the educated analyst jul-aug 2010

7/31/2019 The Educated Analyst Jul-Aug 2010

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A Free Technical Analysis E Magazine for Traders of Financial Markets

Inside this issue...

Two examples of marketmanipulation at work and how toavoid being caught out by it.

The power ofMovingAverages in your tradingsystem.

Discover howContinuation Patterns can beone of the most profitable tradingtechniques of all.

AAnndd mmuucchh mmoorree......

www.EducatedAnalyst.com

Volume 2 Issue 4

JUL / AUG 2010
http://www.educatedanalyst.com/http://www.educatedanalyst.com/


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Th e Edu cated An alyst | JUL / AUG 2010

THE EDU CATED ANALYSTJU L / A UG 2 01 0 - V OLU M E 2 Issu e 4

4 SOM ETHING STINKS IN THE U.SAlan Ol iver rev iews the Bear Stearns opt ions scanda l, and the m ore

recent t raders acc ident event w h ich cause the la rgest one day

d ro p in US M a rke t H isto ry . A la n th e n g o e s o n to sh o w yo u wh e reyou can go to escape th is k ind o f m arke t man ipu la t ion w hi le

contin uing to em ploy Gann and Fibonacci techniques (video).

7 SOM E OF THE M OST W IDELY TRADEDSTOCKS ON ASXWith th e cu r ren t vo la t i li t y in th e A u st ra l ia n Sto ck ma rke t Dale

Gilham rev iews som e o f t he b iggest s tocks in the Top 100 to see

wh a t t h e y are d o in g a n d d e mo n s t rate s ho w to a p p ly so me simp le

techn iques and make comm ent on ho w the s tocks have been

unfo ld ing .

12 Q& A RAY BARROSIn th is new sect ion of t he Educated Ana lys t M at thew Humphreys

f rom M arket Ana lyst Sof tw are poses a ser ies quest ions to Aut hor ,

T rader and M arke t Educator Ray Barros .

15 M OVIN G AVERAGES IN TH EORY AN DPRACTICEDespite man y innovat ions in technical analysis over the years, them ov ing average in a l l o f i ts fo rms rem ains one o f t he m ost

pow er fu l m ethods ava i lab le fo r ana lysing , t rad ing and pro f i t ingf ro m f in a n cial ma rke t mo ve me n ts . In th i s a r t i cle Asoka Selvarajah

w i l l rev iew some o f the system s w h ich can be im p lement ed usingthe granddaddy o f TA ind icator s.

21 POETRY IN M OTIONThis art ic le is a fo l low on fr om Daw n Bolton-Smi t hs p re vio u s i te m

LESSONS IN GEOMETRY. I t is not so m uch abo ut w ords bu t the

p ic tu res tha t the m arke t p rov ides and t rans la tes in to char ts, wh ich

at t im es can be pure geomet ry .

24 CONTINUATION PATTERNSCont inuing t he series of art ic les by Peter Varcoe th is issue we com e

to the bus iness end o f the ident i f icat ion process fo r w hat isundoubt ed ly , fo r m any, one o f the m ost p ro f i tab le t rad ing

techniqu es of a l l .

33 AN INTRODUCTION TO EXCHANGE-TRADED FUNDS (ETFS)M ike Smi th f rom Hor izon Pro fessiona ls rev iews the nu t s and bo l t s

of Exchange Trade Fund s as th ey becom e mo re popu lar wit h

t raders and investors fo r the i r versa t i li ty and w h ich can g ives you

exposure w i th r e la t ive ease to m arke ts and veh ic les w h ich maybe

otherw ise d i f f icu lt o r com pl ica ted to t rade.

39 EM OTIONAL STAGES OF A TRADEThe psychological states of traders rarely get a mention, yet thesehave an enormous impact on ind iv idua l t raders resu l ts . Chris

Col l ingwood exp lorers why emot ions in f luence our capac i t ies totake in inform ation, pro cess it and m ake functional decis ions.

CONTENTS

The Educate d An alyst is Changing!

Beginning f rom Septem ber th e Educated Analyst wi l l no

longer ex ist as a b i -m ont h ly PDF pub l icat ion.

Instead w e are conver t ing to a b log sty le web site w hich wi l l

begin wi t h weekly ar t ic le upd ates. The ar t ic le s ty les and

con ten t w i l l no t change, and our focus w i l l con t inue to be

qua l it y educa t ion fo r marke t t raders.

The change to a b log form at wi l l a l low us to react to curr ent

events (such as the imp act of th e RSPT) mu ch faster , and to

inc lude a w ider var ie ty o f cont ent such as v ideos, po l ls, user

comm ents , e tc.

Once the s i te is ready w e w i l l emai l a ll o f ou r ex ist ing

subscr ibers wi th the deta i ls.

W e look fo rw ard to see ing you in Sep temb er .

The Edu cated An alyst Team


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H i and welcom e to t he latest edit ion of The Educated Analyst.I t always amuses me ho w w e often h ave a recurrin g them e in the art icles w itho ut any script ing from us. This t im e we have

tw o art icles th at highlight som e of the m arket manip ulation t hat seem s to b e going on. Besides tho se given in the art icles,

anoth er example in recent t im es is the m anipulation o f the silver market, w here large players w ere allegedly manipulatin g

the pr ice by the sheer volume of contracts that t hey held. M any people wi l l cry foul over this - and r ight ly so, where th is is

found to b e happening i t should be p rosecuted.

In reality th ough, I take a very pragmatic view on this, w hile I do no t dou bt t hat m anipulation h appens, I think it is som eth ing

that h as been happen ing for as long as w e have had "Free" m arkets. From a purist Gann poin t of view, it could be said that

the m anipulation was necessary to h ave the m arket reach the r equired Gann levels... .. .. . but t hat is where m y min d struggles

too m uch with the paradox of "Does the m arket def ine the levels, or do the levels def ine the market" . I think that th at is a

philosophical discussion t o be h ad over a nice bott le of w ine.

Nevertheless, I do no t th ink manipu lation is a reason t o stay away from a m arket. The mo re you stud y a market and get t o

know i t , you wi l l be able to successful ly t rade i t no m atter i f the m oves are "natural" or m anipulated. In over f if teen years of

being involved in t he tr ading industry, the very best trader s that I have met are alw ays tho se that choose, stud y and test a

market thorou ghly.

In som e other new s related a bit m ore closely to The Educated Analyst, this will be the last t im e that w e present The

Edu cated An alyst as a large PDF file like t his. You see, man y of

the art icles in t his issue w ere actually received w eeks ago, andsom e of them w ere quite pert inent to what w as happening in

the market at that t ime. Rather than make you wait for us to

collate all the art icles and bu ild th em int o th is PDF, we are

going to release them as we receive them in a blog form at. I f

you are subscribed t o The Educated Analyst, w e'l l let you know

as soon as w e have changed the w ebsite so t hat yo u can

subscribe to th at service via em ail or RSS.

Well that 's i t f rom me, I t rust that you enjoy the art ic les and

that t hey give you some insights into t he market t hat assist you

with your t rading.

Stay safe with your t rading and remem ber to protect your

capital.

M athew Verdouw

Editor

The Edu cated Analyst.

EDITORIAL

Disclaimer:

The Educated Analyst, its staff, officers and contr ibut ing author s cannot be held liable for tr ading decisions that you m ake as a

consequence of education t hat you receive from the art icles.

Trading and Investing involves risk and has the p ot ential fo r large financial losses. The content provid ed in The Educated Analyst is of a

general nature and does not take your per sonal situat ion or financial objectives into consideration.

You should consult w ith you r bro ker or f inancial advisor before act ing on any of the cont ent in The Educated Analyst.

STOP THE PRESSES!

As an example of the im portant (and t im e

speci f ic) informat ion we re hoping the new blogform at w il l make avai lable to you, please cl ick the

image below to w atch a short video presentat ion

from Alan Oliver about the S& P500 Index.
http://www.screencast.com/t/NzFmYjUxN2M


4/40Th e Edu cated An alyst | Som et h ing St inks in t he U.S JULY/ AUG 2010

ny t rade r w ho has been wa tch ing the marke ts

act ively in the last year or so could be

excused for th inking that the US has a real

corrupt ion prob lem, and th is has been h igh l igh ted on

several o ccasions.

Let s look a t the two most recent examples o f dub ious

behaviour.

In M arch 2008, som ebody unknow n to m arket

regulator s and off ic ia ls bought 1.7 mil l ion do l lars of put son Bear Stearns stock. I f you havent t r aded opt ions, th is

is a short t rade wi th a t ime l imi t and a pr ice that the

m arket must drop be low t o have a winn ing t rade.

Nothing unreal ist ic or suspicious about the trade, but

bear in m ind the o pt ions had st r ike pr ices betw een 50%

and 60% low er than the t rad ing price. Again, perhaps a

w i ld bet on m arket mo vement s, but consider ing the s ize

o f the t rade one w ou ld be fo rg iven fo r raising you r

eyebrow s. But i t gets better.

The options were due to expire in 9 days..

I don t t rade opt ions but I recogn ise a stup id t rade when

I see it. This was a ridiculous strategy unless you had

som e reason t o suspect tha t Bear Stearns was not go ing

to b e saved l ike the oth er banks w ere.

