Fibonacci

 

We owe a debt of gratitude to the Italian mathematician Leonardo Pisano (1170-1250) Best known by his nickname, Fibonacci (he also went by "Bigollo," which may have meant "wandering good-fornothing"), he wrote the famous book, Liber abaci(1202). In it, he introduced to Europe the HinduArabic place-valued decimal system and Arabic. He also discussed mathematical problems that resulted in what we now call the Fibonacci summation sequence and the ratios derived from it. Here's one of the most important problems Pisano posed, and the result. Although the question sounds lighthearted, the answer has produced serious resolutions. "If one places a rabbit couple in an enclosed place, how many rabbits would one obtain after a certain time assuming they reproduce once per month, and that those born can reproduce at the age of a month?" The following infinite progression (now called Fibonacci numbers), results: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, and 144, after each month. You'll notice that Fibonacci numbers run in a sequence. Each successive number equals the sum of the two previous numbers: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, and so forth. The interrelationships between these numbers are intriguing. First, starting with the number five, any of these numbers equals approximately 1.618 times the preceding number. Second, any number equals approximately 0.618 times the subsequent number. Cool, huh? It's remarkable that so many objects formed in Fibonacci proportions occur throughout nature, including butterflies, sea shells, and spiral galaxies. The pentagram, Christian crucifix, and Pythagorean triangles also contain these proportions, as well as the art pieces of Leonardo da Vinci and Michelangelo. The four popular Fibonacci studies used by traders include arcs, fans, retracements, and time zones. Most charting software programs include Fibonacci retracements. Some of the more advanced programs utilize arcs, fans, and time zones. For now, we'll look at retracements.

What you need to know about Fibonacci retracements: Slocks.·often
Fibonacci ratios are gauged at 38.2 percent, 50.0 percent, and 61.8 percent, and are considered a leading indicator (predicting possible future price action).
Your job is to draw an uptrend (or downtrend) line, connecting a major peak and trough. Then, activate your charting software's Fibonacci retracement option. Start at the bottom of the trendline and drag your cursor to the top of the trend. (Fancy charting programs will include a 23.6 percent line.) You'll see five horizontal lines, representing 0.0 percent, then 38.2, 50, 61.8, and 100 percent of the entire move, or trend.
These levels act as support and resistance areas.

Since so many traders use Fibonacci retracement levels for guidance, some support/resistance action may be a self fulfilling prophecy. Still, it's positively uncanny how many times a stock in an uptrend will pull back to a Fibonacci level, then bounce. Or, a stock in a downtrend will rebound to a Fibonacci level, and then begin its fall anew. Some traders use "Fib ratios" by placing their stop-loss points a quarter-point below a stock's 61.8 percent retracement level from the previous high. Remember, though, that no indicator in this world predicts future price movement with absolute accuracy. Just because your stock happens to be heading for a Fibonacci retracement level is no guarantee it's going to halt there and bounce. It could just as easily slice right through it. Indicators-no matter what flavor-are just that. They indicate. Please don't use them as an excuse to stay in a losing position!

Relative Strength Index

 

The RSI, or Relative Strength Index, is a misleading moniker for this reliable oscillator. When we speak of an equity's relative strength, many times we refer to its health as it relates to a broad market index such as the S&P 500, or the industry index where the stock resides, like the semiconductor index ($SOX.X) or the pharmaceutical index ($DRG.X).
The RSI does not compare two separate entities. Introduced by Welles Wilder in the June 1978 issue of Commodities (now Futures) magazine, and in his book published in the same year, New Concepts in Technical Trading Systems, the RSI operates as an oscillator that measures a particular stock's current relative strength as compared to its'own price history. When Wilder first introduced the RSI, he recommended using a 14-day time period. Now, 9-day and 25day RSIs are also favorites. The RSI is one of my preferred oscillators, and we're going to use it in our buying criteria. For multi-day to multiweek holds, the 14-day parameter works well (and is standard in most charting software). So, please stick to that time parameter for now. As you gain more experience, you may want to tweak the setting to a faster, or slower, time period.
As a price-following oscillator, the RSI is plotted on a vertical scale numbered from 1 to 100. It's considered to be oversold when it falls below 25, and overbought when it rises over 75.

