Trading and Investing in the Forex Markets Using Chart Techniques (eBook)

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2010 | 1. Auflage
100 Seiten
Wiley (Verlag)
978-0-470-68502-0 (ISBN)

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Trading and Investing in the Forex Markets Using Chart Techniques -  Gareth A. Burgess
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This book will show you how to find trade and investment opportunities in the financial markets.

The very nature of trading and investing makes it a difficult business. The uncontrollable human emotions that rotate around greed, fear, and hope, are the elements of the human reaction in the markets that form the same repetitive scenarios time and time again.

This book demonstrates how a few relatively straight forward techniques can create a technical plan that will eliminate the emotional element. It will show you how to find opportunities in the market that are ever present and help to prevent trade and investments becoming subject to irrational thinking brought about by heightened emotions during moments of volatile market conditions.

Finding opportunities within the financial markets is about interpreting the price action. This book demonstrates that by observing certain chart techniques, markets that are changing from bullish to bearish and bearish to bullish can be interpreted in light of the change in market sentiment and produce early warning signals. Entry and exit points can then be located and positions that are already in the markets can be monitored for signs of change or weakness. This book will equip you with the skills to create a plan that can be forged and implemented to make the entire process of trading and investing easier.

By reading this book you will be introduced to some of the familiar chart techniques in such a way that it will not take long to understand how best to apply these techniques to your own charts and study them for potential market opportunities. This book does not dwell on the already known signals and techniques but instead concentrates on demonstrating their use and how to confirm the signals with a variety of techniques that have stood the test of time, pulling them together to create a technical picture that visually displays a change in market sentiment and a plan for trading and investing the markets.

These techniques are covered in a step-by-step process through the chapters of the book that include exercises to test your knowledge as the book proceeds. By learning to read charts you too can find great trade and investment opportunities.



Gareth A Burgess has over 10 years experience applying chart techniques to investment analysis creating technical views and strategies and is a dedicated private investor himself. He is founder of the chart workshop (www.chart-workshop.de), a provider of technical views for investors. His current research interests are on moving average based signals from which many trading systems are based today. Burgess studied at the University of Liverpool and the University of Konstanz, Germany, and graduated with honours. Burgess also went on to complete a Masters research degree, M.Phil.


The financial markets are made up of people from very diverse backgrounds but whether by long or short term investment these market participants all have a desire to win by varying degrees. Many market participants, especially short term traders are often too interested in the release of some fundamental statement or some rumor or the latest bank recommendations than in the trading price of the asset which leads them to trade and fail because of emotions based trading. The daily price movements, the patterns, the volatility that appear on charts, are for whatever reason, the results of the actions of the crowd. To avoid making decisions based on heightened emotions, it is necessary to create your own plan based on your own analysis. This book has been developed to demonstrate how a few relatively straight forward techniques can create a plan that does not rely on outside investment recommendations and therefore takes the emotions out of trading. The book demonstrates how to interpret the market price action in the shape of forms or patterns and Japanese candlesticks to help you: Find markets that are changing from bullish to bearish and from bearish to bullish Locate entry and exit points Monitor the position for signs of change. The book provides a series of charting techniques involving the use of candlesticks as graphical representations of market price actions in the Foreign Exchange markets. It presents methods of chart technical analysis for medium to long-term investing, in a market where despite strong returns when compared with other asset types, it is difficult to realize a profitable return. The title does not dwell on already-known 'signals' represented by candlestick formations, but concentrates instead on how to confirm these signals by applying a variety of confirmation techniques which form a step-by-step process through the chapters of the book to finish by 'Putting It All Together'.

Gareth A Burgess has over 10 years experience applying chart techniques to investment analysis creating technical views and strategies and is a dedicated private investor himself. He is founder of the chart workshop (www.chart-workshop.de), a provider of technical views for investors. His current research interests are on moving average based signals from which many trading systems are based today. Burgess studied at the University of Liverpool and the University of Konstanz, Germany, and graduated with honours. Burgess also went on to complete a Masters research degree, M.Phil.