As i t turns out, Bear Stearns was not af forded a rescue

package l ike the others, and in 6 days th is t rade was

worth $270 mi l l ion do l la rs to the t rader. Not bad for a

w eeks w ork.

So who is th is super t rader with mil l ions to r isk on very

doubt fu l t rades? W hat w as h is st ra tegy and how d id he

presume to know that one bank would not be saved

when o thers were rescued? Wel l , we wi l l never know

because the SEC, the Securities and Exchange

Commission charged with maintaining an orderly and

fa i r t rad ing m arket cant find t he trader or the money.

This must beggar bel ief to anyone that $270 mil l iondol lars can go missing or is untraceable. From my bank

em ployee days I know this is

untrue, so there is a def in i te

st ink brew ing here .

Now le t s look a t the la test

fiasco.

The US stock market had i ts

largest single day down in

history, fa l l ing over 1000

poin ts in one day. M any

stops would have been

knocked out as the market

f e ll t emp o ra r il y; in f act i t

on ly took a coup le o f hours

for the market to ra l ly back

up 700 p o in ts .

SOMETHINGSTINKS IN THE U.S

W ith Alan Oliver
http://www.market-analyst.com/http://www.market-analyst.com/


5/40Th e Edu cated An alyst | Som et h ing St inks in t he U.S JULY/ AUG 2010

And no w , yes, you guessed i t , t he

NYSE exchange doesnt know

w hat caused it o r how it

happened. I t was rumoured that

a t rader m ade a mistake enter ing

an order, but th is wou ld have le f t

a paper t ra i l tha t cou ld be

co n f irme d . Th i s n o w s ee ms t o

have been ru led out .

Now you know why I am

imploring smaller, individual

t raders to t rade currency

markets on an intraday basis.

From my previous art ic les you

w i l l know t hat I am a b ig be l iever

in using bot h Gann and Fibonacci

techniques in my t rad ing . Gann

in part icular is probably most

famous for h is t rad ing oncom m odit ies, and to a lesser exten t eq uit ies, and as such

many t raders th ink that h is techn iques are on ly

app li cab le to t hose marke ts. W ha t I have found over

years of study is that you can apply al l the w orks of Gann

to currenc ies just as you would to commodi t ies or

e q ui t ie s, so me t ime s i t ev en wo rk s b e t t er . In f ac t I

be l ieve that where there is any " f ree market " tha t has

enough l iqu idity, you can apply these techniques.

I th ink th e best way to explain th is is to show you a videowh i ch d e mo n st ra t es h o w I u se b o t h Fibo n acci a nd G an n

techniqu es in the analysis of t he Euro t o $US. This is one

o f the fou r

weekly v ideos

based on M arket

Analyst that I

p roduce for

peop le who buy

m y co ur se. Th e

f i rst o f t he four isactual ly a free

w eekly v ideo that anyone can sign up for o n m y w ebsi te

(www.t rad ingwi thgods.com ).

Best w ishes to al l ,

Alan Oliver.

About Alan Oliver

Alan Oliver is a ful l t ime trader and private educator. Early in Alans

career he w orked for t wo major Austral ian banks where his interest in

the m arkets began. Aft er developing and successfully honin g the skills

of a ful l t ime tra der, Alan left the workforce to trad e ful l t ime which is

w hat he has been doing ever since. M ost recently Alan has writt en a

book on his favourite subject of Fibonacci and the Golden Harmonic

rat io. Alan has tra velled extensively, been invited as a key speaker to

ma ny countr ies including: Australia, Hong Kong, M alaysia, Singapore,

Thailand and China.

Alan also runs a web site (named after his book) to assist traders

www.tradingwithgods.com.
http://www.tradingwithgods.com/http://www.tradingwithgods.com/http://www.tradingwithgods.com/http://www.screencast.com/t/ZTk4ODk3OThttp://www.tradingwithgods.com/http://www.tradingwithgods.com/


6/40

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7/40Th e Edu cated An alyst | Som e o f t he M ost W idely Trad ed St o cks o n ASX M ay 10 JULY/ AUG 2010

W ith the cur ren t vo la t i li t y on the m arket w e thought i t w ou ld be a good t im e to look a t some o f t he b iggest s tocks inthe Top 100 to see what t hey are do ing . Heavy se l li ng has occur red across the broader m arket , and w i th i t w e have

seen the pr ice of stocks l ike CBA, AM P, BHP, TLS and WOW t rade low er to test levels of support below , and in som e

cases the s tocks have t r iggered s ignals to ex i t . Given th is, we t hought now w ould be an o ppor tun e t im e to apply

som e simple techn iques and make com ment on how the stocks have been unfo ld ing.

Comm onw ealth Bank Austr alia

Since fal l ing to a low in Januar y 2009 , CBA has r isen arou nd 149% in ju st sixty-fou r w eeks. This r ise is faster t han an y

prev ious upt rend over the sam e per iod of t ime. W hi lst i t is always impo rtant t o a l low you r prof i ts to ru n, it is equal ly

impo r tan t t o ensure tha t you are prepared fo r a change in t rend. Remem ber what goes up fast w i ll genera ll y com e

back at a m uch faster rate t han the p r ior r ise. Given th is, you need to kno w how you w i l l m anage your do w nside r isk

w hen condi t ion s do change.

CBA recent ly broke t hrou gh resistance at around $56.00 to b e t rading jus t below the A l l T im e High pr ice for the share

of $6 2.16 in Novem ber 2007 . This is a stro ng level capable of t urn ing or at least slow ing the r ise, and as expected, th e

stock form ed a high c lose to t h is pr ice at $60.00 on 21 Apr 10. As you can see, CBA has pul led back sw i f t ly f rom t hat

level to pro v ide tw o consecut ive w eekly closes below the curren t up t rend l ine, and th is w eek t r iggered a Gann swing

ex i t . Given th is , now is not t he t ime to consider CBA. That said, i f you al ready ho ld th e s tock you m ight cons ider

sel l ing to prot ect your capi ta l against any fu r th er dow nside r isk , in case the stock cont inu es to fa l l through suppo rt at

around $51.00 to the next level below at $46.00.

SOME OF THEMOST WIDELY

TRADED STOCKSON ASX MAY 10With Dale Gilham

Source: M arket Analyst 6 (www.Marke t -Ana lys t .com)
http://www.market-analyst.com/http://www.market-analyst.com/http://www.market-analyst.com/



AM P Ltd

AM P has nevert raded above i ts

open ing p r i ce , and

is one of the worst

per fo rmers in t he

A SX To p 20 ov er

the past 10 years . I t

is t h er ef o re no t a

stock suitable for

buy and ho ld ,

h ow ever it is a

good t rading s tock

tha t has more than

doubled in pr ice a

num ber o f t imes.

During the past s ix

months, whi ls t

other f inanc ia l

stocks cont inued to

rise, AM P has

mere ly t raded

sideways below resistance at $7.00 causing i t to also

break below i ts upt rend l ine. Pr ior to the fa l ls we have

seen over the p ast fe w w eeks, th is sidew ays m ove could

just hav e been a co nso li dat io n phase (as h igh li gh t ed by

the pennant pa t te rn) p r io r t o i t s nex t upward move.

How ever, as AM P recent ly broke below t he pat tern and

cont inued the dec line th is w eek to conf irm a dow nt rend

is in place, the r isk of a fur t her fa l l has increased. Giventhis , i t is now poss ib le to draw a downt rend l ine f rom

the h igh in Oct 09.

AM P has been in a bat t le against NAB for the

opportuni ty to takeover AXA. As a general ru le, the

share pr ice of t he com pany doing t he tak ing over is like ly

to f a l l, whi lst th e pr ice of the comp any being taken over

w il l r ise. Theref ore, i f AM P is successful, th e share pr ice

is l ike ly to be held back for som e t im e below t he current

dow nt rend l i ne . That sa id , i f AM P m oves up to comple tetw o consecut i ve closes above the dow nt rend l i ne , i t m ay

be t im e to m ove i t back on to your w atch l i st .

BHP Billit on

Fol low ing the long te rm low o f $20.00 in November

2008, BHP worked i ts way up s teadi ly to a recent

sign i f ican t h igh o f $44.93 on 6 Apr i l 2010, before

reversing and fa l l ing away to comp lete tw o consecut ive

w eekly c loses below the current u pt r end l ine at the end

of Apr i l . It is interest ing to not e that unt i l January 2010,

BHP enjoyed suppo rt f rom and t raded above an upt rend

l ine ( dashed l ine ) ancho red f r om N ov em ber 2008 .

How ever, in January BHP reversed f rom Point A and

broke dow n th rou gh the up t rend l i ne to f i nd suppor t a t

a round $40.00 before cont inu ing the up t rend to a new

high at Point B . This m ove to a new high enabled a new

upt rend l ine to be draw n (so l id li ne).

Historical ly BHP has resonated around part icular levels

of suppo rt / resistance; mul t ip les of $8.00 being $32.00,

$40.00 and $48.00, and also t he hal f w ay points




betw een these levels at $44.00 and $36.00. Tw o w eeks ago BHP gapped dow n at th e star t o f the w eek to c lose

st ro ngly below the $ 40.00 level , and is test ing support just abo ve the next level at $36.00. Given th is , it is l ike ly forBHP to slow th e curren t decl ine close to th is level.

