Tag: Traders Toolbox

Traders Toolbox: Fibonacci - It's all about the numbers

Posted on by The INO.com Team

Fibonacci Number Series: The work in mathematics by a thirteenth century Italian has had a profound impact on modern man and has yielded a useful technical analysis tool. Born Leonardo of Piza, he is better known in the trading community as Fibonacci. Fibonacci's best known work is Liber Abaci which is generally credited as having introduced the Arabic number system which we use today.

Fibonacci introduced a number sequence in Liber Abaci which is said to be a reflection of human nature. The series is as follows:1,1,2,3,5,8,13,21,34,55,89,144 and on to infinity. The series is arrived at by adding each number to the previous. For example, 1 plus 1 equals 2; 2 plus 1 equals 3; 3 plus 2 equals 5; 5 plus 3 equals 8; 8 plus 5 equals 13; and so on.

I use the Fibonacci series in a number of ways, in terms of both time and price movement. I will briefly discuss some basic time movements.

Watch a free video on Fibonacci.

The 13-week pattern in hogs is the simplest application of finding market turns based on a Fibonacci number. Markets will often turn on a time span which is a Fibonacci count from a previous important event. For example, look at the monthly cattle chart to see several turns on or about 21 months from a previous high or low.

Time counts can be done on virtually any type of chart. The turns can be counted in terms of days, weeks, months or even years. I have found weekly counts to be the most practical and very effective.

Another powerful method is to look for areas where Fibonacci time counts from various previous lows and highs converge.

In analyzing price action, the simplest way to use Fibonacci numbers (1,1,2,3,5,8,13,21,34,55,89,144...) is on support and resistance levels or pivot levels. For example: 5.00 and 8.00 soy- beans, 5.50 (55) soybeans, 3.00 corn, 500 gold, 5.00 silver, 1.44 oats, 34.00 hogs, 55.00 cattle, and so on.

Lengths of moves in terms of price commonly are a Fibonacci number. The down move on the weekly crude oil chart was $22, which was followed by a $13 rally. Livestock commonly move in increments of $5, $8 or $13. Grains like to move in 8<;, 13<t! and 21d; swings. Treasury bonds and Treasury bills often move in Fibonac- ci increments in terms of both time and price.

The most common application of Fibonacci numbers is the use of ratios within the number series. Many people do not realize that the common retracement levels are derivatives of Fibonacci relationships. Fifty percent is 1 - 2, 66% is 2 - 3 and thereafter, any number in the series divided by the next results in 62 %. Also, starting with 3, any number divided by the second number following it will result in 38% (3 - 8, 5 - 13, etc.).

Traders Toolbox: This often overlooked technical indicator is a winner

Posted on by The INO.com Team

Parallel trendlines

I am constantly amazed that some of the simplest tools available to technical analysts are often the most effective. One of these simple tools is parallel trendlines. I have used them to identify planes of support and resistance on the charts.

At times, these parallel trendlines will form channels. Commonly, a market will stay within a bounded channel for a sub- stantial period of time. However, these trendlines are not limited to channels of equal width. The weekly corn chart reveals a market which has followed the same angle, or plane, of movement for much of the past three years, but within channels of various widths.

There are three primary applications of this tool which are very useful. The first is to expect a market to respect existing parallel boundaries of support and resistance. Second is to expect a significant change in market action when a boundary is significantly violated. And third is to expect the market to eventually resume trading on a parallel plane at a new level. The weekly corn chart is a good example of all three applications.

Traders Toolbox Lesson 4: How to profit and use pivot areas effectively

Posted on by The INO.com Team

Over the years, I have found certain areas of support and resistance to be especially effective in trend analysis. These special levels have been given the term pivot areas. These are areas which, once reached, act like a pivot man in basketball. The pivot man is faced with the choice of which direction to send the play; once the decision has been made and the ball has been passed, the play generally continues in that direction. When a market reaches a pivot area, a decision needs to be made to go higher or lower, and once a decisive close has been made away from or beyond the pivot area, the direction is likely to continue.

A good example of a pivot area is the 5040 level on the weekly hog chart. When the market has approached this level, it has either clearly turned or definitely con- tinued the existing trend with very little consolidation. Other examples include the 550 level in soybeans, 500 area in silver and sugar, 5500 area in cattle, 1500 level in soybean oil, the 80-00 area in Treasury bonds and the 205 level in soy- bean meal. Many markets exhibit pivot areas especially well on Gann (contract specific continuation) charts.

Traders Toolbox Lesson 3: Change is inevitable

Posted on by The INO.com Team

The most powerful ally you can have in trading and analysis is the trend. A market may stay in a given trend for a long period of time, but change is inevitable.

Since change is inevitable, it is important to be able to identify when or where a market may turn. I use an analytical tool called terminal areas to identify a time or a place in the market where a trend potentially may change. Terminal areas are the single most powerful tool I possess.

