1.The market discounts everything 2.Price moves in trends 3.History tends to repeat itself Basic Assumptions
Markets have three trends Trends have three phases The markets discount all news Market averages must confirm each other Trends are confirmed by volume Trends exist until proven otherwise Dow Theory Principals
Commodity Futures Fixed Income Foreign Exchange Equities and Indices Technical Analysis and the Markets
Fundamental Analysis: Based on the study of economic factors Fundamental vs Technical Analysis Supply demand relationships Government economic reports Geo-political factors Acts of nature Corporate balance sheets, cash flow statements, and income statements
Fundamental Analysis: Based on the study of economic factors Fundamental vs Technical Analysis Technical Analysis: Study of price action through charts and price history
The Study of Supply and Demand Fundamental Analysis Price SupplyDemand
Futures markets and other derivative markets were created as risk management tools Futures Markets
Futures markets are an anticipatory market Futures Markets
Types of charts Bar charts Candlestick charts Constant volume charts Line charts Tflow charts, exclusively CQG
Bar Charts Vertical line representing the high and low of the sessions Horizontal line on the left of vertical is the opening Horizontal line on the right of the vertical is the close. Timeframe can be anything from 1 minute to annual, including intraday, daily, weekly, monthly, quarterly, semiannual, and annual.
Candlestick Charts The candlestick chart like the bar chart includes the high, low, open and close. The Japanese put great interest in the opening and the closing. The candlestick charts have a colored body which represents the open and close. In CQG the body of the candlestick is colored green if the close is higher than the open (trades up). The body of the candlestick is colored red if the open is higher than the close (trades down) The shadow or the black vertical line represents and trading activity which is higher than the open or close which is higher or any trading activity which is lower than the open or close which ever is lower.
Timeframes The timeframe used for forming a chart depends on the compression of the data:The timeframe used for forming a chart depends on the compression of the data: –Intraday, daily, weekly, monthly, quarterly or annual data. –The less compressed the data is, the more detail is displayed. –Different time horizons represent different trend lengths. Many traders look at multiple timeframes. Many traders look at multiple timeframes. –Traders trend to look at three time frames: trend, trade and trade entry. i.e. monthly (trend), weekly (trade), and daily (entry). –Short term traders may look at weekly, daily, and intraday timeframes.
Advantages of multiple timeframes Identify divergences in timeframes Trade when all three timeframes are in sync. Confirm trade systems in multiple timeframes. Better timing of trades. Better monitoring of trades in longer systems. Protecting your position from trades in higher timeframes. Better profit objectives from the longer timeframes.
Constant Volume Bars Constant volume bars, CVB, look like bar charts but each bar represents the same number of contract or ticks rather than a set timeframe. A 500 contract CVB chart, each bar represents 500 contract no matter how long it takes to trade 500 contracts. It is time independent. Overnight a bar may represents an hour or more to trade 500 contracts. During the day the same 500 contracts could trade in seconds. The advantage to CVB is the void of distortions in the quantitative indicators as a result of inactivity, common at night.
Line Charts Line charts simply connect the close of each bar, ignoring any intra bar activity. Most spreads, CLE-QO (NYMEX CRUDE – ICE BRENT CRUDE), are displayed as a line. Many market participants believe the close is the single most important price.
TFlow Charts The birth of the TFlow chart are a result of both technology and accurate volume data including whether the buyer or seller was the aggressor as well as observing the behavior of traders on the trading floor prior to electronic trading. Each bar is colored part red and part green. The red portion represents trades in which the seller hit the bid, accepted a lower price to enter the trade. The green portion represents trades in which the buyer lifts the offer, accepts a higher price to enter the trades. Volume is the most sensitive indicator and tflow indicates whether the buyer or the seller is the aggressor, adding context to the volume data.
TFlow Chart 2 There are two ways to calculate the TFlow charts. First, the traditional TFlow charts are constructed based on the inside market, best bid and best offer. A trade above the offer or below the bid triggers the creation of a new bar. TFlow charts are new and exclusive to CQG and represents a new view of volume as it changes during the trading day. Second, the TFlow chart was adopted to fit time based charting. For example, a five minute TFlow chart would be a five minute chart except the coloring would represent the proportion of traders lifting offers or hitting bids. Time Based TFlow provides the added information of TFlow charts but continues the comfort most traders have with traditional time charts.
Continuation Charts In the futures market we are faced with contracts which expire, therefore techniques are necessary to link the active front month contracts with expired contracts for long term analysis. 1. Standard continuation: the chart continuation rolls to next front contract as soon as the prior contract expires. The weakness to this continuation process is the presence of a delivery period where the holder of a long contract can be issued a delivery notice. This is acceptable to a hedger, but a problem for a speculator. 2. Adjusted continuation: the user selects the number of trading days prior to expiration to roll the next contract.
Continuation Chart 2 3. Active Continuation: the futures contract rolls to the next contract based on volume and open interest. This methodology assures the speculator that they are not in the contract when it goes first noticed and can be asked to deliver on the contract. This is the most popular methodology for our users. Adjusted and active continuations also have an option for equalized closes. This is adjust all prior data to reflect the basis difference between the two closes when the rollover to a new contract occurs. This methodology is appropriate for interest rate based futures or a trade system is being back tested. This methodology is questionable for deliverable commodity contracts which has identifiable seasonality. The equalized closes would mask the seasonality.
Support and Resistance Levels Support levels are price levels where buying has entered the market prior or is expected to enter the market currently. Resistance levels are price levels where selling has entered the market prior or is expected to enter the market currently. Support and resistance levels are identified by horizontal line from recent highs and lows or trendlines which connect highs and lows. Buy support when penetrated becomes resistance. Sell resistance when penetrated becomes support.
Support and Resistance 2 All our markets are auction markets Auction markets move higher to find sellers. Auction markets move lower to find buyers
Support and Resistance 3 Trendlines Up trendline is a straight line drawn upward connecting successive swing or reaction lows. Down trendline is a straight line drawn downward connecting successive swing or reaction highs. Two points are needed to draw a trendline and a third point is necessary to confirm the validity of a trendline. The longer a support or resistance hold the stronger, more important the level. Volume is a sign of the strength of the support or resistance levels.
Retracements Another indication of the strength of a trend is retracements from highs and lows. Markets do not trade in one direction, they take breathers and retrace. Dow retracement levels are 33%; 50%; 66% Fibonacci retracement levels are 38.2%;50%;61.8% Strong trends retrace % Weak trends retrace %
98% of all trading is now done electronically across all asset classes, creating a resurgence and growth of technical analysis Electronic Trading
Charting Mechanical Trend-following Range Automated executed, black box Artificial intelligence Neural network Technical Systems