If you w ere using t rend l ines to m anage your ex i t t hen you w ou ld be ou t o f t he t rade. However , if you are using

Gann swing or Dow Theory to m anage your dow nside r isk you w ould s t i l l be in the t rade. Rem em ber to set a stop

loss to pro tect capi ta l in case i t cont inues to fa l l . If you are look ing for an opp ortu ni ty t o t ake a pos it ion in BHP i t is

important to note that the weekly swing is s t i l l point ing down and therefore i t has not proven the fa l l is over .

Given th is , i t would be bet ter to wai t unt i l the s tock looks s t ronger technical ly , par t icular ly as the next level of

overhead res istance is not far aw ay at around $40.00.

Telstra

Fol low ing the A l l T im e High of $9.20 in February 1999, TLS t raded dow n t o a low of $2.88 eleven years later in

M arch 2010. This represents a loss in value of 69%, making i t s im i lar to AM P as one o f th e w orst Top 20 stocks to

buy and ho ld. How ever unl ike AM P Telst ra is not a t rading sto ck. A l though TLS has paid a huge div idend, th is

m assive erosion of capi ta l adds l i t t le support for the buy and h old appro ach advocated by m any adv isors .

M arked on t he m ont hly char t b elow are impo rtant pr ice levels w hich have been calculated by t ak ing spec i f icFibonacci and Gann percentage levels of f Telst ra s $9.20 high. You can see that so far t he pr ice act ion has

respected t he levels at 38.2%, 50% and 61.8%, w ith t hese price divisions being supp ort / resistan ce.

http://www.market-analyst.com/http://www.market-analyst.com/http://www.market-analyst.com/http://www.market-analyst.com/



Woolwor ths (WOW)

Follow ing th e Al l Tim e High (ATH) of $35.05 in Decemb er

2007, WOW fel l away sharply as investors ex i ted over

the next seven months to create a s igni f icant low of

$22.85 in July 2008 (Point A). Imp or tant levels of suppo rt

/ resist an ce ar e sho w n at $24 .20, $26.60 an d $29.2 0,

indicat ing i t h as a natural pr ice m ul t ip le aroun d $2.50.

I t is a lso inter est ing to note t hat w hi le in the gr ip of the

GFC, the signif icant low at Point A occurred about nine

m onths be fore mos t o f t he market bo t tom ed in M arch

2009. Since then W OW has been caught up in a s idew ays

t rading band bet w een $24.20 and $29.20, and in do ing

so has given investo rs a moder ately volat i le journey,

w i t h f l uct ua t ions r ang ing be t w een + / 9 .5%. Go i ng

forw ard, $29.20 is a very impo rtant resistance level and

as such, unt i l the stock breaks strongly above this level

and out of th e sidew ays m ove, I bel ieve there are bet ter

opp ort uni t ies e lsew here.

In term s of w here to f rom here for TLS, there is no indicat ion so far that the lon g term d ec line is comp lete.

Current ly TLS is t rading under a conf i rmed downt rend l ine on the monthly char t as shown. For me the s tockw ould need to m ove up conv inc ingly through this l ine to even indicate possib le future suppo rt around $2.90.

Given this, TLS is more l ikely to fal l to around $2.30 (75% price divis ion) before i t is ready to turn up in a

sustainable m anner and be cons idered for purchase.




About Dale Gilham

Dale Gillham, founder and chief analyst of Wealth Within

successfully trades $10s of millions on behalf of clients using

his proven and aud ited investm ent strat egy. His company also

specialises in delivering Australias f irst and only nationally

accredited Diploma and Advanced Diploma of Share Trading

and Investm ent as well as t he accredited Course in Contr acts

for Difference. For information about Wealth Within visit

www.wealthwithin.com.au . AFSL No. 22 634 7

Source: M arket Analyst 6 (ww w.M arket -Ana lyst .com)
http://www.wealthwithin.com.au/http://www.market-analyst.com/http://www.market-analyst.com/http://www.market-analyst.com/professional-editionhttp://www.wealthwithin.com.au/http://www.market-analyst.com/


12/40

Q. How did you get into trading / investing?

A. My father was the investment manager for his company and I gravitated to the stock market during the

Poseidon Boom in Australia.

Q&A WITH MATTHEW HUMPHREYSQ & A I S A N E W R E G U L A R

S E G M E N T W E V E A D D E D I N

T H E E D U C A T E D A N A L Y S T

W H E R E W E P O S E A S E R I E S O F

Q U E S T I O N S T O T H E E X P E R T S ,

T O L E A R N F R O M T H E I R

E X P E R I E N C E A N D E X P A N D O U RO W N H O R I Z O N S . I N T H I S

E D I T I O N W E T A L K T O T R A D E R ,

A U T H O R A N D M A R K E T

E D U C A T O R R A Y B A R R O S .

Q. How long have you been trading the markets?

A. My first trade was 1969 (Australian Stock Market - Peerless Options). I became a full-time trader in 1980

when I sold my legal practice. My private hedge began in 1990.

Q. Were there any authors, market teachers that influenced your style of trading as you started?

A. Richard Wyckoff and Pete Steidlmayer

The Poseidon bubble was a stock market bubble in which the price of Australian mining shares soared in late 1969, then crashed in early 1970. It was

triggered by the Poseidon NL company's discovery of a promising site for nickel mining in September 1969. In the late 1960s, nickel was in high

demand due to the Vietnam War, but there was a shortage of supply due to industrial action against the major Canadian supplier Inco pushing the

price of nickel to a peak of 7,000/ton.

In September 1969, the mining company Poseidon NL made a major nickel discovery. Their shares had been trading at $0.80, but as information about

the discovery was released, the price rose until it was trading at $12.30 on October 1. After this, very little further information came to light, but the

price continued to climb due to speculation; at one point, a UK broker suggested a value of up to $382 a share. The price of Poseidon shares quickly

became too high for many investors, so some investors turned to other nickel stocks, stocks in other mines near Windarra, and eventually other mining

stocks in general.

As the price of mining shares grew, numerous new companies were listed by promoters looking to cash in. Some of these new listings did not even

have any mining leases, let alone viable mines. Many investors lost money on these shady listings, and this attracted substantial negative press. Thus

the image of mining stocks was tainted, and the prices began to fall. Mining stocks peaked in January 1970, then immediately crashed. Poseidon shares

peaked at an intraday high of $280 in February 1970, and fell rapidly thereafter. By the time Poseidon actually started producing nickel, the price of

nickel had fallen. Also, the nickel ore was of a lower grade than originally thought, so extraction costs were higher. Profits from the mine were not

sufficient to keep Poseidon afloat, and in 1976 it delisted.

Source: Wikipedia


13/40

Q. What was one of the most common mistakes you made when you started trading the markets?

A. All the common ones and some that were unique: Looking for certainty and the Holy Grail - Confusing

Win Rate with Positive Expectancy - Overtrading in terms of Frequency and position size - Failing to pre-

define initial exit strategies (initial stops) - Trading without a Plan - Trading Without Risk Management -

Failing to keep a Psyche Journal and thus failing to learn from my mistakes......

Q. Which exchanges do you prefer to trade and why?A. FX (major crosses including AUDUSD and USDCAD), S&P futures, 30-year Bonds, Crude Oil Futures, Gold

Futures. At one point the basket offered diversification - not now but I do expect it will do so again in the

future.

Q. Are there any markets you wont trade and if so why?

A. Thin markets like Orange Juice, Heng Seng because of the slippage.

Q. What time frames do you aim for your trades (short term, mid-term, long term, combination of all 3?)A. I trade the monthly trend, the 18-day Barros Swing.

Q. What is the most important lesson youve learned as a trader so far?

2. The educational system by which traders learn to trade (similar to US Army pilots pre-1934) is partially

responsible for the dismal success rate (8%) of traders. It needs revamping.

Q. Do you utilise leveraged products such as CFDs?

A. I trade FXC and Futures because they are the most cost effective way to trade. I do not trade stocks in

bear markets.

Q. Do you utilise any hedging products such as Options?

A. No. Options are outside my realm of expertise.

Q. Do you utilise any fundamental analysis in your trading, or do you use Technical Analysis exclusively?

A. I use Austrian economics to provide a context to my trading but my trading entries and exits are based on

technical analysis.

Q. Can you give the details of one of your best trades (setup, entry, exit, etc).

A. On April 29 I said in my Forum Daily Free Service that I believed that the S&P had topped. I sold a full size position.

The next day, the S&P pushed past minor resistance, so I covered 1/4 of my positions. I was expecting the market to

head higher but on May 4, the S&P had a bearish-conviction bar down and I added to my shorts. By end of trading

May 4, I had twice my normal position. I covered all my shorts on May 6.

A. 1. Success comes from the consistent execution of my trading and risk management plans.

Austrian School economists hold that the complexity of human behaviour makes mathematical modelling of an evolving market extremely

difficult (or undecidable) and advocate a laissez faire approach to the economy. Austrian School economists advocate the stri ct enforcement ofvoluntary contractual agreements between economic agents, and hold that commercial transactions should be subject to the smallest possible

imposition of forces they consider to be coercive. In particular, they advocate an extremely limited role for government and argue for the

smallest possible amount of government intervention in the economy, especially in the area of money production (advocating instead a

commodity-money system).


