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Kiev part1

  1. 1. Using Candlestick charts with Support and Resistance as the basis for a trading strategy. Part 1 – Introduction to Support and Resistance ShowFx World Expo – Kiev – 20th May 2017 Written and presented by Clive Lambert MSTA MCSI, Director - FuturesTechs
  2. 2. Clive Lambert • 31 years market experience including 10 years on LIFFE Floor • Founding director of FuturesTechs in 2000 • Leading figure in UK Society of Technical Analysts • - Board Member from 2004 to 2011, 2013 - present • - Regular speaker on yearly Diploma Courses • - Spoke at IFTA Conference on 2011 • Author of “Candlestick Charts”, published in 2009 • Appearances on CNBC, Reuters TV. Regularly quoted on DJ Newswires, Bloomberg and Reuters • 6 times winner at the Technical Analyst Awards
  3. 3. Agenda • Introduction – Technical Analysis vs other ways of looking at the market – Definition of support and resistance – Different traders’ interaction with a level • Including Algorithmic and Fundamental Traders – The markets’ memory • Is TA self fulfilling? • Chart patterns – Double Tops/Bottoms – Head and Shoulders • Levels for Shorter term Trading – Gaps – Outside Days – Pivot Points – Yesterday’s Intra-day charts • Different timeframe charts – Trading around levels • Don’t buy below resistance/sell above support • Factoring S & R into your Reward/Risk parameters/trade management • Summary
  4. 4. Efficient Market Hypothesis 'Random Walk Theory‘ Technical analysis – deals with the 'WHERE?’ Fundamental Analysis – deals with the 'WHY?’ '…nearly every sell side analyst reached the same conclusions about Enron in 2001, right up to the brink of its bankruptcy on Dec. 2. As of Oct. 18, all 15 analysts tracked by Thomson Financial/First Call rated Enron a 'buy'-12 of the 15 called it a 'strong buy.' Because it’s cheap??!!! BUY BUY BUY BUY BUY The distribution of (Stock) Market data doesn’t stick to a 'normal distribution', rather we find a 'Leptokurtic' distribution with 'Fat Tails'. In other words, Markets aren't Random! Academia’s attempt to quantify market action, championed by Eugene Fama and Burton Makeil, and widely credited with the collapse of LTCM Behavioural Finance Academia’s latest attempt to make sense of the markets, a kind of 'EMH' that accepts that human decision making processes (like emotion!) can also have an effect on things (herd instinct, etc).
  5. 5. Support and Resistance • Prices move up and down – Price moves up because there is more demand than supply – more buyers than sellers – Price moves down because there is more supply than demand – more sellers than buyers – Tops and bottoms are formed when the balance between supply and demand changes
  6. 6. Support and Resistance • Support is the name given to a price at which a market bottoms out and the buyers start to outweigh the (previously dominant) sellers • Resistance is the high, where the sellers turn things around and start to outweigh the (previously dominant) buyers Support Resistance
  7. 7. Support and Resistance • To further expand on this we should think about two of the three basic tenets of Technical Analysis • Everything is in the price • Market action is repetitive • Price move in trends, and trends persist
  8. 8. Support and Resistance • Market action is repetitive – Old support and resistance levels are remembered, and referenced, and can often “repeat” – The markets have long memories, and these days we have lots of technology (we all have access to charting systems!) to jog any dimming memories – We shall go into further detail later as to why as we go along • Prices move in trends, and trends persist – Uptrend – Series of higher highs and higher lows – Downtrend – Series of lower highs and lower lows • If you have old highs and lows defining the trend for you, then they become important reference points; important support and resistance levels!
  9. 9. Support and Resistance S S S R R R R Uptrend = Series of higher highs and higher lows. Therefore resistance levels break , while support levels hold Trade uptrends by buying dips or buying breakouts
  10. 10. Support and Resistance S At this time the market is still in an uptrend, and you’d look for a fresh test of the upside resistance… S S S R R R R
  11. 11. Support and Resistance S …and even now we’re still in an uptrend, although some doubts may be creeping in (lower high, but no lower low yet, so not a downtrend) S S S R R R R
  12. 12. Support and Resistance S R Now, because the last support level has broken, after a lower high has been put in place, we are in a downtrend. ALL CHANGE! The support level is the game changer! S S S R R R R
  13. 13. Support and Resistance S S R R R Downtrend establishes further with more lower highs and lower lows. Often old supports can do a job, so know where they are! S S S R R R R
  14. 14. Support and Resistance • So trend spotting and definition relies 100% on support and resistance • So what creates a trend? What makes a market move up and down? • Simple: People buying and selling (ie Everything is in the price) • Or, more specifically: the collective mass of operators in the market place. This is where things get tricky as far as making generalisations is concerned, because there are lots of different types of trader operating in the market, all sorts of people buying and selling.
