Although diversification is a popular method of managing risk when it comes to financial investments, it is often undifferentiated. Here in this first part of a two-part series, we’ll take an in-depth look at the concept and determine if it is indeed a good way to manage risk.
When you go back in history, you’ll find that human beings have been groomed not to take chances in physically hostile environments. We are genetically tuned to fear risk. Uncertainty means risk and implies lack of control, and it is this lack of control that makes it difficult to trade the markets. But there’s no reason to fear risk in the markets — well, perhaps there is but it’s far less than we subconsciously believe. Without uncertainty, the financial markets wouldn’t exist and the positive aspect to risk is that it equals opportunity. Instead of fearing risk, perhaps we should try to respect it, get to know it, and try to contain it.
We all know that we shouldn’t put all our eggs in one basket. In order to reduce our risk, we should diversify our assets. But does that really work? Let’s find out.
Continue reading Rethinking Diversification By Dirk Vandycke
They’re the life of the party—simple, elegant, and add so much value. Here’s how you can turn each candle bar into a set of three numbers so you can identify patterns and determine the strength of their predictive power.
Candlesticks are the epitome of information packaging. A candlestick can represent price action—the hem & haw of buyers vs. sellers for a minute, a day, or a year. They tell which party won in the end, which parties began their fight in the beginning, how high the buyers pressed the sellers, how low the sellers drove the buyers (Figure 1). Candles are a simple, elegant device yet they convey so much information.
Continue reading Candlesticks, Condensed By Dave Cline
In this article, We’ll look at some of the more common chart patterns, moving averages, indicators, and Elliott wave theory. I’ll continue examining technical analysis by looking at some other tools that can be useful when trading the forex markets.
Double Tops & Bottoms
The first patterns I’ll consider are double tops & double bottoms (Figures 1a & 1b). These patterns share similar characteristics with the head & shoulders pattern. The double top is a bearish signal, formed when a currency pair hits a resistance level, fails to break through, and attempts to break it again. After the second failure, the price falls. The point to which the price falls between these two peaks is the neckline. While it might look like a support line, it really isn’t much of one—something that becomes clear after the currency falls from its second peak and blows right through the neckline.
Continue reading Trading Forex: More On Charting By Imran Mukati
Do exhaustion gaps really fade? Here’s a study that creates and tests an exhaustion gap prediction technique using two measurable factors: stock trend and gap size.
A price gap is a price range in which no trading takes place. An upside price gap occurs when today’s price range is above yesterday’s high price. A downside price gap occurs when today’s price range is below yesterday’s low price. It is easy to spot price gaps on bar charts. According to the statistics from this study, the typical US stock generates 18 price gaps on average, annually. The average gap sizes are 1.62% for upside gaps and 1.72% for downside gaps.
Continue reading Gap Trading By Kevin Luo
It is well known that as soon as the markets open, there’s a significant amount of trading activity, much of which is strong breakout patterns. How do you identify which of these patterns are strong enough to continue and generate successful trades? Find out here.
Many of the strongest breakout trade entries can be found using specific chart patterns that you can see during the first hour of each trading day. When you’re looking for successful breakout trades, it helps to visually scan for these technical trade setups during the market open for potential swing and intraday trades. One reason these patterns work so well is because institutional traders enter high-volume “market on open” client orders during the first few minutes of each trading session, which leads to rapid breakouts that you can capitalize on. Since your goal is to avoid false breakouts and instead enter trades that keep going in your favor, your ability to spot these useful technical momentum patterns is a valuable strategy. In this article, I’ll show you top first-hour breakout patterns to be on the lookout for when entering your trades.
Continue reading Trading First-Hour Breakouts By Ken Calhoun
There’s more to chart patterns than merely identifying them. Find out how you can see relationships between candlestick bars and patterns to better assess what price is likely to do. Pattern-recognition skills are a trader’s most important chart analysis asset. Since the introduction of Japanese candlestick charts to the West in the late 1980s, they have become the most popular and most-used price plot style by both retail traders and professionals, and with good reason. Candlesticks are the easiest of all the chart styles to read and recognize. However, just learning the basic candlestick patterns taught in numerous books, DVDs, and articles is not going to make a trader consistently successful in the stock market. What can help is going beyond the basics of the candlestick books and patterns to apply a technique I named Spatial Pattern Recognition Skills (SPRS), which I will describe here. This technique can provide far more in-depth analysis quickly and accurately.
Continue reading Recognizing Patterns and Relations in Candlesticks By Martha Stokes
What do Gann’s square of nine and the Elliott wave theory tell us about the S&P 500 index? We’ll explore.
Are the world’s indexes about to turn south for the fourth time since the 2007–2011 global financial crisis (GFC) and Eurozone slumps? W.D. Gann’s square of nine and R.N. Elliott’s wave theory may help shed light on what the future holds. Gann taught us that the behavior of the market is subject to the time factor and the law of vibration, while Elliott postulated that money markets unfold in a fixed eight-wave pattern. Bull markets advance in three motive waves, each followed by a downward correction. Bear markets decline in a zigzag A-B-C pattern, in which waves A and C are motive and the B wave between them corrects upward.
Continue reading Squares and Waves By Pauline Novak-Reich
When it comes to investing, the Oracle of Omaha usually plays his cards close to his chest. But here is one favorite indicator that he’s been willing to share. In an article I wrote a year ago titled “Warren’s Best Valuation Measure,” I discussed a macro indicator that Buffett uses to help him decide when stocks are over or undervalued. But after a close look at the data in the article, it was obvious that further research and observation was necessary.
According to a 2001 Fortune Magazine article (“Warren Buffett On The Stock Market”), Buffett considers US total stock market capitalization to GDP to be “probably the best single measure of where valuations stand at any given moment.”
Continue reading Dissecting Buffett’s Macro Buy-Sell Indicator By Matt Blackman
History plays an important role. Can 224 years of US economic history predict the stock market for the next seven years? Since the 1970s there have been many predictions of a coming economic collapse that would be larger than the Great Depression. We did experience a stock market crash in 1987 and some economic calamities in the early 2000s, but nothing approaching the degree of what happened in the 1930s. The answer to why a mega economic collapse hasn’t happened and most likely won’t happen can be discovered in the long-term US economic cycle.
The EBB & Flow
In 1934, Ralph Nelson Elliott made an intense study of stock prices and discovered a rhythmic pattern of waves. He called this phenomenon the wave principle, now known as Elliott wave theory. Elliott found that the pattern was not limited to just the stock market. He found the pattern in commodities, steel output, and patent applications. In addition, each five-wave pattern is a component of the next larger five-wave pattern.
Continue reading The Us Long Wave By Mark Rivest
In this article. We’ll explore how some hidden power laws can affect the individual trader’s profits and thus why you should be aware of them. The 80–20 rule, also known as the Pareto principle or Juran’s principle, named after Vilfredo Pareto and Joseph M. Juran, is commonly heard of in different walks of life. It is also known as the law of the vital few and trivial many. This law states that a large part of the input (the trivial many) only accounts for a small part (the vital few) of the system’s effects (Figure 1). It is common to hear the Pareto principle pop up in fields such as manufacturing, management, and human resources, but I’ll focus on its relevance to the financial markets.
Continue reading Laws Of The Vital Few By Dirk Vandycke