Preface

1 Candlesticks = Signals

Introduction

Japanese Candlestick Signals

The Single Signals

Japanese Candlesticks - Double Candlestick Signals

Some Candlestick Examples

Some Further Candlestick Examples

Chart Analysis Exercise 1

Chart Analysis Exercise 1 - Answers

Summary

2 Chart Patterns = Opportunity

Continuation Patterns

Reversal Patterns

Bull Flags

Bear Flags

Bull Pennant

Bear Pennant

Bull Symmetrical Triangle

Bear Symmetrical Triangle

Bull Falling Wedge

Bear Rising Wedge

Inverted Head and Shoulders Continuation Pattern

Reversal Patterns

Bullish Head and Shoulders Reversal Pattern

Bearish Head and Shoulders Reversal Pattern

Triple Top Pattern

Triple Bottom Pattern

The Double Top Pattern

The Double Bottom Pattern

The Bullish and Bearish "V" Pattern

Bullish "V" Top

Bearish "V" Bottom

The Broadening Top and Bottom

Some Chart Pattern Examples

Chart Analysis Exercise 2

Chart Analysis Exercise 2 - Answers

Summary

3 Buying and Selling = Support and Resistance Levels

Support and Resistance

Trend Lines

Trend Line Channels

Intermediate Trend Lines

Internal Trend Lines

Pivot Lines

Predetermined Pivot Highs and Lows

Calculated Pivot Lines

Fibonacci Levels

Chart Analysis Exercise 3

Chart Analysis Exercise 3 - Answers

Chart Analysis Exercise 4

Chart Analysis Exercise 4 - Answers

Summary

4 Applying Confirmation = Confidence Building

Simple Moving Average (SMA)

Simple Moving Average Channel

Chart Analysis Exercise 5

Chart Analysis Exercise 5 - Answers

Momentum Oscillators

The RSI Oscillator

The Stochastic Oscillator (Slow)

