A Technician’s Approach to

Day and Swing Trading
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Definition of Technical Analysis:
The art of identifying a price trend reversal
at a relatively early stage and riding on that
trend until….
…..the weight of the evidence
shows or proves that the trend has reversed.
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The hopes and fears of all market
participants are reflected in one thing…
….the price !!
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Technical analysis assumes that prices
move in trends.
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Trends have a tendency to perpetuate.
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Prices in any freely traded market are
determined by the attitude of all market
participants to the underlying fundamentals.
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“A trend is a trend is a trend.”
Always assume the prevailing trend is in
existence until proven otherwise.
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There is no known technique for
determining the duration and exact
magnitude of a price move.
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We can only recognize a change in
direction.
It doesn’t matter what time frame you
are following...
…the principles of technical analysis
remain constant.
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The only difference is…
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…the longer the time frame, the greater the
significance of any given trend reversal.
The principal difference between day and
swing trading and other forms of trading
is the time frame.
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It doesn’t matter what security you are
following...
…the principles of technical analysis
remain constant.
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Look for the weight of the evidence;
(several indicators, to indicate a reversal.)
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In technical analysis we are dealing in
probabilities, never certainties.
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Always look down before you look up!!
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The first trading objective
is to preserve capital.
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#1 Trading Rule…
Cut losses quickly, and let profits run.
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First trade has a 50% loss!
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Next trade has a 50% gain
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Next 3 trades make 10% each
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Next 4 trades make 80%
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Still not back to break even
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The Indicators
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1.Peak and trough analysis
2.Support and resistance
5. One and two bar price patterns
6. Brokers as a leading market indicator
3. Trendlines
4. Placing stops
1. Peak and Trough Analysis
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Rising peaks and troughs is bullish
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Rally fails to
make a new high.
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B
Declining peaks and
troughs now signaled.
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D
Rising peaks and
troughs now signaled.
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Price falls below
breakout point, but rising
peaks and troughs are
still intact.
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Y
Rising peaks are
still intact . . .
X
. . . but a new low here
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Y
Rising peaks
and troughs
now broken.
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New high!
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What constitutes
a legitimate peak or trough?
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100% of the advance
Retracement should
be about 1/3 - 2/3 of
the previous move.
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Retracement far
less than 1/3 - 2/3
of the previous rally.
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1/3 or more of
time taken to
form the rally.
100%
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S & P Composite
Bear ( Inverted) 6-wk MA
S & P Comp(6MA) 13-wk ROC
Low
High
15-minute bar
S&P Composite
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S&P Composite
S & P Composite
Bear ( Inverted) 6-wk MA
S & P Comp(6MA) 13-wk ROC
New reference high
15-minute bar
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S&P Composite
S & P Composite
Bear ( Inverted) 6-wk MA
S & P Comp(6MA) 13-wk ROC
Still intact
15-minute bar
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S&P Composite
S & P Composite
Bear ( Inverted) 6-wk MA
S & P Comp(6MA) 13-wk ROC
Still intact
15-minute bar
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S&P Composite
S & P Composite
Bear ( Inverted) 6-wk MA
S & P Comp(6MA) 13-wk ROC
Downtrend continues
15-minute bar
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S&P Composite
S & P Composite
Bear ( Inverted) 6-wk MA
S & P Comp(6MA) 13-wk ROC
New reference high
15-minute bar
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S&P Composite
S & P Composite
Bear ( Inverted) 6-wk MA
S & P Comp(6MA) 13-wk ROC
Downtrend still intact
15-minute bar
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S&P Composite
S & P Composite
Bear ( Inverted) 6-wk MA
S & P Comp(6MA) 13-wk ROC
Rally meets resistance
15-minute bar
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S&P Composite
S & P Composite
Bear ( Inverted) 6-wk MA
S & P Comp(6MA) 13-wk ROC
Possible reference low
15-minute bar
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S&P Composite
S & P Composite
Bear ( Inverted) 6-wk MA
S & P Comp(6MA) 13-wk ROC
Breakout above previous
high….