14/40

Q. With the debt problems in Europe, and the massive bail outs weve seen in Australia and across the

globe, what effect do you think this will have on the markets (if any)?

A. Add dark pools and quant trading, and you have the recipe for greater volatility. Success will depend

on knowing when to stay away from the markets as much as knowing when to take part. This will be a

function of our personality and trading methodology.

A. 1) The beliefs that, a) money can be made from the markets b) I can make money from the markets

c) I deserve to make money from the markets.

2) Honesty - to see what the market is telling us rather than fit the information to our preconceptions.

3) Integrity - to keep the promises we make to ourselves.

Q. The internet is flooded with claims market traders can see 1000s of percent profit each year which can

be very misleading to those just starting out. What would you consider to be an achievable average

return (p.a.) for people trading the markets?

A. That is a difficult question because it depends on the trader and where he is in his stage of a trader's

evolution. With low risk of ruin, probably around 15% to 20%.

Q. Do you recommend your book, The Nature of Trends, for novice traders or does it require some

experience in the markets to be fully beneficial? What knowledge were you hoping to impart to your

readers?

A. The Nature Of Trends is aimed at the experienced trader. For most experienced traders, Nature of

Trends brings a fresh perspective with a robust edge. If you are a novice, it will take effort to master

the material. I am writing a new book with the target audience being the novice.

In Nature Of Trends I was looking to provide an approach that was statistically sound and one which

moved away from the normal set of Technical Analysis tools.

About The Nature of Trends

The Nature of trends draws on the

latest developments in theneurology, psychology, game

theory and complexity theory to

construct a written trading plan

with an edge. The books step by

step approach will assist traders in

their quest for investing and

trading success.

The Nature of Trends provides a template for a

successful trading plan. It assists the trader to answer

questions such as:

What are the conditions for low-risk entry?What is the trend of my time frame?Once in a trade, how can risk be managed?This practical guide to identifying trends and

determining their likelihood of continuing or changing is

an essential tool for traders looking to achieve their

About Ray Barros

Ray Barros is a professional

trader, fund manager, author,and educator with over 30 years

experience in the markets. Ray

has appeared on Singapores

Chanel News Asia, Bloomberg and

CNBC and has been regularly featured in regional

newspapers and publications like Sydney Morning

Herald, Your Trading Edge Magazine, Business Times,

and Smart Investor. The interviews have focused on his

trading strategies as well as his opinions on market

sentiment. They have also dealt with his track record,

trading philosophy, how and why he got into trading,

and what advice he would give to those wishing to

become traders/investors.

Ray can be contacted through his website

www.tradingsuccess.com

Q. If you had to pick 3 things no trader should be without, what would they be and why?

Dark Pool Liquidity is a term that refers to the trading volume created from institutional orders, which are unavailable to the public. The bulk of dark pool

liquidity is represented by block trades facilitated away from the central exchanges.Source: Investopedia.com

financial goals.Click here to purchase.
http://tradingsuccess.com/http://amazon.com/Nature-Trends-Strategies-Successful-Investing/dp/047082235X/ref=sr_1_1?ie=UTF8&s=books&qid=1274152393&sr=1-1http://amazon.com/Nature-Trends-Strategies-Successful-Investing/dp/047082235X/ref=sr_1_1?ie=UTF8&s=books&qid=1274152393&sr=1-1http://tradingsuccess.com/http://images.google.com.au/imgres?imgurl=http://4.bp.blogspot.com/_49PrmhLYWuI/SI0kX8aJsjI/AAAAAAAAATI/JrP5zA4Xd3g/s200/20080716_raybarros.gif&imgrefurl=http://yyklse.blogspot.com/2008/07/learn-from-mr-ray-barros-professional.html&usg=__P32TQUmU99NYA2ZKlGcJ8EjhGtw=&h=166&w=154&sz=13&hl=en&start=23&tbnid=rbimAOOev6VWgM:&tbnh=99&tbnw=92&prev=/images?q=ray+barros&gbv=2&ndsp=21&hl=en&sa=N&start=21


15/40Th e Edu cated An alyst | M ovin g Averages JULY/ AUG 2010

Despite many innovat ions in technical analysis over the

years, the m oving average in a l l o f i t s form s remains oneof t he m ost pow er fu l methods ava ilab le f o r analysing,

t rading and prof i t ing f rom f inanc ia l market movements .

M oving averages can be p ut to a w ide d iversi ty of uses

f rom assessing the major t r end of t he market w i th in any

t i m e f r am e , r i gh t t h r ough t o det ect i ng sho r t - t er m

overbought /oversold condi t ions. As a consequence,

m oving averages form a cr it ica l comp onent in m any high

qual i t y f ixed rules t rad ing system s.

There has been a lot of innovat ion in moving averagesover the years . However , the bas ic concept is that of

smoothing out shor t - term pr ice f luc tuat ions in order to

gain a bet ter p ic ture of the overal l t rend. The spec i f ic

calculat ion for achiev ing th is may di f fer according to the

type o f average used, but on ce th is sm oot hing has been

achieved, one or more such averages of d i f ferent

t i m e f r am es m ay t hen be c om par ed w i t h each o t he r t o

ga in add i t iona l i n fo rmat ion about marke t movements

and resu lt i ng t rad ing oppor tun i t i es.

Basic M oving Aver age Calculat ions

The simple moving average is calculated by adding the

prices (general ly c losing prices, but no t necessari ly) over

n t im e per iods, and then d iv id ing by the num ber o f t ime

per iods:

M oving Average (n) = Price(1) +Price(2) +Price(3)+ +Price(n)

__________________________________n*

This type o f m ov ing average is the m ost comm only used.I t has this fact as i ts chief advantage, in so far as i t fo rm sa ready basis of com par ison because so many p layers inthe market use i t . For example, a lo t of people l ike tot rack the 200 -day moving average because th ey knowthat many long- term players such as investment fundst rack i t s m ovements close ly and fo l low i t .

Other k inds of mo v ing average have been created,

usual ly wi th a v iew to correct ing some perceiveddef ic iency in the s imple average. The weighted movingaverage gives more recent pr ice act ion a progressivelylarger weight ing than more d is tant pr ice act ion at thebeginning of the sequence. The not ion is that morerecent pr ice act ion should be g iven greatercons iderat ion than pr ices that occurred fur ther back inthe past , par t icu lar ly in the case of longer movingaverages. Hence, i f w(n) is the weight of Price (n) inper iod n, th e calculat ion is:

W eighted M oving Average (n) = w(1)* Pr ice1 +w (2)* Price2+ . +w (n)* Price(n)

_________________________________ _____n * w ( n )

w here w (n) i s t he sum o f t he ind iv idua l we igh ts .

Usual ly , the w eights used are l inear ; for exam ple i f t hemos t recent pr ice is Pr ice1 and n=5, then w e m ight use:w(1)=5, w(2)=4, w(3)=3, w(4)=2, w(5)=1. This gives the

requi red heav ier weight ing to the most recent pr ice,Pr i ce1 , and cor respond ing ly less we igh t in l i near l yreduc ing fashion to o ther pr ices in the sequence.

Yet other k inds of moving average calculat ion exist . Forexample, the exponent ia l mov ing average uses weightsder ived f rom an exponent ia l sequence. Never theless,how ever these moving averages m ay be calculated, thepurp ose is u lt im ately the same. I t is to smo oth out noiseand random f luc tuat ions f rom t he pr ice ser ies in order togive the best poss ib le p ic ture of the main t rend in the

t imef rame being cons idered. From that point , th isin fo rmat ion may be used in con junc t ion w i th t ha t f romother moving averages or even other technicalindicator s a ltogeth er .

How M oving Averages Are Used

Al though the calculat ions used to obta in movingaverages may be som ew hat in t r icate, thei r use is ratherm or e s im p l e and i m m ed ia t e.

One m ay use a single m oving average to bot h deter m inethe general d i rect ion o f the t r end, as w el l to f ind suppo r t

and r esistance zon es in exact ly t he same m anner as you

MOVING AVERAGESIN THEORY AND PRACTICE.

With Dr Asoka Selvara ah



w ould fo r a standard t rend l ine. When pr ice is above the

single moving average and t he lat ter is point ing up w ard,

then th is is a clear indicat ion of an up t ren d. Conversely

when pr ice is below the average and the lat ter is

point ing down, then th is is c lear indicat ion of adownt rend. However , no te tha t s ince the mov ing

average is a lagging indicator , i t therefo re indicates w hat

the t rend has been up t o th is point , but no t necessar i ly

i n t o t he f u t u r e . Havi ng sa id t ha t , a sk il f u l t echn i ca l

analyst can integrate the moving average analysis with

ot her technical indicators to generate a h igh prob abi l it y

assessm ent of h ow pr ices are l ike ly to m ove.

The two moving average combinat ion is probably the

m ost com m only used because i t is very ef fect ive as w el las quick to in t erpret and un ders tand. It a lso readi ly lends

i tsel f to being incorporated into f ixed ru les t rading

systems.

With two moving averages, the shor ter average t racks

the shor ter term t rend whi le the longer average t racks

the longer term t rend. Consequent ly , when the shor ter

average crosses

above or below

the longer t e rmaverage, this

signif ies a

possible t rend

change. I f the

shor ter average

crosses below

the longer t e rm

average, it

means tha t t he

marke t may becommenc ing a

shor t - term

m ov e t o t he

downside, and

vice-versa.