Dandy features of the RSI are:
The RSI forms chart patterns, such as a double top or head-and-shoulders, which may not show up in the stock's price pattern.
The RSI may indicate support and resistance levels more clearly than the stock's price pattern.
The RSI makes a fantastic buy/sell decision support tool when it diverges from the stock's price action. For example, the stock may make a new high, but the RSI does not. That's bearish. Or, the price may tumble to a new low, while the RSI moves sideways or up. That's bullish. Prices usually follow the direction taken by the RSI.
To incorporate the RSI into your buy/sell criteria, you'll add it to the signals we already have in place, meaning the 1-2-3 entries, strong volume on the breakout, and price bouncing off a major moving average (such as the 20-day, 40-day, or 50day MAs). Now add the RSI. When you enter a position, you want it to appear in one of these ways:
Oversold, and hooking up from below 30.
Hooking up from below 50 and in an uptrend (making higher lows and higher highs).
Making a bullish divergence by rising when the stock price is consolidating, or pulling back, in the course of

SMA Indicator

A simple moving average is the simplest type of moving average (DUH!). Basically, a simple moving average is calculated by adding up the last “X” period’s closing prices and then dividing that number by X. If you plotted a 5 period simple moving average on a 1 hour chart, you would add up the closing prices for the last 5 hours, and then divide that number by 5. If you were to plot a 5 period simple moving average on a 10 minute chart, you would add up the closing prices of the last 50 minutes and then divide that number by 5. If you were to plot a 5 period simple moving average on a 30 minute chart, you would add up the closing prices of the last 150 minutes and then divide that number by 5. If you were to plot the 5 period simple moving average on the a 4 hr. Most charting packages will do all the calculations for you. The reason we just bored you with how to calculate a simple moving average is because it is important that you understand how the moving averages are calculated. If you understand how each moving average is calculated, you can make your own decision as to which type is better for you.Just like any indicator out there, moving averages operate with a delay. Because you are taking the averages of the price, you are really only seeing a “forecast” of the future price and not a concrete view of the future.

Moving Average Convergence-Divergence

 

Traders· fondly refer to the MACD as "the mac-dee." The acronym stands for "moving average convergence-divergence" (say that fast three times!). Multifaceted, the MACD not only acts as an indicator, it also plays the role of an oscillator. Developed by Gerald Appel, publisher of Systems and Forecasts, the MACD is a trend-following momentum indicator/oscillator that illustrates the relationship between the 26-day and 12-day exponential moving averages of an equity's price pattern. A 9-day exponential moving average, referred to as the "signal line," overlays the MACD and indicates buy/sell setups.

Since the MACD is a "lagging" indicator, meaning it delivers signals from information that's already taken place (the S&P and Nasdaq 100 futures are "leading" indicators), it is best used in strongly rending markets. Because the traditional MACD usually arrives a bit late to the party (read: trend reversal), short-term traders may leave money on the table by adhering strictly to its signals. To obtain faster signals, I recommend using the MACD histogram, available on most charting programs. The MACD Histogram (MACD-H) represents the difference between the MACD and its 9-day exponential MA. Don't worry if your brain tangles over that one. Your charting program understands it! Just insert it on your chart, above the volume indicator. The MACD-H will snake above and below its zero line, moving into positive (above zero) or negative (below zero) territory.
MACD-H signals are:

Crossovers. Buy signal (bullish) equals when the MACD-H rises above its zero line. Sell signal (bearish) equals when the MACD-H tumbles below the zero line.
Overbought/oversold indicators. As an overbought/oversold oscillator, when the MACD-H rises to the top of its scale and resembles a majestic mountain, the stock may. be overbought and ready to pullback. When the MACD-H edges below the zero line and digs a deep scoop to the downside, the stock is oversold. WQen the histogram bars shorten and edge back up, the stock should be preparing to bounce.Fun to do: Use a MACD-H on a weekly chart to generate a long-term buy/sell signal. Then, go to a daily chart of the same stock, and only trade in the direction of that longer-term signal.

Candle Stick

 

What is a Candlestick?
Back in the day when Godzilla was still a cute little lizard, the Japanese created their own old school version of technical analysis to trade rice. A westerner by the name of Steve Nison “discovered” this secret technique on how to read charts from a fellow Japanese broker and Japanese candlesticks lived happily ever after. Steve researched, studied, lived, breathed, ate candlesticks, began writing about it and slowly grew in popularity in 90s. To make a long story short, without Steve Nison, candle charts might have remained a buried secret. Steve Nison is Mr. Candlestick.