15-minute bar
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S&P Composite
S & P Composite
Bear ( Inverted) 6-wk MA
S & P Comp(6MA) 13-wk ROC
…and this one.
15-minute bar
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S&P Composite
S & P Composite
Bear ( Inverted) 6-wk MA
S & P Comp(6MA) 13-wk ROC
New reference low
15-minute bar
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S&P Composite
S & P Composite
Bear ( Inverted) 6-wk MA
S & P Comp(6MA) 13-wk ROC
New downtrend signaled
15-minute bar
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S&P Composite
S & P Composite
Bear ( Inverted) 6-wk MA
S & P Comp(6MA) 13-wk ROC
Neutral trend
15-minute bar
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S&P Composite
S & P Composite
Bear ( Inverted) 6-wk MA
S & P Comp(6MA) 13-wk ROC
Above previous high
Below previous low
15-minute bar
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S&P Composite
S & P Composite
Bear ( Inverted) 6-wk MA
S & P Comp(6MA) 13-wk ROC
Two
benchmarks
15-minute bar
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S&P Composite
S & P Composite
Bear ( Inverted) 6-wk MA
S & P Comp(6MA) 13-wk ROC
Uptrend
confirmed
15-minute bar
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S&P Composite
S & P Composite
Bear ( Inverted) 6-wk MA
S & P Comp(6MA) 13-wk ROC
Sell signal
15-minute bar
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2. Support and Resistance
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"Support" and "Resistance" are
terms that are often misused!
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“Support” is where a declining trend can be
expected to halt, temporarily, due to a
concentration of demand.
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“Resistance” is where an advancing trend
can be expected to halt, temporarily, due to a
concentration of supply.
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Support and resistance areas are not predictors
if where prices will reverse, but merely indicate
possible, or probable, points.
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Previous low often becomes support
Support
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A
1. Previous low is a good point to expect support.
Support has been violated
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B
A
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B
A
New support level
C
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B
C
A
2. Support reverses its role to resistance
on the way back up.
Resistance
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B
Previous support is now…
…potential
resistance
A
C
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B
C
3. Resistance reverses its role to support
on the way down.
Support again
A
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Where are Support/Resistance
Points Likely to Develop?
1. Previous highs and lows.
2.The upper and lower area of gaps often
represent crucial support / resistance pivotal
points.
3. Retracement points for previous moves; e.g.,
50% Fibonacci retracement levels, etc. .
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3. Trendlines
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Down Trendline
Connect first peak to . . .
. . . second peak
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Breakout point
is the buy signal.
Down Trendline
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This line does not
touch any peaks,
and is not a valid
trendline.
Down Trendline
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To the second low . . .
Connect the final low . . .
Up Trendline
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Trendline break
is the sell signal.
Up Trendline
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Line is invalid because it
only touches one point.
Up Trendline
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Rules for Determining
Significance of Trendlines
3. The steeper the angle of ascent or descent
the less sustainable the trend and therefore
the less significant the line.
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1. The longer the line the greater the trend
being measured and the greater the
significance.
2. The more times a line has been touched or
approached the greater its significance as a
dynamic support resistance zone.
4.Placing Stops
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A key trading rule is always run scared.
The number one decision when entering a
trade is to know where you are going to get out
if the market goes against you.
That means setting stops ahead of time
and changing them when appropriate.
Best place to set stops is above resistance
or below support…
The order is executed immediately the price is
touched and there is no opportunity to second
guess.
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The disadvantage is that locals and market
makers can "go" for your stop.
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Advantages of placing Stops
1. Mentally preparing for the worst.
2. Decision more likely to be made with a more
balanced judgment.
3. A correctly placed stop is usually executed at a
better price.
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For liquidation of long positions, the best point to
place a sell stop is below support and for
covering a short one above resistance.