This sort o f crossover characterist ic is com m on ly used in

creat ing automated setup condi t ions. When i t occurs ,

t he marke t i s se tup fo r a new up t rend or downt rend

according to the m oving averages, and consequent ly th et rader creates an ent ry condi t ion to then explo i t that

new s i tuat ion. The s implest ent ry condi t ion is no ent ry

condi t ion at a l l , i .e . one s imply buys or sel ls when the

two averages cross over. However, this sort of system is

highly vulnerable to fa lse moves, and consequent ly

bet ter t rading systems general ly employ a subsequentent ry condi t ion af ter t he m oving average setup has been

tr iggered. Examp les are (1) bu y/ sel l s ignal on candles, (2)

conf irm at ion s f rom oscil lators such as RSI, (3) t ren d l in e

breaks and so on.

W hen th e pr ice act ion i tse l f is inc luded w i th th e mo ving

averages, even m ore u sefu l in form at ion can be g leaned.

I f the pr ice is above th e shor t er m oving average which is

i tsel f above the lo nger m oving average, w e can infer that

the market is in an unambiguous bul l ish condi t ion, andone should be look ing pr imar i ly for buy ing oppor tun i t ies,

or for chances to add to ex is t ing long pos i t ions. I f the

pr ice is below the shor t er m oving average wh ich is i tse l f

be low the longer mov ing average, we in fe r t ha t t he

market is unambiguously bearish. In this case, we are

pr im ar i ly look ing for sel l ing oppo r tun i t ies, or for chances

to add to ex ist ing shor t t rades.

However , when pr i ce i s be tween the two mov ing

averages, the interpretat ion becomes somewhat less

obv ious. Under t h is si tuat ion, the t rader m ight not w ish

to in i t ia te any t rade at a l l bu t ra ther m igh t w a it un t i l t he

s i tuat ion resolves i tse l f c lear ly in to one of the twoscenarios just described above. I f the t rader already

holds an exist ing posit ion and then this neutral scenario

Source: M arket Analyst 6 (www.Market -Analys t .com)



appears , th is might be inferred as an oppor tuni ty to

reduce th e pos i t ion (hopefu l ly by tak ing prof i ts ) or e lse

to c lose i t comp lete ly in ant ic ipat ion of a t rend reversal.

Of course, other forms of technical analys is would be

used to dec idewhich o f t hese

two poss ib i l i t ies

should be

favored. The

t rader m igh t

not necessari ly

do exact ly the

same th ing

under every

such scenario,unless a f ixed

rules t rading

system is being

used.

W i t h t h r ee

m ov i ng

averages, even more possibi l i t ies are introduced. In this

case, the unambiguous bul l ish (bearish) s i tuat ion is

w hen t he shor tes t mo v ing average is above (below) themedium term moving average, which is i tse l f above

(below) the longest m oving average. The next scenar io is

that the shor t average could cross below (above) the

m ed ium t e rm average, bu t t h e la t t e r m igh t s t i ll remain

above (below) the long moving average. This might be

used by the t rader as an ear ly signal of t rend change to

at least exit th e exist in g long or shor t . How ever, this k ind

of s ignal is also t he m ost vulne rable t o false breaks.

Another poss ib i l i t y presented by the three movingaverages is for t he shor tes t average to cross below the

medium term average, which i tse l f c rosses below the

long average. This scenario is a high p rob abi l i ty s i tuat io n

for d ef ini t ely closing ou t exist ing po sit io ns because w hen

both the shor t and medium-term averages cross below

the long- term average, i t means that i t is h ighly l ike ly

that the main t rend has changed. Al though noth ing is

guaranteed, there is much less chance of a whipsaw

when the middle average also conf i rms the s ignal f rom

the shor t average. However , the p r ice you pay for t h is is

that the s ignal takes that much longer to occur and

hence you ex i t your ex ist ing pos i t ion that m uch later .

Three m ov ing average com bina t ions a re o f ten used in

f ixed ru les t rading system s for the very reason t hat t hey

al low for a w ider var iety of respon ses comp ared to a oneor even two moving average combinat ion. The number

o f v ar iab le pa ram e t e r s p r i ce p l us t he t h r ee m ov ing

ave r ages i s g reat e r and becom es g reat e r st i ll if t he

system also includes other technical indicators such as

osci l lators.

In fact , i t is also possible to use four moving averages

(and doubt less more besides). In this case, t reat ing the

fou r as tw o p airs can yield very good results. The an alyst

employs the two longer moving averages to determinethe overal l t rend, using simple crossovers as previously

expla ined. Once the t ren d is def ined in t h is m anner, the

two shor ter moving averages c rossovers may then be

used to determine ent ry and ex i t s ignals with in the

overall direction of the m ain trend . For example, taking

the two longer term moving averages, i f the shor tes t of

th is pai r is above th e longer , then t he m arket is overal l

bul l ish. Given t hat th is is the case, one th en u ses bul l ish

crossovers of the two shor ter term moving averages to

enter long trends ONLY, and bearish crossovers to exit

those long pos i t ions. Out r ight shor t pos i t ions are not

Source: M arket Analyst 6 (www.Market -Analys t .com)



entered unt i l the pai r of longer t erm averages cross into

bear mode. When they do, only shor t t rades are taken

thereaf ter , again us ing the shor ter moving average

crossovers.

M oving Av erages Used As Oscillator s

M oving averages comb inat ions may also b e used to

create osc i l la tors . This may be done in a number of

d i f ferent w ays.

In the famo us M oving Average Convergence Divergence

(M ACD) osci l lato r, the b asic idea is to t ake the difference

between 12-per iod and the 26-per iod exponent ia l

m ov ing averages, wh ich pro duces the f i rst l ine of tw o in

the osci l lator. The second l ine, cal led the signal l ine, iscalculated as the exponent ia l equivalent of the 9 -per iod

moving average. Of course, al l of these numbers can be

var ied.

Traders then u sed th e M ACD by look ing for (1)

crossovers of t he t w o l ines, (2) crossings of t he zero l ine,

(3) overbought /oversold condi t ions indicated by the

osc i l la tor when compared to prev ious values of i tse l f

dur ing past market ex t remes, (4) break ing of t r end l ines

draw n up on the M ACD l ine i tse lf , (5) osci l la tordivergences.

Actual ly , mov ing averages are used in many more

osci l lator s than jus t t he M ACD and can give value far in

excess of thei r usual means of in t erpret at ion.

Other Application s of M oving Averages

In addi t ion t o a l l o f the abo ve, there are s t i l l m ore uses

that m oving averages m ay be put to.

M any market par t i cipan ts l ike to f o l low cer ta in mov ing

averages on the bas is that they know that these are

popu la r and are keen ly watched by o ther marke t

par t ic ipants . A good example of th is is the 200-day

simple moving average. Since this is a very long term

moving average, i t fo l lows the long- term t rend of any

market , i .e . the investor t imef rame. Hence, manyinvestm ent and p ens ion fu nd m anagers keep an eye on

the market re lat ive to the 200-day moving average.

Closes below this average are deemed highly negat ive

and may lead to l iquidat ion of pos i t ions. Thus, a smart

t rader might a lso watch the same 200-day moving

average to gain an idea of what the large p layers are

l ike ly to be th ink ing. The 200-day average of ten g ives

excel lent support and resistance, part ly as a result of a

self - ful f i l l ing prophecy in so far as so many big players

watch this part icular average and make decisions based

upon i t .

One very popular

appl icat ion of

m ov ing averages i s

to pro jec t bands of

a f ixed percentage

above and below

the mov ing

average to f o rm a

pr ice envelope.

The best known

example of th is is

the Bol linger Band,

w hich is st ru c tured

to conta in 95% of

the pr ice act ion

w i t h i n t he

boundar ies o f t heb an ds. He nce , if

the pr ice penet rates the bands in e i ther d i rec t ion, theSource: M arket Analyst 6 (ww w.M arket -Analyst .com)



t rader wou ld e i t her cons ider t he marke t

overbought /oversold and hence potent ia l ly r ipe for a

t rade in t he op pos ite d i rec t ion, or e lse ready to m ake a

breakout in to a new d i rect iona l move.

Percentage pr ice bands around a m oving average need

not be l imi ted to jus t two alone. Some systems have a

series of such bands projected around a single moving

average. When used ei ther a lone or in conjunct ion wi th

ot her t echnical indicators, such price envelopes can yield

very usefu l in form at ion regarding the p resent and l ike ly

fu tu re cond i t ion o f t he m arket .

Another appl icat ion of mov ing averages at tempts to

overcome thei r chief l imi tat ion, which is the fac t that

they are lagging indicators. Al l technical sof tware

packages nowadays a l low you to create a moving

average based upon the usual h isto r ical data, and t hen

displace i t for w ard a f ixed num ber of t im e per iods. The

Displaced M oving Average (DM A) creates an ef fect

s imi lar to pro jec t ing the moving average forward in

t ime, rather l ike hav ing tomorrows moving average

value today. The m ost comm on u se of t he DM A is as a

shor t - t e rm t rend ind ica to r .

