presents

Peter Pontikis
with the latest seminar on
:: Technical Analysis Strategy

What the
professionals
look for...
CMC Markets Education :: Technical Analysis :: Strategy
Technical analysis what professional dealers look at

:: Trendlines
:: The head and shoulder pattern
:: Uses of Fibonacci
:: The EMA
:: Percentage and bollinger bands
:: Momentum
:: MACD, ADX and stop-losses

CMC Markets Education :: Technical Analysis :: Strategy :: 2

Trendlines
:: Used in the trend analysis of price
:: Uptrend line connects the lows of ascending
major troughs
:: A Downtrend line connects the highs of
descending major peaks

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Trendlines

a a

b b

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Trendlines

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Trendlines :: rules
:: In an uptrend, buy on dips towards the
TL — as a support
:: Penetration of an uptrend line is a ‘sell’ signal
:: In downtrend, sell on rallies towards the
TL — as a resistance
:: Penetration of a down trend line is a ‘buy’ signal

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Trendlines :: rules

sell

sell

sell

CMC Markets Education :: Technical Analysis :: Strategy :: 7

Trendlines :: rules

buy
breach
buy

buy

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Trendlines :: a warning
:: End well before the trend line is broken, which means
that reliance only upon the trend line will give a very
late signal
:: Break the trend line decisively, yet continue intact, even
moving back across the trendline, which means that
reliance only upon the trend line will yield a premature
or even totally false signal

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Trendlines :: a warning

CMC Markets Education :: Technical Analysis :: Strategy :: 10

CMC Markets Education :: Technical Analysis :: Strategy :: 11
Head and shoulders patterns
:: There MUST be a prior trend
:: It must be a trading range that follows a trending move
:: It is a reversal pattern if price breaks out in the opposite
direction to the prior trend

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Head & shoulders
:: Description
:: Volume confirmation
:: Target measurement
:: Trading strategy

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Head & shoulders

head
right shoulder

left shoulder <- neckline

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Head & shoulders

<- neckline

target

CMC Markets Education :: Technical Analysis :: Strategy :: 15

Dow Jones industrial average

L.S R.S
head

CMC Markets Education :: Technical Analysis :: Strategy :: 16

Who is Fibonacci?
:: Leonardo Fibonacci, Italian Mathematician,
Born AD 1170
:: Elliot incorporated Fibonacci into his Wave Analysis
:: Gann used mainly divisions of time and price
movements by eights which approximates to some
key Fibonacci ratios

CMC Markets Education :: Technical Analysis :: Strategy :: 17

The Fibonacci series :: defined
:: The Fibonacci Series is the sum of the previous two
numbers, starting with 1 and 1
:: The next number is 1+1=2
:: The next number is 2+3=5
:: The next number is 3+5=8
:: And so 5 + 8 = 13
8 + 13 = 21..etc..etc

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The interrelationships of numbers
:: Any number is approx. 1.618 times the preceding number
:: Any number is approx. 0.618 times the following number
:: Any number is approx. 2.618 times the number two before
in the series
:: Any number is approx. 0.382 times the number two after
it in the series
0.618 is also known as the golden mean or ratio and
has application in music, art, architecture and nature

CMC Markets Education :: Technical Analysis :: Strategy :: 19

Fibonacci retracement levels

200

161.8 0.382 target

150 0.500 target

100 point move

138.2 0.618 target

100

CMC Markets Education :: Technical Analysis :: Strategy :: 20

Fibonacci retracement levels

CMC Markets Education :: Technical Analysis :: Strategy :: 21

CMC Markets Education :: Technical Analysis :: Strategy :: 22
Exponential moving averages, the EMAS:
:: Exponential Moving Average [EMA]
>> Based on a closing price
>> Still lags
>> When price turns down – price follows
:: Trading rules
>> Go long when price crosses from below to
above the moving average
>> Go short when price crosses from above
to below the moving average
>> The model is always in the market

CMC Markets Education :: Technical Analysis :: Strategy :: 23

Exponential moving averages, the EMAS:

simple

EMA
EMA

EMA
simple MA

CMC Markets Education :: Technical Analysis :: Strategy :: 24

Percentage bands
:: A moving average of the closing price is calculated. The two
bands are then calculated by increasing and decreasing the
moving average by a given percentage
:: Bands should be ‘robust’. That is, varying the band does not
significantly alter the results of your analysis

CMC Markets Education :: Technical Analysis :: Strategy :: 25

Using percentage bands for ranging markets
:: Long positions should be taken as prices move back inside
the lower band
:: Stoploss should be placed at the immediate prior low
:: Short positions should be taken as prices move back inside
the upper band
:: Stoploss should be placed at the immediate prior high

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Using percentage bands for ranging markets

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Using percentage bands for ranging markets

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Bollinger bands:
:: Like the percentage bands
:: The area above the upper band is an over bought zone
:: The area below the lower band is an over sold zone
:: Focus on entry and exit(s) of these zones

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Bollinger bands:
:: The bands are statistically defined around a simple
moving average. With suggested settings including;
>> Short term trends 10 days average with
1.5 standard deviations
>> Intermediate term trends 20 days average
with 2.0 standard deviations
>> long term trends 50 days average with
2.5 standard deviations

CMC Markets Education :: Technical Analysis :: Strategy :: 30

Bollinger bands:

