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The Application Of Technical Analysis In the Financial and Commodity Markets

Robin Wilkin
Global Head of FX and Commodities Technical Strategy

JPMorgan Chase Bank


robin.wilkin@jpmorgan.com 0207 777 1345

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The JPMorgan FX Technical Team


London
Robin Wilkin 0207 777 1345

New York
Niall OConnor 001 212 834 5108

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Popular misconceptions of Technical Analysis


Technicals are a stand alone system only Not True Technicals can and are widely used in conjunction with fundamentals. Technicals are merely a reaction to the fundamental outlook. Not True More often than not the markets have topped or bottomed way before the fundamental picture is evident. Market commentators use Technicals as an excuse when the driver is unclear True When it is not clear about why a market is moving it is put down to technical buying or selling.

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EURUSD a base developed at the end of 2000, but fundamentals didnt become bullish till late 2002

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The greatest misconception


It doesnt work! - Untrue

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What makes a good technician?

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OBSERVATION

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We combine Elliott Wave with a number of other tools available

Predictive techniques Elliott wave Pattern Analysis Candlesticks Mechanical techniques RSI Stochastics Moving Averages

We combine all these methods into a powerful predictive tool that can be applied across all the markets.

If you dont know where you are going , youll probably end up somewhere else

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The Elliott Wave Principle


Elliott waves are visible measures of the ebb and flow of investor psychology that repeat themselves as patterns. They allow us to anticipate the next move more accurately than anything else.

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Predictive techniques
Elliott Wave Theory:
Background Method developed by Ralph Nelson Elliott which argues that social or crowd behaviour trends and then reverses in recognisable patterns. Technique further developed by Robert Prechter after Elliotts death Details of the principle Trends are identified by a sequence of waves termed impulse waves, which are numbered 1-5, and a shorter corrective sequence of waves which are lettered A-C There are also 9 different degrees of scale, spanning short and long term, from Grand Supercycle to Sub-minuette

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Basic Tenets
Movements in the direction of the trend develop into five wave patterns Counter-trend movements display three wave structures

Elliott Wave Analysis assesses probable outcomes by determining the current position within the larger pattern

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The Structure of the Wave Pattern


5

1
2 c 4 1 a 4 2 B

3
5

3 5

2 c

3 5

1
5 b 3 1

a c

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Vocabulary
Impulse Waves -- movements in the direction of the trend

Corrective Waves -- movements against the trend

Fibonacci Ratio -- a mathematical ratio that often occurs between related waves.

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Three Rules of Elliott


Wave 2 CANNOT retrace past where wave 1 began.

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CORRECT
5 3

4 1

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Three Rules of Elliott


Wave 2 CANNOT retrace past where wave 1 began.
Wave 3 can NEVER be the shortest.

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CORRECT
Three is not the shortest
5

3 4 1

2
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Three Rules of Elliott


Wave 2 CANNOT retrace past where wave 1 began. Wave 3 can NEVER be the shortest.

Wave 4 NEVER ends in the price territory of Wave 1.

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CORRECT:
iv does not overlap i
v iii

i ii

iv

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Know when to break the rules

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Diagonal First and Fifth Waves

5 3 1

4 2

Diagonal Fifth Waves

Diagonal Fifth Waves

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Guidelines - True most of the time


EQUALITY When 3 is longest, 5 will approximate 1

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Guideline of Equality
(1) 5 3 4

Wave 3 is the longest therefore wave 5 equals wave 1

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Guidelines - True most of the time


EQUALITY When 3 is longest, 5 will approximate 1

ALTERNATION If 2 is sharp, 4 will be sideways If 2 is sideways, 4 will be sharp


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Guideline of Alternation
5

Four is sideways
4 1

Two is sharp, so...


2

And vice versa


5 3

4 1 2

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Guidelines - True most of the time


EQUALITY When 3 is longest, 5 will approximate 1 ALTERNATION If 2 is sharp, 4 will be sideways if 2 is sideways, 4 will be sharp

CORRECTIONS Often end in the area of the previous wave 4


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Guideline of previous fourth wave support


(1) 5 3
a b Span of 4th wave of previous degree

4 1

(2)
Previous 4th wave

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Popular Corrections.

C
5 3 b a c C a

5 A 3 1 4 2 1

A 4

ABC Zig Zag

Regular Flat or Irregular Flat is when wave B makes a new low/high

Triangle

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5 3 A 4 1 C B

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Trading with Elliott Wave


Exit all longs and look to initiate small shorts Take profits at ideal target - 1.618 x wave 1 Wave A typically overlaps the top of wave 3 4th wave typically retrace 38-50% of wave 3 -provides 2nd buying opportunity Wave B fails to test the wave 5 high - add to short positions

Initial 5 wave rally breaks the sequence of lower highs

Wave C targets at least the previous 4th wave lows

First buy opportunity occurs on the pullback in wave 2. FX the last couple of years has more often than not been a shallow and quick correction

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USDZAR a walkthrough example

2 ii 1 i C A

iv

iii v 3

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4 1

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c a

b 1

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USDNOK another example


5

A c

b ii 1 4

a a

i iii

iv 2 c B

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USDNOK

EURNOK

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GOLD why were we bullish?


v

iii i B D i
ii v iii iv

iv ii

E
i

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Mechanical Techniques

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Mechanical techniques
Oscillators
RSI - (Relative Strength Index) Uses an average of periods higher and lower closes to provide a number which shows extremes of market buying/selling power by using deviations outside of a band. Stochastic Comprises 2 lines, one leading (the %K) line and one lagging (the %D line) that provide buy and sell signals through deviation outside of a band. When the 2 lines cross, at the outside of the band, then this is a strong signal. Numbers are derived from measuring the latest, lowest and highest closes within 5 periods. Confirmation Both indicators give a similar reading. Divergence Condition where prices register a further extreme print, while the oscillators do not make a similar extreme reading.

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Stochastics in a range trade environment

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RSI Use them to get into the trend

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Japanese Candlesticks

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What are the candles telling youprice action!

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Markets are generally driven by

EMOTION

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Remember the Cycle of Psychology in Mikes presentation

Greed
Confidence Complacency

Hope

Fear

* The Trade *

Anger?

Panic
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Jedi trading The 3 key words are:

Anger Fear Greed


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Whats your edge ?

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The checklist
Plan your Trades. Trade your plans Keep records of your trading results Keep a positive attitude, no matter how much you loose Dont take the market home Continually set higher trading goals Successful traders buy into bad news and sell into good news Successful traders are not afraid to buy high and sell low Continually strive for patience, perseverance, determination and rational action Limit your losses - use stops Never cancel a stop order after you have placed it Place your stops the time you make the trade Never get into the market because you are too anxious because of waiting beware of into wishing over intuition Avoid getting in or out of the market too often Losses make the trader studious - not profits. Take advantage of every loss to improve your knowledge of market action

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The reading List


Technical Analysis of the Financial Markets John J Murphy (The Bible A little bit of everything) Trader Vic Methods of a Wall Street Master Victor Sperandeo (A market wizard tells all) Trader Vic II Principles of Professional Speculation Victor Sperandeo Elliott Wave Principle Robert Balan (great for examples at the back) Market Wizards 1 and 2 Jack Swager (Straight from the horses mouth) Reminiscences of a Stock Operator Edwin Lefevre (the classic) Technical Analysis of Stock Trends Edwards and Magee (The best for patterns)

Backgammon for . - Bill Robertie (wanna learn about probabilities and luck versus skill this is the game)

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