In this webinar we looked at the Top Five Technical Indicators.
For a free trial of the software used in this presentation visit www.traderdealer.com.au/d2mxIRESS.aspx
Thanks to everyone who attended!
You may have heard people talk about the market being overbought or oversold, but what do they really mean? A share can move to an extreme level that will often lead to a reversal, if it moves too far too fast. But what is too far and too fast and how can you measure this? Today we’ll take a look at some of the indicators built into the D2MX Trade Tools plugin for IRESS Trader that can be used to identify when these conditions occur and how you use them to identify entry and exit opportunities when trading.
>> Get a free trial of the d2mxIRESS software to test this out for yourself
The group of indicators that can be used to measure overbought oversold conditions are known as oscillators. These indicators fluctuate up and down between two extremes, often 0 – 100. Indicators like moving averages or On Balance Volume will have different values on every share as the price of every share varies, but oscillators remain within their designated range on every share, regardless of price or volume. Commonly used oscillators include the Stochastic, Relative Strength Index (RSI), Commodity Channel Index (CCI) and the Williams %R. These are all available in the Standard Indicators in the D2MX Charts window. Oscillators are normally displayed in a separate window to the price and usually have reference levels marked on the chart as well.
The RSI is displayed in the chart above and fluctuates between 0 – 100 with reference lines at 30 and 70 on the chart. The top reference line marks when the indicator is overbought and the bottom line when it is oversold. You can select the timeframes you wish to use for the indicators and it is a good idea to align these with your trading timeframe. If your average holding time is a few days, then you will use a setting of between 3 – 5 days for your indicator. If you wish to hold a trade for about a month then use a longer timeframe, something nearer to 20 – 25 days. The shorter timeframes will allow the indicator to fluctuate more rapidly back and forward between the extremes and will provide more signals of overbought or oversold.
The Stochastic indicator is usually plotted with a signal line, similar to the MACD indicator, along with the two reference levels at 80 and 20. The blue dotted line is a moving average of the red stochastic line and is referred to as the %D in the chart properties. As with the RSI this indicator is overbought when it crosses above the top signal line and oversold when it crosses below the lower signal line. The crossover between the indicator %K and its signal line %D can be used as a buy or sell signal.
We can test how well trading overbought or oversold signals works using the Trading System tool, located under the D2MX Trade Tools menu. The following setup uses the Commodity Channel Index (CCI) oscillator which fluctuates between 100 and – 100. The entry signal is to buy shares when the 21-day CCI indicator is below -70 and sell shares when the share hits a 3% trailing stop. This strategy will be traded on the top 20 Australian companies (ASX20) with $5000 placed on each trade. The test will be run over the last 10 years, from 2002 – 2012.
The results below show how the strategy performed. Overall it has been profitable with strong gains through the bull market from 2002 – 2007. It did lose money late in 2007 and into 2008, but remember the strategy trades long only and the markets did fall heavily during this time. Recently the performance has improved with good results so far in 2012.
You can test out the other indicators or alter the parameters of this indicator and view the results for yourself in the D2MX Trading System.
Now you know how you can identify overbought or oversold conditions in a share and you can test how well different indicators work using the Trading System tool in the D2MX Trade Tools plugin. Trading overbought or oversold signals can work very well, as seen from the result of just one test we have run here. The new d2mxIRESS platform gives you the tools to build your own trading strategy.
By Jeff Cartridge
In this webinar we looked at fundamental concepts of technical analysis – what it is, and how you can use your charting software to monitor trends and make informed trading decisions.
For a free trial of the software used in this presentation visit www.traderdealer.com.au/d2mxIRESS.aspx
Thanks to everyone who attended!
The basis of technical analysis is to identify a trend and then trade in that direction. There are a number of different ways to identify a trend and today we will take a look at some of the tools in the D2MX Chart system that can assist you with this process. D2MX Charts are part of the D2MX Trade Tools plugin available in the d2mxIRESS, Bourse and Market Analyser platforms.