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Bollinger bands:

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The momentum indicator
:: Defines the speed of a price trend
:: Crossing the zero line can be taken as a buy signal
(from under/over)
:: A sell signal with a cross over from above/below
the zero line
:: Better signals are turns from ‘extreme’ levels away
from the zero line

CMC Markets Education :: Technical Analysis :: Strategy :: 33

The momentum indicator
Momentum Indicator: M = Pt - P(t-n)
Where M = Momentum
Pt = Today’s closing price
P(t-n) = Closing price N days (chosen by trader)

CMC Markets Education :: Technical Analysis :: Strategy :: 34

The momentum indicator

CMC Markets Education :: Technical Analysis :: Strategy :: 35

The momentum indicator

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The momentum indicator

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Moving average convergence divergence [MACD]
MACD is calculated as follows
:: Step 1 Calculate a 12 period exponential moving average
of the closing price
:: Step 2 Calculate a 26 period exponential moving average
of the closing price
:: Step 3 Take the difference between the 2 averages
- This is MACD line
:: Step 4 Calculate a 9 period exponential moving average
of the MACD line calculated in step 3
:: Thus the MACD consists of a fast and a slow line

CMC Markets Education :: Technical Analysis :: Strategy :: 38

Moving average convergence divergence [MACD]

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Moving average convergence divergence [MACD] trading rules

:: MACD is only useful for trading trends

Rule 1
:: Go long when the MACD [fast] line crosses from below to
above the signal [slow] line. The trade is closed when the
MACD line gives a signal to go short
Rule 2
:: Go short when the MACD [fast] line crosses from above
to below the signal [slow] line. The trade is closed when
the MACD line gives a signal to go long

CMC Markets Education :: Technical Analysis :: Strategy :: 40

[MACD] trading rules

CMC Markets Education :: Technical Analysis :: Strategy :: 41

[MACD] trading rules

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[MACD] trading rules

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Directional movement system: advanced
mathematical technical analysis

:: Most common problem of trend following indicators is that

they fail to distinguish trending from non-trending markets
:: The directional movement [DM] system is an attempt
to deal with this problem
:: It is employed as
>> As stand alone trend following trading system and;
>> As a filter for ‘other’ trend following system
>> ie. use trend following indicators ONLY when
the DM says so

CMC Markets Education :: Technical Analysis :: Strategy :: 44

Concept of true range
:: Refines the definition of highs and lows
>> By including the gaps in price day ranges
:: True range is always a positive number
:: Directional movement then takes the directional move
of the day and divides it by the true range to create
the Directional index [DI] based on whether it is +DI
[up days] or –DI [down days]
:: The DX takes the difference between the two
>> This is then averaged into the ‘ADX’

CMC Markets Education :: Technical Analysis :: Strategy :: 45

Reading the directional movement system
:: +DI the index of new highs
:: -DI the index of new lows
:: ADX the index of new highs and news lows
:: The ADX rises as +DI and –DI diverges
:: Note the ADX is about ‘trendiness’ of the market,
not its direction
:: +DI > -DI Long mode
:: -DI > +DI Short mode

CMC Markets Education :: Technical Analysis :: Strategy :: 46

Reading the directional movement as a trading system
:: Go long when +DI crosses from below to above –DI
:: Go Short when -DI crosses from below to above +DI
:: Three additional rules
>> Only takes signals if ADX turns up from below
the +DI and the –DX
>> Take profits when the ADX turns down from
[ideally] above the +DI and the –DX
>> The high of the signal day should be used
as the stop on a short signal
>> The low of the signal day should be used
as the stop on a low signal
CMC Markets Education :: Technical Analysis :: Strategy :: 47
Reading the directional movement as a trading system

CMC Markets Education :: Technical Analysis :: Strategy :: 48

Reading the directional movement as a trading system

poor rsi
signals-
Poor RSI
ignored
signals - ignored

rising adx &

ignore the
rsi Rising ADX, &
ignore the RSI

CMC Markets Education :: Technical Analysis :: Strategy :: 49

CMC Markets Education :: Technical Analysis :: Strategy :: 50
Stoploss styles – exit planning:
:: This is about ‘exit’ planning
:: Best calculated BEFORE one enters the trade
:: (Some) Types of stops
>> Visual (support/resistance)
>> Time stops
>> Trailing Time stops
>> Dollar value

CMC Markets Education :: Technical Analysis :: Strategy :: 51

Stoploss styles – exit planning:

stoploss buy
resistance orders (exit)

sell orders

buy orders

support... stoploss sell

orders (exit)

CMC Markets Education :: Technical Analysis :: Strategy :: 52

Stoploss styles – exit planning:

stoploss (buy) order

stoploss (sell) order

CMC Markets Education :: Technical Analysis :: Strategy :: 53

Stop losses & Capital management
Rule
:: Hope for the best
:: Plan your stops for the worst

CMC Markets Education :: Technical Analysis :: Strategy :: 54

Summary
:: We have completed an overview of many of the mathematical
models available
:: Including EMA, % bands, Bollinger Bands & Momentum indicators
:: Looked at the trend line function
:: Head & Shoulder pattern
:: Looked at Fibonacci ratios and their application
:: Directional movement indicator
:: Don’t forget to plan & set your stoploss!

CMC Markets Education :: Technical Analysis :: Strategy :: 55

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