One o f th e chief draw backs to a l l m ov ing averages is the

di f f icu l t of know ing which t im e per iod m oving average is

op t im a l t o use w i th w h ich m arket , and a lso w hether t he

analyst is bet t er of f look ing at one, tw o or m ore m oving

averages combinat ions. To overcome these problems,

Trading Systems exper t Perry Kaufman invented the

Adapt ive M oving Average, w hich is comm only avai lable

in pret ty wel l a l l technical analys is sof tware programs.

The Adapt ive M oving Average is a single average which

dynamical ly var ies i ts own length, typ ical ly f rom a 2-per iod to a 30-per iod average, according to the degree

of volat i l i t y and d i rec t ional ity in the m arket .

Hence, when the market is t rending s t rongly wi th l i t t le

volat i l i t y , the length of the average wi l l decrease

tow ards i t s m in imum va lue. However , w hen the marke t

trend eventual ly stal ls and a t rading range ensues, the

Adapt ive M oving Average w i l l grow longer , tending

to ward s i ts m aximu m value.

The secret to using this indicator is NOT to look for

crossovers between pr ice and moving average, but

s imply to cons ider the overal l d i rec t ion of the moving

average i tse l f . Hence, when the average points up, the

t rend i s up , and when i t po in t s down, t he t rend i s dow n.

W hen th e d i rect ion of t he Adapt ive M oving Average is

hor izonta l , the market is in a t rading range (at leastw i t h i n t he ov er a ll t im e f r am e da il y, w eek ly , m on t h l y

in which the Adapt ive Average has been

calculated).Thus, you only need ONE moving average,

no t two or more , t o very neat l y de te rm ine the overa l l

m arke t t rend .

Closing Summary

In conc lus ion, the moving average remains a very

powerfu l technical tool . I t g ives the analys t / t rader a

large range of possib le met hod s for det erm ining overall

market t rend across d i f ferent t ime f rames,

overbought /oversold condi t ions, t rade ent ry /ex i t

s ignals, and can of ten serve as excel lent zones of

suppo r t and r esistance. M oving averages a lso form a

cri t ical part of many excel lent rules-based technical

t r ading system s.

They are a crucial part of the arsenal of any serious

technical analys t / t rader and should be s tudied and

researched in depth in order to gain a l l o f the many

benef i ts that they of fer .

About Dr. Asoka Selvarajah

Dr. Asoka Selvarajah is a form er investm ent ban ker of 11 years

experience, as well as a f inancial markets trader/researcher

for many more. He worked as Technical Analyst for several

ma jor W all Street f irm s and w as a senior tradin g strat egist for

a mult i-bil l ion dollar investment fund in the UK. His work has

been featured on Reuters and he has been interviewed by

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20/40
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21/40Th e Edu cated An alyst |

This ar t ic le is a fo l low on f rom the pre

LESSON S IN GEOM ETRY . It i s no t so much a

but t he pic tures that th e market prov ides andin to char t s, w h ich a t t im es can be pure geo

M ARKET ANALYST 6 Sof tw are is a wo nderfu l

some of the hand drawn char ts of the var io

he lp y ou t rade w i t h t he t r end .

I consider t he h al f hour ly char t on the ASX 2

the m ost im por tan t one you shou ld main ta in

w or th t he e f fo r t a long w i th a 2 p t . P& F char t

the same t ime as the pr i ce act ion . I do m ine

Tic data wi th 4 screens 2 char ts of SPI & indata be low .

I t i s m ak ing my l i fe so m uch easier t o fo

exci t ing and vo lat i l e markets in t raday w here a

detai l is so im port ant .

The prev ious ar t i cle conta ined the i ll ust ra t ion

hour ly a lm ost up to t he Apr i l 2010 h igh o f t h

mark et . It p rov ided some w onde r f u l t r ends,

us ing Gann square over lays. The current charM ay show s how quick ly the bear can take hol

The met hodo logy w h i ch I have been t eac hin

prod uces excel lent resul ts .

This was described in detai l in the last i

D i rect ional M ovem ent System has been out

recent w eeks, prov id ing th e crossover sell s ig

mark et t opped , con f i rm ing a marke t t o be t r

t he sho r t si de. When t he -DI c rossov ers t he

take the shor t t rades. A t rend ing ADX, usua l

leve l as the new t rend gets underw ay , i s a

the s t rength o f t he t rend and no t t he d i rect io

ADX is a t rend ing market and th is eventua ll y

signa l t ha t the t rend has run i t s course . Com

a Parabol ic Stop to take you out of the

excel lent ex i t level for a very pro f i table t rade.

t o l eve ls o f +50 p lus. I alw ays cau t ion aga

posi t ions when the ADX is t rending s t rongly .

POETRY INMWit h Dawn Bolton-Smit h

Poe t ry in M ot ion

v ious one

ou t w o rds

translateset ry. Th e

back up to

s styles to

0 index as

. It is w e ll

p lo t ted a t

f r om M A 6

ex and t ic

l low these

t t en t i on t o

o f t h e ha l f

e then bu l l

, especial l y

t up t o 20t h

again.

g f o r y ea rs

ssu e. Th e

tanding in

nals as the

aded f rom

+DI you

ly at a low

easure of

n . A r isin g

prov ides a

b ined w i th

t rade, an

It can rise

inst taking

M y f av ou r it e comb ina t ion a ft e

s imple crossover of 3/5 per iod

need to fo l low DM on the var iof o r y ou rse lf how w e l l it f unct i

char t .

I t ry to leave the fundamen

yesterdays news) and concent

Bo a rd in g u p t he w i n d ow s i s n

w ho bought in to the recent top

now jo ined the losers, hav ing

sense of secur i ty m ost ly f rom pr

Whether we have jus t had a b

M arch 2009 low , o r a bu l l ma

now . It pa id t o f o ll ow t he c ha r t

w ay . If y ou a re t r ad i ng t he st oc

maintain char ts which show th

and ha lf hour ly t rends. The BIG

par t o f your ana lysis. Up to -dat

necess i ty in th is env i ronment

Get t ing in ear ly in any t r end of f

th e least r isk.

M oney managemen t , i f no t p ra

to ru in espec ia l ly in fu tures and

Dologa is m ost adamant about

t rading.

H is b o o k Volume III INTEGRAT

shou ld be in your l ib rary . I f i rm

knowledgeable person on the

technical indicator s, w hich of co6 . The Gann and Jenkins Too l s

now to advantage, and a lso the

I bel ieve Gann w as 90% astro log

SPI t raders cont inue t o b e at t h

most ly d ic tates the opening t re

overnight ranges can b e ext raor

do techn ica l work on the

part icularly S&P 500, Nasdaq 1

the mos t quoted index on th

ar t i cle w i thout t he benef i t o f ac

TION

JULY/AUG 2010

r strong accelerat ion is

mov ing ave rages. You

us t ime f ram es to checkns even on a 1 minute

t a ls t o o t h er s (m o st l y

ra te on the pr i ce t rend.

t a bad idea. Investors

area o f t he m arket h ave

been lu l led into a fa lse

ess and radio com m ent .

ear mark et r a ll y o f f t he

rket is most ly irrelevant

s t echn i ca ls pav ed t he

m arket i t is advisable to

e monthly , weekly , dai ly

PICTURE is an im po rt ant

e cha rt s a re an abso lu t e

of increasing volat i l i ty.

e rs the best rew ards and

c t i ced, can to be a road

de r iv at i ves. D r . M i rcea

M M and p repa ra t ion f o r

D PITCHFORK ANALYSIS

ly bel ieve he is the most

lanet when i t comes to

urse are avai lable in M Aare the on es to b e us ing

stro sect ion .

ical.

m ercy of SYCOM w hich

n d o f o u r m ar ke t . Th ei r

d inary. I t i s adv isab le to

Overseas Bourses and

00 and t he D ow Jones

gl o be . A s I w r i t e t h is

ion to com e in Thursday

Wit h Dawn Bolton-Smit h


22/40Th e Edu cated An alyst | Po et r y in M o t io n JULY/ AUG 2010

night 20 t h M ay, m y three t rusty P& F charts show these

ind ices to be just ho ld ing UPTRENDS. Counter t rend

ral l ies can come out o f the blue and be sharp and nasty

and t he t r ade r needs t o be p repared , bu t ov era ll it i s

i m p o rt a nt t o t r a de t h e m ai n t re n d. I v ie w m o v in g

averages as one of the simplest f o rm s o f t rad ing w i th thet r end . Li kew i se t he P& F cha rt s shou t w hen t he o t he rs

stu t t e r . The open ing and c losing sessions o f t he SPI are

w or th p lo t t ing P& F char t s, especial ly t he session 4 .00-

4 .30 pm w hich show s the num ber o f cont racts t raded a t

the var ious pr ice levels. This can give a lead for the next

day or cont inu ing in to th e overn igh t Sycom w here the

smar t and i n fo rmed m oney comes in t o t he mark et . The

late P&F can give rel iable targets for what eventuates in

Sycom . I pu t t h e overn igh t range as a red bar on m y

char t i t can be very he lp fu l.

I t i s a daunt ing exper ience to be caught on t he w rong

side o f any fu tures m arkets but using the r igh t char t s w i l l

assist in p rov id ing the t r igger po in ts. I recal l Dr .

Ale xan der Eld er , au t ho r o f TRADING FOR A LIVING ,

st a t ing i n one o f hi s sem inars t ha t w hen he en t e rs h i s

deal ing roo m , he alw ays says a l it t le prayer please don t

let m e be a loser to-day .