The word "terminal" is defined as, at or reaching an end. It can also mean a stopping point. The importance of terminal areas is that these are the only places where a market can make a major turn. Very simply, a market cannot make a major change in trend unless it is in a position to do so. When a terminal area is reached, and if the end of the trend is at hand, the old trend will die and a new trend will be born. However, reaching a terminal area does not mean a trend change is automatic. Since terminal areas also serve as a stopping point, a market may experience an interruption of trend instead of a change in trend. An interruption of trend will develop as a congestion area or a sideways pattern, preceding continuation of the trend.

There are six primary areas which can be termed terminal. These are: 1) Major retracement levels, primarily 25%, 38%, 50%, 62%, and 75%; 2) congestion or sideways areas of the past, preferably from weekly, or even longer-term, charts; 3) old highs and lows, again from longer-term charts; 4) trendlines  natural trendlines, Andrews lines, Gann angles or whatever your preferred method of drawing trendlines; 5) gaps caused by market action, not those created by the changing of contract months on a continuation chart; and 6) critical points in time, such as cycle turns, anniversary dates, Fibonacci counts, etc.

The combination of several terminal areas greatly enhances the probability of a major turn. Combine two terminal areas and you have a point which has as much as three times the influence of a single terminal area. Three converging terminal areas have the potential to be as much as nine times more powerful than a single area. Occasionally, a convergence of four legitimate terminal areas will occur. This development can evolve into the "home run" type of move.

Terminal areas which have the greatest impact for a major trend change are found on long-term charts. Also, I have found the combinations which have the highest reliability in forecasting a turn usually include a major time point.

Traders Toolbox: Lesson 2 Discipline

Posted on by The INO.com Team

Discipline Of all the "tools" available to the trader, none is more important than his or her own mind! Lack of mental discipline has to be the primary cause of losses in the marketplace. Why else would traders with years of experience and reliable systems fail to be consistent winners? Show a 6-year-old child a chart and he will tell you if a market is going up or down by simple observation. Yet, 80% or 90% of all traders end up as losers. The market doesn't beat you; you beat yourself!You are your own worst enemy!

Challenges of a trader's mental discipline exist in many areas of the marketplace and appear in many different forms. Virtually every trader who has spent any amount of time in the commodity business has experienced one or more of the following upsets to his mentality: My broker says ... ; the report said. .. ; the weather will be ... ; but this time is different; ABC is buying; XYZ is selling; it's too high to buy; it's too low to sell; if I get out today the market will turn tomorrow; I saw it coming but my broker (wife, husband, brother, friend, etc.) talked me out of it; and my favorite "They say..."

The trader lacking confidence in his own abilities will seek advice from anyone who will agree with his position. In doing so, he often finds the group of experts called "they" quoted. Invariably, he will stay with a bad position or prematurely abandon or exit a good position because "they" said so and so. Interestingly, in all my years in the business, I have never been able to locate a government agency or an advisory service under the title of "THEY." Do not take the advice of anyone unless you are sure they know more than you do.

Contrary opinion or bullish consensus is a measure of mental attitude. When 80% to 90% of traders are bullish, a market may be termed overbought. How does a market become overbought? High bullish consensus readings develop when traders are "sold" on the idea a mar- is going higher. The idea is promoted by market action and by media attention. A prime example was the media blitz during late 1987 which said foreign currencies would never experience another down day. Finally, everyone was convinced the sky was the limit and, as usual, when everyone knew what the market was going to do, they were wrong. When a person is bombarded by a multitude of news re- ports,it is extremely difficult to examine a market from an unemotional and objective point of view.

However, to be successful, you have to develop such a mental discipline. mental discipline is necessary in any competition you enter. The competition the trader faces is the battle he has with himself. He must be able to avoid the emotional forces constantly tugging at his mind. He must defend against im- pulsive greed when a market is "leaving" without him and against fear when a market is moving against his position. He has to maintain the confidence that his analysis is correct and enter orders based on this confidence even when it is "obvious" the analysis can't be correct. When he suffers a loss, the trader must fight the "I have to get it back" syndrome. When he succumbs to this malady, he begins to trade equity instead of the marketplace and he is doomed to throw good money after bad.

My observation has been the most dangerous period a trader can face is when he first becomes a winner. I have had the good fortune to catch some significant moves in the past and have received a number of calls from people who were overjoyed with their positions; in some instances, the callers were nearly euphoric (probably long hogs or bellies).

All too often I have watched new winners gain the feeling of overconfidence and indestructibility. Greed sets in and one- or two-contract traders become five- and ten-contract traders. They hit on another trade or two and the ego goes limit up; now they can do no wrong. Suddenly, they are one of the "big swingers"; then disaster strikes. The hot streak turns cold and the equity leaves faster than it came. Their emotions leave an island top and they plunge into mental despair. They become another statistic marked to the loser category.

Where do the new winners go wrong? In general, they have not learned the lessons of past losses and do not have the discipline to continue the trading strategy which finally brought them into the winner category. What is different about the consistent winners? First of all, most of the consistent winners were losers at one time. They learned from their losses. They went on to study which tools work and then implemented those tools.

But most importantly, they have undergone a self examination to determine their mental flaws and how to correct them. Like a championship boxer, they realize they can win the first 14 rounds of a fight, but if they let their guard down and relax, they can still lose by a knockout in the final round. It takes work to become a winner and even more work to stay a winner.