occurs when prices trade within a very well defined range either after a rally or a decline or within an existing period of strength or weakness. Figure 12-10 shows a few examples of price congestion. They also show what occurs after a breakout from congestion. As you can see, breakouts following periods of congestion can be very profitable within the day time frame. I recommend you follow them. While this is not a totally mechanical methodology, it is not difficult to use and can yield large rewards. It does take some training and experience, however.

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Moving Average Channels

One of the methods described earlier in this book, the MAC (Moving Average channel) lends itself readily to use by scalpers. My recommended parameters for the MAC are 10 units of the high and 8 units of the low. For scalpers these parameters are likely to be somewhat long. I recommend instead using 5 units of the high and 4 units of the low.

This illustrates how the MAC will look in relation to 5-minute price bars in T-bond futures. Figures 14-2 and 14-3 illustrate the same methodology in Swiss francs and S&P futures.

These illustrations are included here merely as examples, but they are fairly typical in terms of structure and clearly show that Scalping the market by buying the low of the channel and exiting at the high of the channel in an up trend is a good procedure. Conversely, in a down trend, you may scalp the market by selling the high of the channel and buying the low of the channel.

Alternatively, in sideways trending markets, the procedure is to buy the low of the channel, reversing position and selling the high of the channel, and then reversing position again by covering shorts at the low of the channel and going long.

Ideally, this technique will work in any market which has established some specific channel relationships. It is your job to identify markets which are suitable for Scalping. I have included several more examples which will help you identify the types of markets you want to trade for Scalping purposes. Remember that as a scalper it is your job to exit profitable and losing positions quickly in order to capitalize on the many price swings each day. It is especially important to exit your losing positions promptly so that your small profits will not be erased by one large loss. Unfortunately, this happens all too often. Sadly, some traders will scalp the markets very effectively all day long, only to allow one large losing trade to eliminate their entire profit for the day or worse. Therefore, the scalper should be particularly attuned to exiting positions which are not working, quickly, without hesitation, and, of course, decisively.

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South African Currency Up on Risk, Capital Repatriating

foreign-exchange markets as appeal for higher-yielding commodity exporter currencies was high, providing support for the rand to beat even an attractive dollar in today’s session.

Speculations that South African exporters are repatriating capital to the nation before the end of the year also forced the rand further up in a session that virtually all events provided support for the rand to gain against most currencies, specially safe refuges like the yen and the Swiss franc.

USD/ZAR traded at 7.4125 as of 17:35 GMT from an opening rate of 7.5093.

If you want to comment on the South African rand’s recent action or have any questions regarding this currency, please, feel free to reply below.

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