Random Walk Theory

The Random Walk Theory, developed and nurtured in the academic community, claims that price changes are serially independent and that price history is not a reliable indicator of future price direction. In a nutshell, price movement is random and unpredictable. The theory is based on the efficient market hypothesis, which holds that prices fluctuate randomly about their intrinsic value. It also holds that the best market strategy to follow would be a simple buy and hold strategy as opposed to...

Starc Bands And Keltner Channels

As discussed in Chapter 9, banding techniques have been used for many years. Two types that I prefer are based on the Average True Range. Despite this common factor, these two types of bands are used in very different ways. Average True Range is the average of true price ranges over x periods. True Range is the greatest distance from today's high to low, yesterday's close to today's high, or yesterday's close to today's low. See Welles Wilder's New Concepts in Technical Trading Systems. Manning...

Constant Forward Continuous Contracts

A Constant Forward Continuous Contract looks a constant length of time into the future. It uses more than one contract to do this. A common method is to use the nearest two contracts and do a linear extrapolation of the data. (See Figure D.l.) Figure D.l A visual representation of a continuous contract. One possibility is to give the futures trader (as with the Nearest Contracts) the ability to construct his own Constant Forward Continuous Contract. Three things are needed to do this The...

The Relative Strength Index

Welles Wilder, Jr. and presented in his 1978 book, New Concepts in Technical Trading Systems. We're only going to cover the main points here. A reading of the original work by Wilder himself is recommended for a more in-depth treatment. Because this particular oscillator is so popular among traders, we'll use it to demonstrate most of the principles of oscillator analysis. As Wilder points out, one of the two major problems in constructing a momentum line using price...

The Symmetrical Triangle

The symmetrical triangle or the coil is usually a continuation pattern. It represents a pause in the existing trend after which the original trend is resumed. In the example in Figure 6.1a, the prior trend was up, so that the percentages favor resolution of the triangular consolidation on the upside. If the trend had been down, then the symmetrical triangle would have bearish implications. The minimum requirement for a triangle is four reversal points. Remember that it always takes two points...

The 4 Week Rule Tied to Cycles

Earlier in the chapter reference was made to the importance of the monthly cycle in commodity markets. The 4 week, or 20 day, trading cycle is a dominant cycle that influences all markets. This may help explain why the 4 week time period has proven so successful. Notice that mention was made of 1, 2, and 8 week rules. The principle of harmonics in cyclic analysis holds that each cycle is related to its neighboring cycles next longer and next shorter cycles by 2. In the previous discussion of...

Technical Analysis Applied To Different Time Dimensions

Another strength of the charting approach is its ability to handle different time dimensions. Whether the user is trading the intra-day tic-by-tic changes for day trading purposes or trend trading the intermediate trend, the same principles apply. A time dimension often overlooked is longer range technical forecasting. The opinion expressed in some quarters that charting is useful only in the short term is simply not true. It has been suggested by some that fundamental analysis should be used...

The Fan Principle

Fan Principle Trend Lines

This brings us to another interesting use of the trendline the fan principle. See Figures 4.11a-c. Sometimes after the violation of an up trendline, prices will decline a bit before rallying back to the bottom of the old up trendline now a resistance line . In Figure 4.11a, notice how prices rallied to but failed to penetrate line 1. A Figure 4.11a Example of the fan principle. The breaking of the third trendline signals the reversal of a trend. Notice also that the broken trend-lines 1 and 2...

Trend Has Three Classifications

Secondary Trend Technical Analysis

In addition to having three directions, trend is usually broken down into the three categories mentioned in the previous chapter. Those three categories are the major, intermediate, and near term tends. In reality, there are almost an infinite number of trends interacting with one another, from the very short term trends covering minutes and hours to superlong trends lasting 50 or 100 years. Most technicians, however, limit trend classifications to three. There is a certain amount of ambiguity,...