I cons ider i t a pr iv i lege to be assoc iated wi th theM ARKET ANALYST TEAM . Al l Aust ra l ian and t horo ughly

pro fessional at al l levels, I especial ly value t heir excel lent

suppor t t eam .

On a personal note, I am eagerly await ing a vis i t by Dr.

M i r cea D o loga f r om Pa r is as he has p rom ised me m ore

lessons wi th Gann and Jenk ins Tools in M A 6. I hopeful ly

w i l l be ab le t o r epo r t on t hese i n a f u t u re a r t icl e. O n t he

occas ion of my recent 80 t h b i r t hday , D av id Fu l le r o f

Ful lerm oney (a P& F enth usiast & expert to o) sent m e anema i l w i t h a hug , st a t ing t ha t i f he ev e r mee t s M arga ret

Thatcher he w i l l te l l her she is the Dawn Bol ton-Sm ith o f

po l it i cs! H e d id say t ha t st i ll l ea rn ing at 80 o r h i s more

m odest learn ing at 68 , i t i s wo nder fu l and what keeps

the bra in ale r t . I nvestm ent ana lysis i s, o r shou ld be , a

cont inuous learn ing curve unt i l we run out o f t im e. He

concluded by saying just t h ink how m uch more I w i ll

know a t 100! There i s a message in th is fo r a l l t raders

coming f rom one o f t he best in the w or ld .

The var ious char ts accom panying th is ar t ic le wi l l prov ide

t he accu ra t e i n fo rma t i on t o copy dead l ine , and a re

w or th s tudy ing . The spec ia l P& F Char t on ASX 200 20

p t one box is t he simp lest , and at t imes p rovi des t he

ear ly and def in i t ive signals par t icular ly w hen th ere is a

m ajor change o f t rend. I used Gann 144 Square over lay

on th is char t and last w eek there was som e impor tan t

geometry , a set up which I had learnt f rom the latePhyl l is Kahn i .e. when price is at a 45 degree angle

junct u re an d is 2/ 3 in t im e (h o r izo nt al Ax is) an d 2/ 3 in

p r i ce w hen t h i s b reak s, expect a M O MEN TU M M O VE

DOWN. Th is happened th is week w i th the index at c lose

4316 on 7 t h M ay 20 10 t h e r o w o f 0 s d o w n f o r a 43 20

p lo t . O u r mark et has b rok en ma jo r suppo r t t he bear

come t h aga in ! Look s simp le in h i ndsi gh t , bu t ex ci t ing if

you not iced i t w i th fores ight . I suggest a l l ser ious t raders

keep th is char t . I f you wou ld l ike a scanned copy wh ich

you cou ld t ransfer t o a sheet o f char t paper , you cou ld

send m e an emai l : dawnbo l tonsmi th@optusnet . com.

This char t wi l l prov ide a valuable par t of your roadmap

f o r t he f u t u re . By pu t t i ng t he p lo t s on by hand , y ou hav e

an awareness o f t h e prevai li ng t rend. It i s t he o ldest

fo rm of char t ing in th is day o f soph ist i ca ted b lack box

system s, and at t imes tends to ou t sh ine them.

Chart No. (1) ASX 200 Half Hour ly to 20/ 5/ 10
mailto:[email protected]:[email protected]


23/40Th e Edu cated An alyst | Po et r y in M o t io n JULY/ AUG 2010

(2 ) ASX 200 Ha lf Hour ly a recent example o f a Gann

Square 144 over lay - pure Gann and Geomet ry f rom the

7 t h M ay low w h ich prov ided a sizeab le bounce in the

market .

( 3) A SX 200 20 Pt 1 box P& F t o 20/ 5 / 10

(4 ) BH P 5 m i n ut e ch ar t f ro m M A 6 scr ee n d um p ( t h e

p r in t er do es n o t do it j ust ice ). O ne of t he big

heavyweights in the index. A se l l signa l f rom DM on 20 t h

Apri l at 42.80 +DI 29 DI 38, ADX 16.

20 t h M a y - 36.75 +DI 9 DI 36 . ADX 49. So m e nice

signals there fo r day t raders. So far a t rou ble f ree r ide

for t he shor t s and put op t ions . The Resources Tax news

a t 39 .5 3 t h e m a rk et w a s al re ad y in d o w n t r e nd . A b lu e

p r i nt o f t h i s me t hodo logy t o p ro t ect and p rese rve

capital .

Good Trading.

Dawn Bol ton-Sm ith

About the Author

Dawn Bolt on-Sm ith is th e mat riarch of technical

analysis in Austra lia, wit h a career spanning 43 years. A

fem ale pioneer of t rading in Austra lia, Daw n

successfully predicted t he 1974 share crash and called

the bott om of the market to wi t h in four points .


24/40Th e Edu cated An alyst | Co n t in u at ion Pat t ern s Co n t in ued JULY / AUG 2010

ow w e are get t ing tow ards the bus iness end

of th is ident i f icat ion process for what is

undoubted ly , f o r many , one o f t he mos t

prof i table t rading techniques of a l l.

W hy wo u ld I say tha t? Because, un l i ke many o ther

techn iques, cont inuat ion pat te rns w ork equa ll y w e l l

w heth er going long or going shor t .

Therefore, because the combined t rending t ime going

up plus going down is longer than the t ime they go

s ideways, the informed and pract iced t rader ispresented w i th more pa t te rn en t ry oppor tun i t ies than

m any o ther en t ry techn iques.

Dur ing the Bu l l run f rom M arch 2003 to December 2007,

there were approx imate ly 10 pa t te rn en t ry

opportuni t ies to every t rend change opportuni ty . Now

while this seems logical in hindsight, i t wasnt unt i l late

2005, ear ly 2006 that i t w as real ised th at w e w ere in the

biggest Bul l run, in Austral ia anyway, since the run into

1987.

Dur ing November & Decem ber 2007, there were a large

number of d i rect ional change (Trend Change) ent r ies

w h i c h p r esen t ed t hem se lv es. Si nce D ecem ber 2007 ,

how ev e r t hese con t i nuat i on pat t e r ns have al so

presented a la rge numb er o f en t ry oppor tun i t ies dur ing

the downward run, and have cont inued to do so s ince

the m arket changed di rect ion in M arch of 2009.

At th e r isk of repeat ing mysel f , I th ink i t impo rtant hereto re-state a view I have long had, which is also backed

by many successful t raders Price is King Indicators

are confirmation only. The share p rice i tself wi l l tel l you

everyth ing you need to know about w hen to ge t in and

w h e n t o ge t o u t t o o m a n y p e op le lo o k f o r t he la te st ,

you beaut , you can t bend i t indicator wi th a 100%

success rate .

Please do n ot fa l l in to th is t rap, i t is an easy one to fa l l

into. Why is this? The answer is s imple, the abovedescr ibed indicator means that we don t have to spend

count less hours researching, test ing, applying in real

t ime, before we get to make squi l l ions f rom the market

w i th very l it t l e e f fo r t .

This is no more t rue than wi th cont inuat ion pat terns.

Pr ice is what te l ls you whether i t is a cont inuat ion

pat tern or ret racement . Pr ice te l ls you when to get in

and when to ge t ou t .

Now w e have establ ished t hat p r ice is k ing, let u s look at

how w e c an u t il ise w ha t w e have cov e red so f a r w ha t

does a pattern actual ly tel l us? I t tel ls us which direct ion

the pr ice is expected to t ravel and gives us a minim umdest inat ion point o r target for the pr ice to reach.

Research has shown that a cont inuat ion pat tern, as

discussed in th is ser ies of ar t ic les, has a probabi l i ty o f

d i rect ional cont inuat ion of in excess of 80%, and once

that d i rect ion has been conf i rmed, target probabi l i ty in

excess of 90 %. In oth er w ord s, on ce a correct ly iden t i f ied

pat te rn has broken out in t h e expec ted d i rec t ion , t here

is a 90% or greater pro babi l i ty that i t w i l l reach i ts target .

This is very exc i t ing news as we not only know the

intend ed di rect ion, but a lso th e distance to be t ravel led,

or in o ther words , t he m in imum expec ted pro f i t f rom

the transact ion. This aids us enormously as i t then tel ls

us immediately , wi th a >=90% probabi l i ty what reward

to r isk we are l ikely to achieve should we enter the

t ransact ion.

M any of t he no v ice t r aders amo ngst u s are, at th is stage

wonder ing why we should be exc i ted by th is , as manyare not aw are of wh at good r isk m anagem ent st rategies

m ean, or how they are an in tegral par t o f t he i r surv iva l

as a t rader .

Let m e digress for a m om ent .

Rew ard: Risk

I f you were to r isk $1.00 per share on a t ransact ion

($1.00 being the di f ference between your ent ry f igure

and your Stop Loss ot herw ise know n as Trade Risk persha re ) w ou l d y ou li ke t o see a po t en t i al re t u r n o f

$1.00?

CON TINUATION PATTERNSCONTINUED....

W ith Peter Varcoe



Or w ould you l ike to see a poten t ia l return o f $2.00 per

share for e ach $1.00 r isked?

Or w ould you l ike to see a poten t ia l return o f $3.00 per

share for every $1 .00 r isked?