The simplest way to identify a trend is to take a look at the bars or candlesticks on a D2MX chart. A series of green candles or bars show a rising trend while a series of red candles or bars show a falling trend. Using this simple analysis allows you to quickly identify a trend. It works particularly well in longer timeframes, like weekly or monthly as some of the “noise” is filtered out.
Taking trend analysis one step further we can take a look at the definition of a trend which was created by Charles Dow, who also created the Dow Jones Index. This is known as Dow Theory and states an uptrend is defined as a series of higher lows and higher highs. A downtrend is defined as a series of lower highs and lower lows. At a transition between trends the share fails to make a higher high and forms a lower high. This is not yet a downtrend, until it breaks below the previous low (blue line) to form a lower low. From this point on there is now a downtrend in place.
You can also use trend lines to define the direction of a trend. A downtrend line is drawn above the share price joining up as many of the highs as possible. This line is then monitored for a break to the upside signalling a change in trend. An uptrend line can be drawn underneath the share price joining as many lows as possible. A break in this line signals a change in trend. A word of caution however – a break in a steep downtrend line may just mean the share is no longer going down as fast as it was.
Take a look at the chart below for an example of a break in the downtrend in GRY. The initial breakouts did not signal the start of a new uptrend, instead the share is no longer falling as fast. A break of a flat trend line, close to horizontal, is better as the share price has no choice but now to move higher.
Other than just looking at the chart and the candles you can use indicators to identify trends as well. The most common of these is the moving average. If the share price is above average it is rising and if it is below average it is falling. While this simple definition can work, it is more common for two moving averages to be combined to identify a trend. When the faster moving average (red line) is above the slower moving average (blue line) then the share is in an uptrend and when the moving averages turn down and the faster crosses below the slower average the share is now in a down trend.
One more indicator that is widely used to define a trend is the MACD. Before a moving average crosses over the two averages must come closer together. The MACD is an indicator based on the distance between two moving averages. The MACD was originally calculated as the difference between a 26 period and a 12 period moving average (red line). A signal line of 9 periods (blue line) is then used to provide a crossover signal similar to that which occurs in a moving average. The indicator is also displayed in the chart below as a histogram, with bars above and below the zero line.
We have looked at a number of different ways here to define a trend. It is obviously not possible and certainly not recommended, to use all of these approaches. Choose one that you are comfortable with and then stick with it.
** Are you looking for Top Down Analysis? It’s over here! **
The D2MX Charts used in the Market Analyser 7 and the Bourse 7 trading platforms have a wide variety of different analysis tools available. One of these is the Entry Scripts which allow you to apply a range of indicators to the chart so that you can clearly see key points identified by the indicator you have chosen.
Entry scripts allow you to identify when the conditions you specify for an indicator have been met. When the indicator meets your criteria a dot is placed on the chart. For example if you want to see when the MACD crosses over you can set an entry script to signal the crossover point as shown in the chart below.
The red dots show when the MACD crosses down while the blue dots show when the MACD crosses up. You can adjust the parameters when you first apply the Entry Script and also with a right click on any one of the dots, then select your chosen Entry Script Properties. You can alter the colour of the dots as well as the location of them. I find it useful to plot sell signals at the top of the chart and buy signals at the bottom of the chart. You can also adjust the parameters, so for a moving average crossover you can select the moving average time periods you wish to use. With the RSI you can set the levels that determine overbought or oversold conditions.
While Entry Scripts can be used to identify simple crossovers or overbought and oversold conditions, they can also identify more complex parameters as well. The MACD Divergence identifies when the price is rising and MACD is falling or the other way around. There are a range of other divergence parameters available as well, including On Balance Volume, Stochastic and the Commodity Channel Index.