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December 1997 Corn
10-minute bar
Do not place stops at support
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December 1997 Corn
10-minute bar
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December 1997 Corn
10-minute bar
Place them below support
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December 1997 Corn
10-minute bar
Place them above resistance
S
H
S
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December 1997 Corn
10-minute bar
..but just in case you are
wrong place a sell stop
below support.
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December 1997 Corn
10-minute bar
Break takes
place just
before the
session
close.
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December 1997 Corn
10-minute bar
Breakout
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December 1997 Corn
10-minute bar
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December 1997 Corn
10-minute bar
Enter partial profit taking stop at
level of previous high.
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December 1997 Corn
10-minute bar
Start of gap also represents
resistance.
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December 1997 Corn
10-minute bar
Price reverses at resistance.
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5.One and Two Bar Price
Patterns
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All one and two bar price patterns must
be preceded by a short-term up or down
trend.
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One and two bar patterns are usually
short-term reversal phenomena.
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These patterns indicate exhaustion,
where market psychology has reached a
short-term extreme.
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Outside bars
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Outside bars are reversal patterns that
indicate a change in sentiment.
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Encompasses
trading range of
previous bar and
then some!!
We want the close to
be in the lower end of
the trading range.
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Close should be in the
upper part of the range.
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Measuring the Significance of Outside Bars
1. The wider the bar and the
wider the difference between
the open and close the better.
2. The sharper the preceding rally (reaction for a down
reversal) the better.
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Outside bar
5-minute bar
S&P Composite
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Outside bar failure
5-minute bar
S&P Composite
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Outside bar
“Outside bar”
Dollar/franc 30-minute
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Two Bar Reversals
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Two bar reversals indicate a dramatic
change in sentiment.
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Closes near the high
First bar opens
near the low.
Sharp rally
Two Bar Reversal
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Second bar opens
near the high
Closes near the low
Two Bar Reversal
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Resistance zone
The lower
the
resistance
zone the
better.
Two Bar Reversal
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Opens near low
Opens near high
Closes near low
Closes near high
The higher the
support line the
better.
Two Bar Reversal
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Two bar reversal
Dollar/franc Daily
Dollar/franc Two Bar Reversal
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December 2006 British Pound IMM
10-minute bar
False breakout
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December 2006 British Pound IMM
Hourly bar
Two bar reversal
signals false
breakout
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Price closes near
its low and that of
the previous bar.
5-minute bar
S&P Composite
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Pinocchio Bars
Pinocchio bars give us a false impression
of what is really going on.
1. Intrabar trading pushes the price through support
or resistance but not the open or close.
2. Generally speaking, the longer the nose the
stronger the signal.
Pinocchio Characteristics
False impression
of strength
Most of the trading range
is above the open and
close.
Pinocchio Bars
False impression of
strength
Pinocchio Bars
Pinocchio bar
March 1997 S&P
10-minute bar
Most of bar outside of the recent trading range
March 1997 S&P
10-minute bar
Crude Oil Daily
Pinocchio bar
Strong outside day
Confirmation
Support line
Crude Oil Daily
Pinocchio peak
March 1997 S&P
10-minute bar
Exhaustion = Resistance
March 1997 S&P
10-minute bar
6. Brokers are a leading stock market
indicator.
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1. Stock market discounts corporate profits.
2. Brokers get their profits from financial markets.
c. More underwritings as companies come to market.
b. Falling interest rates mean wider margins on bond and
equity inventory..
a. There is more volume i.e. more commissions.
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3. When markets are rising…..
Why Brokers lead the Market
S&P Composite
S&P vs. Amex Brokers Index
Brokers
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S&P Composite
Merrill Lynch
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Merrill Lynch Vs S&P Composite
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Merrill Lynch Vs S&P Composite
Joint breakout
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Merrill Lynch Vs S&P Composite
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Merrill Lynch Vs S&P Composite
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Merrill Lynch Vs S&P Composite
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Merrill Lynch Vs S&P Composite
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Merrill Lynch
3-month breakout
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The End
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