Or wou ld the po tent ia l re tu rn wh ich you wou ld l i ke to

see, be l inked to w hether com pany involved w as a blue

chip, midcap or speculat ive com pany?

Personal ly I l ike to see a potent ia l return as fo l lows:

Blue Ch ip 2 :1

M id Cap 3:1

Specu lat ive 5:1

The major advantage wi th cont inuat ion pat terns in

regard to r isk management is that they immediately

show you what you R:R ( reward to r i sk rat io ) i s,

therefo re a l low ing greater f lex ib i l i t y in dec ision m aking.

I w i l l go int o t h is in greater det ai l in later ar t ic les, but I

w as taught t o take in to considerat ion severa l r i sk

m anagem en t pa r am e t e r s by m y m en t o r Rob Lennox

(also a cont r ibut ing author t o Educated Analyst ) . I owe a

great deal for a ll the ext ra t im e, ef for t and energy he put

into me as I was a s tudent under h im learning,

essent ial ly, f rom scratch.

The basic r isk m anagem ent paramet ers Rob taught then

w ere , in com binat ion :

Capi ta l Exposure how m uch capi ta l exposed to a single

t rade.

Cap it a l Al loca t ion how m uc h c ap i t al exposed t o BC

M C S.

2% rule M ax of 2% of capi ta l exposed as a t rade r isk .

Rew ard to Risk param ete rs.

These guidel ines have stoo d bot h m ysel f , and m y fe l low

students who fo l lowed them, in very good s tead over

the last 10years Thanks Rob.

Get t ing back on t rack the ta rge t a llows us to p re p lan ,

w i th g reat accuracy , more so than d i rect iona l change

t rades, our R:R and ther efore conf i rm w hether t he t rade

is viable .

Lets get m ore specif ic shal l w e?

Pat tern ident i f icat ion guidel ines:

Al l cont inuat ion pat terns need to f i rst ly be ident i f ied by

the format ion being a consol idat ion. Af ter that we get

m ore speci f ic for each type of pat t ern.

Flag: Ascend ing

Descending

Tr iangle: Ascend ing

Symmetr ical

Descending

Pennan t s: Ascend ing

Symmetr ical

Descending

W i th f lags, we need to be ab le to p lace a pa ir o f para lle l

l ines around the consol idat ion (we wi l l cal l these

momentum l ines ) , w i th at least 2 touches on each of

the l ines. The upper momentum l ine needs to be very

accurate to ensure highest p robabi l i ty fac tor .

The low er m om entu m l ine can be a line of best f i t , but i t

needs to have very l i t t le over lap and under lap, which

w i l l make mo re sense wi th a pract ical exam ple.

In the case of f lags, the target is determined in the

fol lowing way. The dis tance (pr ice di f ference) between


26/40



W e are going to look at a pot ent ia l f lag form at ion as i t form s in real t ime, wi t h real pr ice bars, then w e w i l l apply th e

target ident i f icat ion to i t and th en determ ine whet her i t reached i ts target or not .

Supercheap is the com pany w e w i l l look at in th is i l lust rat io n.

W e can see that Supercheap changed di rect ion in June 2006, and then had a st ro ng upw ard run, w i th a coup le of

pauses dur ing that ru n.

Is th is pause anoth er of w hat w e saw ear l ier in August & Septem ber??

Tim e w i l l te l l.

The f i rs t th ing we need to look at is whether we can apply our paral le l l ines around the pause at the top of the

upw ard run, and th e current answer is yes w e can.


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28/40



Using the ver t ical l ine funct ion , w e can see where the

breakout , i f i t happens next

week, wi l l prov ide our ent ry . I

do bel ieve in calculat ing this

exactly, as I have seen some

very large discrepancies basedon the use of cursors and

assumpt ion that the l ine was

correct ly drawn exact ly where

i t should have been.

In th is case th e ent ry, sho uld i t

o ccu r ne xt w e ek , w i ll b e

approx im ately $2.84.

As we can see in the next

char t , our pr ice penet rated

t he uppe r m om en t um l i ne ,

bu t no t t he en t ry p r i ce .

H ow ev er w e now have t o r e l oca t e ou r upper and low er

m om entum l ines to keep to our ident i f icat ion cr i t e r ia, as

show n be low .

Som et imes at t h i s po in t we cannot ge t a paral le l low er

m om entum l ine to work proper ly w i th m in im al under &

over lap. Should th is be the case, be prepared to d iscard

t h i s as a t r ad ing pa t t er n . O bse r va t ion i nd ic at es t ha t a t

th is t ime the pa t te rn i s

no longer v iable wi th in

t h e sam e pr o bab ilit ie s

wh ich we have come to

expect .

I t m ay be as sim ple as us

being too enthus iast ic in

the f i rs t p lace and

ident i fy ing something

w hich wasn t really there

Desperat ion, self

conf idence, enthusiasm

made us see th ings which weren t there in the f i rs t

p lace. I know that I have been gui l ty of t h is same t h ing in

the past .

This week our ent ry pr ice is approx imately $2.83, wi th

our s top around $2.70.

So w hat do es next w eek br ing?

M ore d isappo in tment as our p r i ce ac t ion fai led to h i t ou r

ent ry . Damn, th is is get t ing f rust rat ing isn t i t?





Or is i t? For every week our pr ice act ion does not h i t our ent ry pr ice, the ent ry pr ice fa l ls does i t not? The

quest ion w e need t o ask here is, what has happened to o ur t arget pr ice, has it fa l len, or is i t s t i ll the sam e?

The fact is that t he target has not changed, and every week th at our ent ry pr ice fa l ls w i thou t being t r iggered isincreasing the distance betw een our ent ry and the target , al lowing us to expect a h igher am ount of pro f i t is i tno t ?

There is no need to w orry yet , wh at happens next week????


Source: M arket Analyst 6 ( www.Marke t -Ana lys t .com)



Hooray, our ent ry is t r iggered, we are in the t rade and

expect ing to reach our target of $3.96 f rom our ent ry

pr ice of$2.82, which should show us a n ice prof i t of

$1.14 per share, thank you very much. Go you good

th ing gooooo.

Let us jump a few weeks ahead to see what actual ly

happens.

Supercheap reached i ts target in 10 weeks. We would

have made $1.14 prof i t f rom a $2.83 ent ry or 40.28%

pr o f it f r om ou r en t r y p r i ce .

This is not a nor m al prof i t to b e expected f rom a pat tern

ent ry . Rea li t y needs to s tep in here and br ing us back to

ear th. This w as a cont inuat ion pat tern ent ry dur ing w hat

w as to become t he biggest Bul l Run in l iv ing mem ory for

m ost of us . These w ere except ion al ci rcumstances and

shou ld no t be expected to be repeated w i th in the near

fu ture .

M ake no mistake, how ever , t hese sor t o f si t ua t ions w i ll

r epea t t hem se lv es. M ark et s have cy cl es, t hey hav eboom s and busts , and those who do the w ork now , who

are cons is tent ly accurate in thei r determinat ions, who

spend the t ime necessary to become very prof ic ient in

the use and appl icat ion of t hese, and ot her t echniques,

wi l l be in the best pos i t ion to make large prof i ts f rom

these si tuat ions as they ar ise in the futu re.

M y ow n exper ience has show n tha t w i th pa t te rns, when

they are correct ly ident i f ied, they usual ly reach thei r

t a rgets w i th in 10 w eeks. The norm al p ro f i t seems to fal l

in t o t he 17 22%

range per t ransact ion

as an aver age.

There is not hing wro ng

w i th these figures, and

t h e y a re v er y go o d i f

you are able to

cons is tent ly ident i fy

co r r ect l y co n t in u at i o n

patterns in excess of

80% of the t im e. Let us

also b ear in m ind, that

even those pat terns

which do not reach

the i r t argets st i l l g ive

you an oppor tun i t y t o

m ake a pro f i t .

Imagine wi th Supercheap i f it only reached $3.50 and

then fe l l away, an ef fect ive t ra i l ing s top would have

locked in some p rof i t , a lbeit no t as m uch as w e ended up

w i th, but s t i l l a good p rof i t .

Cont inuat ion pat terns are a h ighly re l iable, very

prof i t able ent ry technique.

Nex t t ime w e w i l l exp lo re t r iangu lar pa t te rns. These

pa t t e rns hav e t he ir ow n un i que qu ir k s, and w e w i ll

explore th ese in d etai l .

U n t i l t hen m ay t he m ark e t s go w i t h y ou (t hanks f o r

that say ing Rob), and have an aw esom e t im e.

Pete




About Peter Varcoe

Peter s tar ted learning about t rading wi th Wal ls t reet Group

from M elbourne in 1999. He then jo ined the com pany to head

up t he Queensland Branch in M arch 2000. He lef t W al lst reet

Group dur ing 2002 and Joined Stock M arket Investors Group t o

help wi th thei r program of educat ing Pr imary Producers, and

for the next 2 years was educat ing Pr imary Producers in

Victor ia, Queensland and Western Austra l ia.

Peter joined A ustral ian College of Finan cial Educat ion a s Senior

Lecturer in 2005 and cont racted to them fo r educat ion , a

posi t ion which he st i l l holds today.

Peters experience is mainly in shares and CFDs but Forex is

f i l ter ing i ts way into h is t rading for future incorporat ion. He

the educated analyst jul-aug 2010

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