The D2MX Prealerts are a type of Entry Script that have been built specifically for the D2MX charting platform. You can be alerted when there is an increase in volume in a share after a downtrend (Accumulation), or an increase in volume after an uptrend (Distribution). The Retracement and Open Channel indicators are included in the Prealerts as well.
You can even use the Analyser Wizard to combine indicators, and the indicators you create will be available in the Entry Scripts menu. Make sure you scroll all the way to the bottom of the list to see them. And remember that once you have a chart set up the way you want it you can save it as a template with a right click on the chart and click Save New Template. This means you do not have to apply the Entry Scripts every time you open a chart.
Make the most of the powerful new charting tools in the D2MX Charts, including the Entry Scripts, to assist you to identify when a share meets the entry or exit criteria you choose. It is now quick and easy to identify when the two lines on any indicator have crossed over and the day this occurred using the Entry Scripts.
Our next series of webinars has just been launched!
This program is aimed at giving you new ideas for your trading, and insights into how to use your Market Analyser 7 software effectively.
A Top Down Approach to Trading | August 2
With Top Down trading you start out by looking at the bigger picture of what’s currently happening in world markets. From here, drill down into the strongest sectors, and within those sectors identify the strongest companies. More…
A Bottom Up Approach to Trading | September 6
In this webinar Jeff will show you a way to quickly zero in on companies that may present good trading opportunities, and avoid getting lost in an overload of reports and information. More…
Intro to Technical Analysis | October 4
So many successful traders rely on technical analysis. Find out how the chart indicators and tools in The Bourse 7 can improve your trading. More…
The Top Five Technical Indicators | November 1
In this free webinar Jeff Cartridge will share his five favourite technical indicators, and how to use them as the basis of a trading strategy. More…
We look forward to seeing you online.
Intermarket analysis is a branch of technical analysis that examines the correlations between a number of related markets, which may include major asset classes such as stocks, bonds, commodities and currencies. It can be thought of as a type of instantaneous fundamental analysis that gives you an overall bias and direction for the markets you are studying.
Equities markets have been difficult this year and intermarket analysis can give you an insight into what you can expect in the near-term.
In intermarket analysis you look for times when the underlying relationships are diverging for warning of a turnaround, or when they are moving in the same direction for a confirmation of the underlying trends. John Murphy’s first book, Intermarket Technical Analysis, provides an excellent in-depth study of the correlations between related markets.
Crude-oil prices are a good indication of the state of the underlying economy. Higher prices cannot be supported for any length of time unless the underlying economy is exhibiting strength.
Crude-oil is one of a raft of commodities that has suffered severe selling in the past few months, down over 30% since its mid-March peak. At the end of June it hit 8-month lows, but has now rebounded a whopping 13% and is at a 1-month high.
There are a number of reasons for the recent price surge, including speculation that central banks from Europe to China will ease monetary policy to spur economic growth while sanctions against Iran may curb supply. The European Central Bank has this week cut interest rates to 0.75%, and the Chinese central bank has now cut interest rates for a second time in a month.
Crude-oil prices provide an insight into the underlying strength of the economy and can be used in intermarket analysis to determine what to expect in the equities market.
One way to anticipate near-term activity in the equities markets is to examine the S&P 500 equities index and compare it against the movements and trend in the crude-oil market.
The interrelationship between equities and crude-oil comes from the fact that energy costs make up a significant proportion of the costs of doing business for the corporate world. When crude-oil prices are high, energy costs are seen as a drag on corporate activity and a tax on doing business. Crude-oil prices also impact on consumer spending which equates to over 65% of growth in the US economy.
Our analysis starts back in 2009. S&P500 equities and crude-oil prices suffered a severe down trend in the aftermath of the GFC. At the end of 2008 crude-oil prices based and a new uptrend began in March 2009 (as shown in Chart 1 below). The crude-oil price led the rebound in the S&P500 equities market and the divergence provided a fantastic setup for the bull run in S&P500 equities which began in April 2009.