  15. 15. Support and Resistance • It is important to learn the effect that different market operators can have on price Short term Long Term Scalper … Swing trader ... Prop trader … Wholesale “end” user … Sovereign Wealth Fund Day Trader ... Position trader … Hedge Fund manager … Pension Fund Manager This list is by no means exhaustive, and there will be different traders from different categories who would be in a different place. For example some Hedge Fund traders are high frequency, so would be further towards the left hand side. As a rule of thumb the shorter term a trader is the more reliance they have on Technical Analysis, although this is changing increasingly. Another fairly safe generalisation is that short term traders do lots of trades in smaller size, whereas long term traders do fewer trades in big size!
  16. 16. Support and Resistance • The markets have a memory for old support and resistance levels; you only have to look at a chart for the FTSE 100 to understand this.
  17. 17. Support and Resistance • “Dow 20,000” is a good example of a “psychological” resistance troubling the market as a whole. • Hit 1000 in 1966. Took until 1982 to clear it properly though • Hit 3000 in July 1990. Dropped 700 ticks in the next 3 months. • Failed shy of 4000 in early 1994, didn’t clear this level until March 1995. • Smashed through 5000 in November 1995. Didn’t really stop until we got to 8300 in August 1997. • Hit 10,000 in March 1999. Was still there in April 2005, having been to 11750 then 7200… • Broke above 15000 in March 2013 but not cleanly… • 15000 was defended ardently on pullbacks in 2015-2016. • Got to within 13 ticks of 20000 in December 2016… • This proves that round numbers are an unreliable indicator, but can certainly have a say at times. • After all, who remembers turning 30, 40 or 50?
  18. 18. Support and Resistance • Other traders and their role – “Fundamentalists!” • Good stocks get bought, and this buying will see resistance levels broken • Analyst upgrades and downgrades can move prices through support or resistance levels • “Value” plays can equal “support” plays • They are still the “herd” that us analysts are studying! If the herd make more noise, we hear it! – Algorithmic Trading • Often “Algo” trades are triggered by “events” like a break of a support or resistance level • Most Algo trading is triggered by an uptick in volume, or the release of an economic number, all events that usually provide a break or hold of a support or resistance level • Algo trading models are ultimately written by human beings, so even though it’s a computer doing the trades it is still ultimately a human inputting the criteria!
  19. 19. Support and Resistance • Obviously levels that were the scene of a battle only a few days earlier will be fresh in the market’s memory, but technicians find that support and resistance levels often work well however old they are.
  20. 20. Support and Resistance
  21. 21. Support and Resistance
  22. 22. Support and Resistance
  23. 23. Support and Resistance • Technical Analysis: Self-fulfilling? • As more and more people use charts more will have access to historic data, and be armed with the facts as far as old support and resistance is concerned. – It could be argued that this will make TA increasingly self-fulfilling – But it could also be argued that the most sophisticated investors (the ones with the money!) have had ready access to this information for decades, so nothing’s changed at all! – I believe that the market is too big for any one way of looking at the market to dominate. – Also “Technical Analysis” is a wide church, and at times even Technical Analysts disagree with each other!
  24. 24. Double Tops/Bottoms Double Top • Two price reversals at the same high • The trough between the two peaks must be breached to confirm the Double Top has been activated Double Bottom • Two price reversals at the same low • The high between the two lows must be breached to confirm the Double Bottom has been completed
  25. 25. Double Tops/Bottoms
  26. 26. Double Tops/Bottoms
  27. 27. Double Tops/Bottoms
  28. 28. Double Tops/Bottoms
  29. 29. Head and Shoulders • A series of three peaks in the shape of a Head and Shoulders NECKLINE HEAD RIGHT SHOULDERLEFT SHOULDER “MEASURED MOVE” TARGET
  30. 30. Head and Shoulders Top
  31. 31. Head and Shoulders Top
  32. 32. Head and Shoulders Top • Ideally the volume gets lighter with each peak with the lightest on the right shoulder (the third peak) • The first sell off from the head must go below the high forming the left shoulder • The break of the Neckline should ideally see an uptick in volume and volatility X  
  33. 33. Head and Shoulders Top • A move back to the Neckline after the break is not unusual • A move back above the Neckline negates the pattern • The Neckline can slope higher or lower X  
  34. 34. Head and Shoulders Top S S R R R Is this slide familiar?! In this instance the Neckline is up-sloping so you would get a sell signal from the Head and Shoulders just before the market confirmed the downtrend by confirming lower highs and lower lows… S S S R R R R
  35. 35. Head and Shoulders Bottom
  36. 36. Head and Shoulders Bottom