The MACD Oscillator

Chart Analysis Exercise 6

Chart Analysis Exercise 6 - Answers

Chart Analysis Exercise 7

Chart Analysis Exercise 7 - Answers

Summary

5 Entry and Exit = Right or Wrong?

Climax Volume

Pivot Lines for Entry and Exit

High/Low/Close and High/Low Calculated Pivot Lines

Candlesticks on Short-Term Charts

Patterns on Short-Term Charts

Summary

6 Putting It All Together = Practice and Patience

Finding the Technical Picture

Creating the Watch List

Money Management

Summary

A Word on Filters

A Word on Recommendations

Final Word

Appendix

Further Reading

Index

1
Candlesticks = Signals

INTRODUCTION


Traders and investors have been looking at charts for well over 85 years as Edwin Lefe‘vre wrote (1994, p. 61), “I should say that a chart helps those who can read it or rather who can assimilate what they read”. The problem today, however, arises not only from the interpretation of the chart but also how best to apply the mass of indicators and what indicators are best applied.
This book and the techniques that are discussed set out to demonstrate how to use a chart in the context of the market price action, that is, what to look for on a financial chart and then to place the signal into some form of technical context that will make it possible to gain insight very quickly into a particular currency market, thus saving many hours of fundamental research. This book demonstrates chart analysis that can give you, as a technical trader, an edge for entering a position in the financial markets, allowing the position to be monitored on a daily basis for signs of change or weakness.
The purpose of this book is not to teach you how to trade the markets, but instead how to find opportunities in the markets that present themselves as trade and investment opportunities. The signals, the warnings about market sentiment become apparent once you understand how to apply some of the familiar chart techniques that have stood the test of time, examples made available in such a way that it will not take long to understand how to apply these techniques to your own charts and find trade and investment opportunities.
Regardless of whether you are a part-time trader or full-time trader, your only concern is to find important signals that represent opportunities that will lead you to a profit. The daily market price action that appears on charts in the form of Japanese candlesticks or patterns are, for whatever reason, the result of the actions of market participants, but a technical trader is not interested in the crowd’s reasons for doing what they do, but instead the result of their buying and selling.
It is, however, during the buying and selling that the emotional responses of many market participants are heightened and these emotionally loaded responses to the market occur time and time again and are categorised as FEAR, HOPE and GREED. In light of the vast amount of information that is available via the internet or news channels, these emotions are quite often heightened to such an extent that it is almost impossible to make a clear decision leading in many cases to badly executed trades. The opinion of some expert somehow gets the message across that undermines your objective thinking, and it is ultimately the recommendation that is the technical trader’s worst enemy. To invest in the financial markets it is absolutely necessary to create your own plan based on your own analysis. A trade should be executed from a position of power and confidence not from uncertainty or based on feelings.
In this book the techniques are applied in a relatively straightforward manner so as to create a technical picture on which to base an investment decision that does not rely on any outside recommendations but instead on your own visual analysis of the markets. A chart should be used to identify the opportunities that are ever present in the financial markets, monitor long-term investments and help to plan an investment decisively. Charts should also be used to find the appropriate level at which to enter or exit a position.
Chart analysis is a cold hard study of the markets, it is a study of the price action and nothing more. If the closing price of the Euro continues to move higher in the week then foreign exchange traders and investors will be buying that currency, which is a fact, in spite of what the fundamental and economical reasons may be.
Interpreting a chart is about recognising and understanding the sentiment of the market. If the market was bullish, is it still bullish, if not, why not? Is the market correcting or is it a reversal?
In this book, the more obvious techniques have been taken and applied as ideas for expressing the technical picture. The techniques have been arranged in order of importance and are readily and quickly understandable and bring those searching for a method of interpreting the financial markets to their objective.
Each subject relates to the phenomenon of chart technical analysis with the issue of the investment and trading strategy being part of the plan. Six primary chapters cover the subject matter.
Chapter 1 looks at the categories and ideas behind signals produced by Japanese candlesticks with a focus on the market sentiment. The candles are reduced to eight types in order to comprehend the ideas derived from them, covering the more general standard type signal representing both extreme and normal market conditions with the more abstract representing uncertainty and imminent change.
Chapter 2 relates to the patterns that appear in the financial markets and the various relationships to market sentiment including how to find possible measured targets upon a breakout of the pattern, a pause in the market trend and a change in market sentiment. Patterns are important signals and many market participants trade them.
Chapter 3 looks at the idea of support and resistance levels focusing on trend line support and resistance and the phenomena of polarity and pivot lines that give rise to a simple price observation at levels considered as bullish or bearish, allowing the technical trader to determine market direction and monitor positions.
Chapter 4 introduces the moving averages and the momentum indicators, both of which are based on the underlying price action. The averages supply information about the conditions of the market such as trending environment and support and resistance, the momentum indicators monitor the close in relation to the highs and lows over a set period of time and reflect this as the rate of change within the market. The momentum indicator is used for confirmation of market price action, displaying over-bought and over-sold conditions and divergence.
Chapter 5 applies certain techniques to the charts for finding optimal entry levels as confirmed by the techniques in the previous chapters. The obvious consequences of finding optimal market entry, covered by such themes as volume, pivot lines and interpretation of short-term charts, are very important for the technical trader.
Chapter 6, the final chapter, draws on all the methods and techniques discussed previously in order to create a plan not only for watching the markets for signals but also for developing a strategy to be used for investing and monitoring a position.
All of the methods and ideas covered here come under a form of classification in the world of technical analysis. There will be the view that the ideas contained here must include also the ideas relating to their class. This is not necessarily the case as there has to be an element of will in trading and investing. The operations that involve placing wealth at risk involve emotions, therefore all that can be achieved technically is to arrange those technical tools in accordance with the dominant ideas behind them and convey them in such a manner that the primary task of creating a consistent yet simple technical picture of the financial markets is achieved.
In studying these techniques the reader will undoubtedly try to adopt and produce slight variations. This should be encouraged, however, these techniques, especially those indicators used for the purpose of demonstrating a change in momentum, have stood the test of time, that is, they are universally accepted as being sufficient and do not require change or modification. Applying the same parameters and back testing will prove this argument. It is with these techniques that you will master the basics necessary to understand your own charts and thus read the underlying market sentiment.

JAPANESE CANDLESTICK SIGNALS


On Friday 13 July 2008, the foreign exchange cross EUR/JPY closed the week leaving a large bearish signal on the weekly candlestick chart. This signal, known as a “hanging man” in Japanese candlestick terms, is bearish if seen at certain levels on a chart especially after an advance in recent price action. It is considered by chartists and technical traders to be a warning that the market is reaching a top and may falter on attempts higher. This simple candlestick signal offered traders of the foreign exchange market (Forex or FX) a great opportunity to enter a short position in the EUR against the JPY, see Figure 1.1 overleaf.
Figure 1.1 EUR/JPY weekly chart with large hanging man candlestick.
(source MetaQuotes Software Corp)
The hanging man candlestick signal appeared on the chart because during the early part of the week the market had sold off sharply only to see buyers re-enter the market and push the price back towards the opening levels thus creating the “hanging man” with a lengthy “shadow”.
At the close of that week there would have been many traders in the market, including fresh buyers, all of whom were anticipating higher levels to come and yet were nervous at the slightest decline in price action. The following week a similar candlestick appeared at the weekly close, another warning signal which left many forex traders that weekend concerned about their positions in the market. Two weeks after the first hanging man appeared, clues begin to unfold which confirmed that there is a change taking place in the market, a change which the initial...

Erscheint lt. Verlag 9.2.2010
Reihe/Serie Wiley Trading Series
Sprache englisch
Themenwelt Wirtschaft Betriebswirtschaft / Management Finanzierung
Wirtschaft Volkswirtschaftslehre Finanzwissenschaft
Schlagworte Börsenhandel • Börsenhandel • Finance & Investments • Finanz- u. Anlagewesen • Trading
ISBN-10 0-470-68502-6 / 0470685026
ISBN-13 978-0-470-68502-0 / 9780470685020
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