The uptrends in crude-oil and the S&P500 equities market continued through until early 2010, when crude-oil again gave a great divergence signal that there was impending weakness in the S&P500 equities market. The equities market sold-off in April 2010, but the crude-oil market was giving warning signals of weakness in the overall economy from earlier in 2010, as crude-oil prices failed to make new highs (in direct contrast to the equity prices).
S&P500 equities remained in a downtrend until 4Q 2010, when again we saw divergence between crude-oil and equity prices, as crude-oil began to make new highs and the equities prices continued lower.
By October 2010 crude-oil started its uptrend and the S&P500 equities soon followed (as seen in Chart 2 below).
The uptrends in crude-oil and S&P500 equities remained intact until April 2011, when divergence reappeared, as crude-oil gave a warning of weakness and started to make lower lows. It took another three months for the S&P500 equities market to crash, which began in May 2011 and we saw follow-through in July 2011.
By the 4Q 2011 crude-oil prices began to find a bottom and again there was a divergence signal, which was an early sign that the underlying economy was strengthening and supporting higher oil prices.
The uptrends in crude-oil and S&P500 equities remained intact again until April 2012, and once again divergence appeared as crude-oil gave an early warning of weakness with lower lows. Again it took a couple of months for the S&P500 equities market to crash, which it did in April 2012.
Crude-oil has been a leading indicator for the S&P500 equities markets for the past four years and any divergence should be heeded as an early warning signal for equities prices.
Currently there is still a divergence between the crude-oil and S&P500 equities prices. Chart 2 illustrates that crude-oil prices are confirming underlying weakness in the overall economy, but equities prices are still ticking higher (defying gravity perhaps).
We would need to see crude-oil have consecutive weekly closes above $US92 to confirm a change in trend for crude-oil. Unless this occurs in the near-term there is underlying weakness in the economy which will translate to lower equity prices.
This outcome may be short circuited by a coordinated global central bank intervention towards quantitative easing, but until that occurs be prepared for weaker equity prices in the near–term.
Investment Adviser D2MX Trading
This report was prepared by Michael Hevern. It represents the views and opinions of the author. It is not intended for use by any third party, without the approval of Michael Hevern. While this report is based on information from sources which are considered reliable, its accuracy and completeness cannot be guaranteed. Any opinions expressed reflect my judgment at this date and are subject to change. Contracting Hevern Pty Ltd is a Corporate Authorised Representative No. 408868 of D2MX Pty Limited ABN 98 113 959 596, AFSL No. 297950 (D2MX), and Michael Hevern has been appointed as an Authorised Representative of Contracting Hevern Pty Ltd. Opinions, conclusions and other information expressed in this report are not given or endorsed by D2MX, unless otherwise indicated. The information contained in this Report is General Advice only, as the information or advice given does not take into account your particular objectives, financial situation or needs.
Disclaimer: Using leverage to invest can be a two edged sword, as it can magnify your returns when the stock price rises, but will in turn magnify the losses if the trade does not perform as expected.
In this webinar Jeff Cartridge demonstrated some tips and tricks for using the advanced features in Market Analyser 7′s powerful technical analysis charting engine.
Thanks to everyone who joined in!
For more online training sessions and recordings of past events check our full webinar program page.
The advanced charting engine you know from previous editions of Market Analyser has been incorporated into the new Market Analyser 7 platform. Go to the D2MX Trade Tools menu, and select Chart, or right-click on a symbol in your watchlist and select D2MX Chart.
This video tutorial, part 2/2, provides handy tips for applying technical indicators to your charts, changing the line colour, and saving a layout for later.
For more software tutorials click here.
In this introductory webinar we looked at Market Analyser 7′s powerful charting engine.
Applying chart tools and technical indicators effectively can be a great way to find trade ideas, so why not make the most of the tools available?
If you liked this, look out for our advanced-level charting webinar. View the full program here.