Candlestick Charts
Candlestick charts show the same information as a bar chart, but in a prettier, graphic format.Candlestick bars still indicate the high-to-low range with a vertical line. However, incandlestick charting, the larger block in the middle indicates the range between theopening and closing prices. Traditionally, if the block in the middle is filled or colored in,then the currency closed lower than it opened.
In the following example, the ‘filled color’ is black. For our ‘filled’ blocks, the top of the
block is the opening price, and the bottom of the block is the closing price. If the closing
price is higher than the opening price, then the block in the middle will be “white” or
hollow or unfilled.
Candlesticks are formed using the open, high, low and close.
• If the close is above the open, then a hollow candlestick (usually displayed as white) is drawn.
• If the close is below the open, then a filled candlestick (usually displayed as black) is drawn.
• The hollow or filled section of the candlestick is called the “real body” or body.
• The thin lines poking above and below the body display the high/low range and are called shadows.
• The top of the upper shadow is the “high”.
• The bottom of the lower shadow is the “low”.

Just like humans, candlesticks have different body sizes. And when it comes to forex trading, there’s nothing naughtier than checking out the bodies of candlesticks!
Long bodies indicate strong buying or selling. The longer the body is, the more intense the buying or selling pressure. Short bodies imply very little buying or selling activity. In street forex lingo, bulls mean buyers and bears mean sellers.
Long white candlesticks show strong buying pressure. The longer the white candlestick, the further the close is above the open. This indicates that prices increased considerably from open to close and buyers were aggressive. In other words, the bulls are kicking the bears’ butts big time!

Long black (filled) candlesticks show strong selling pressure. The longer the black candlestick, the further the close is below the open. This indicates that prices fell a great deal from the open and sellers were aggressive. In other words, the bears were grabbing the bulls by their horns and body slamming them.
Mysterious Shadows
The upper and lower shadows on candlesticks provide important clues about the trading
session.
Upper shadows signify the session high. Lower shadows signify the session low. Candlesticks with long shadows show that trading action occurred well past the open and close.
Candlesticks with short shadows indicate that most of the trading action was confined near the open and close. If a candlestick has a long upper shadow and short lower shadow, this means that buyers flexed their muscles and bided prices higher, but for one reason or another, sellers came in and drove prices
Sounds like some kind of voodoo magic huh? "I will cast the evil spell of the Marubozu on you!" Fortunately, that's not what it means. Marubozu means there are no shadows from the bodies. Depending on whether the candlestick’s body is filled or hollow, the high and low are the same as it’s open or close. If you look at the picture below, there are two types of Marubozus.
A White Marubozu contains a long white body with no shadows. The open price equals the low price and the close price equals the high price. This is a very bullish candle as it shows that buyers were in control the whole entire session. It usually becomes the first part of a bullish continuation or a bullish reversal pattern. A Black Marubozu contains a long black body with no shadows. The open equals the high and the close equals the low. This is a very bearish candle as it shows that sellers controlled the price action the
whole entire session. It usually implies bearish continuation or bearish reversal.
Doji
Doji candlesticks have the same open and close price or at least their bodies are extremely short. The doji should have a very small body that appears as a thin line. Doji suggest indecision or a struggle for turf positioning between buyers and sellers. Prices move above and below the open price during the session, but close at or very near the
open price. Neither buyers nor sellers were able to gain control and the result was essentially a draw. There are four special types of Doji lines. The length of the upper and lower shadows can vary and the resulting candlestick looks like a cross, inverted cross or plus sign. The word "Doji" refers to both the singular and plural form.
When a doji forms on your chart, pay special attention to the preceding candlesticks. If a doji forms after a series of candlesticks with long filled bodies (like white marubozus), the doji signals that the buyers are becoming exhausted and weakening. In order for price to continue rising, more buyers are needed but there aren’t anymore! Sellers are licking their chops and are looking to come in and drive the price back down. Keep in mind that even after a doji forms, this doesn’t mean to automatically short. Confirmation is still needed. Wait for a bearish candlestick to close below the long white candlestick’s open. If a doji forms after a series of candlesticks with long hollow bodies (like black marubozus), the doji signals that sellers are becoming exhausted and weakening. In order for price to continue falling, moresellers are needed but sellers are all tapped out! Buyers are foaming in the While the decline is sputtering due to lack
of new sellers, further buying strength is required to confirm any reversal. Look fora white candlestick to close above the long black candlestick’s open.