  37. 37. Chart Patterns - Summary • Chart patterns have caught the interest of Academia. – Federal Reserve Bank of New York staff report from August 1995, on the head & shoulders, entitled ‘Head and Shoulders: not just a flaky Pattern’. Authors are C.L. Osler (Research and Market Analysis Group at the bank) and P.H. Kevin Chang (Stern School of Business). • The Profitability of Technical Analysis: A Review’ by Cheol-Ho Park and Scott H. Irwin, University of Illinois. • A good resource is Thomas Bulkowski’s “Encyclopedia of Chart Patterns” • Also covered in some detail in “Murphy” and/or Kirkpatrick/Dahlquist
  38. 38. Intra-day Support & Resistance • Short term traders rely heavily on support and resistance in their trading. They will be armed with all the important intra-day levels from the previous few days, or the last time we traded at similar levels • They use chart patterns and trendlines in a similar way, but on a 10 minute and/or 30 minute chart instead • They also use Gaps, Market Profile, Moving Averages and Bollinger Bands
  39. 39. Gaps • Why/How gaps occur • Types of gap, and the “psychology” behind them – Breakaway gaps – Measuring gaps – Exhaustion gaps – Island formations • Gaps can be extremely important as support or resistance
  40. 40. Gaps
  41. 41. Gaps • Market gaps higher during an uptrend – Psychology of bulls – Psychology of bears – Activity of day traders • Market is trending lower, and we gap lower – Psychology of bears – Psychology of bulls – Activity of day traders
  42. 42. Gaps
  43. 43. Outside Days • Bullish Outside day: – Reversal signal in a downtrend – Usually used on daily charts – “Western” pattern, similar thinking to the “Bullish Engulfing” candlestick pattern (but not necessarily the same as there is a slightly different set of rules) • Lower low (vs previous day) • Higher high • Higher close
  44. 44. Outside Days
  45. 45. Outside Days • Bearish Outside day: – Reversal signal in an uptrend – Usually used on daily charts – “Western” pattern, similar thinking to the “Bearish Engulfing” candlestick pattern (but not necessarily the same as there is a slightly different set of rules) • Higher high(vs previous day) • Lower low • Lower close
  46. 46. Outside Days
  47. 47. Pivot Points • Pivot Points are a “throw-back” to Futures Pit trading days; when there was very little computing power available to traders. – They could be worked out with a calculator and jotted on to a trading card • They are still used/referenced by traders today, although yours truly isn’t a big fan! • They use the previous days’ high, low and close to calculate 5 levels; the “Pivot Point” plus 2 support and 2 resistance levels. • Calculation: • http://www.futurestechs.co.uk/calculator/ PP = High + Low + Close /3 R1 = PP - (P x 2) – Low R2 = PP + (High – Low) S1 = (PP x 2) - High S2 = PP – (High – Low)
  48. 48. Pivot Points • Have merit in that they have a “volatility” element built in to the calculation. • Best used as confirming levels for “actual” levels. • Useful for short term/day trading target setting.
  49. 49. Intra-day Support & Resistance • Looking at different timeframe charts can give different information • You can find a support level showing up on a 10 minute chart that doesn’t show up on a 30 minute or 60 minute chart • Sometimes the longer term charts cut out some of the noise that appears on something like a 10 minute chart
  50. 50. Intra-day Support & Resistance
  51. 51. Intra-day Support & Resistance
  52. 52. Reversal days • Whenever you’re looking at something that’s hitting a support or resistance level, check to see if there is a pick up in Volume. • A change in sentiment on light volume is likely not an “event” to worry about, and is unlikely to sustain • A challenge of a support or resistance level is a technical event. You want to see a jump in volume and/or volatility accompanying this event, otherwise it’s probably not an event!
  53. 53. Support and Resistance • Take care not to buy things that have strong resistance above… • …and vice versa, avoid selling just on top of support • Ideally buy when there is little potential resistance above, and lots of support below… • …or vice versa - Go short of things that have lots of resistance, and little support • “Never too high to buy” because something on its all time highs has little resistance to worry about!
  54. 54. Support and Resistance • Whenever I’m formulating a trade I try make sure it doesn’t have too many obstacles between entry and (profit) exit, but plenty of levels stopping it from getting stopped out! • It doesn’t matter what timeframe you’re operating on, this holds true • Support and Resistance levels should be used to place stops, and things like trendlines can be extremely effective for trailing stops
  55. 55. Support and Resistance - Summary • Whatever your style of trading/investing, whatever products you’re dealing with, support and resistance is one of the key elements to your decision- making process. • There are lots of different ways of spotting potential support or resistance, and you need to hone your skills and find the ones that work well for YOU in YOUR timeframe and YOUR markets. • In the second half we’ll look at the world of candlestick charts and then see how you can use them in conjunction with Support and Resistance.
  56. 56. Contact Details web: www.futurestechs.co.uk e-mail: info@futurestechs.co.uk twitter: @futurestechs linkedin: Clive Lambert ipad/iphone/Android App: App Store