Options and Candlestick Coaching â Level 1
Options and Candlestick Coaching – Level 1 Session 4 – Western Technicals
Presented by Dave Forster – Nison Certified Options Trainer ™
Western Technical Analysis
• • • • • • • • • • • • • •
Types of Technical Analysis Why Use Various Types of Technical Analysis Support & Resistance Technical Patterns Double tops and Bottoms Triple tops and Bottoms Ascending Triangle Descending Triangle Flags and Pennants Flag and Pennant Examples Types of Technical Indicators Focus on Trending Indicators Conclusion Live Demonstration
Types of Technical Analysis Common Types of Technical Analysis 1. Technical Indicators - MACD, CCI, RSI, moving averages, etc. 2. Technical Patterns - Double Bottoms, Triangles, etc. 3. Price Action - Candlesticks, Gaps, Volume 4. Drawing Tools - Fibonacci, Linear Regression 5. Multiple Time Frame Confluence - Monthly, Weekly, Daily all in agreement
Special Types of Technical Analysis: 1. Tape Reading 2. Inter-market Analysis – How do currency markets affect commodities?, How do bonds affect stocks?
Why Use Various Types of Technical Analysis? Combining different types of Technical gives a broader perspective on how an underlying is behaving. By combining Candles with Western Technicals you can identify more perspectives. Candles should be primary but they have some limitations: • Candles don’t offer price targets but some technical patterns do. So by combining candles with technical patterns, a more complete technical picture can be obtained by using each alone • Candles can indicate a neutral market like a box range but they don’t indicate an overall uptrending or downtrending market like Western technicals can All technicals – indicators, patterns, etc. – consist of price, volume, and time. So if you’re watching the price with candles then you’ll have the most clear understanding of what has the greatest impact on a trades profitability – the price itself Focus on learning candles and add a few technicals that you find helpful.
Support & Resistance Technical analysis’ key idea is that prices move due to supply and demand. Resistance represents too much supply and support represents demand. A trend line is used to connect points of support and resistance
Technical Patterns Patterns put buying and selling into perspective by showing the forces of supply and demand into a picture. Patterns provide a framework to analyze the forces between bulls and bears. More importantly, chart patterns and technical analysis can help determine who is winning the battle, allowing traders and investors to position themselves accordingly. Patterns use multiple trend lines to create a more complex version of combined trend lines . Pattern analysis can be used to on any time frame and can be used to forecast future expected moves once the chart pattern completes.
Double Tops and Bottoms The double top is a bearish reversal pattern where the pattern is made up of two consecutive peaks that are roughly equal in price, with lower prices in-between the two tops. The double bottom is a bullish reversal pattern where the pattern is made up of two consecutive lows that are roughly equal in price, with a higher prices in-between the two lows.
In the example below there is a top and then a double bottom and then the second top. In the top channel there is also a measured move from the top channel where once the top channels support was broken, an equivalent dollar amount of movement occurred to the downside.
Triple Tops and Bottoms The triple top is a bearish reversal pattern where the pattern is made up of three consecutive peaks that are roughly equal in price, with lower prices in-between the three tops. The triple bottom is a bullish reversal pattern where the pattern is made up of three consecutive lows that are roughly equal in price, with a higher prices in-between the three lows. One caution is that the more a support or resistance line is touched, the greater the potential there is of a breakout. There can be measured move with a triple top or bottom similar to double tops and bottoms. In the example below there is a triple top where support was broken.
Ascending Triangle The ascending triangle is a bullish formation that usually forms during an uptrend as a continuation pattern, meaning that further upside is expected. Whether this patter occurs during and uptrend or downtrend, the ascending triangle is a bullish pattern that is indicating that the stock is being accumulated. The ascending triangle makes the same highs but higher lows creating the triangle The volume usually declining during the triangle formation and then rises as the stock breaks out (that’s what we should be looking for) The example below shows a breakout past the resistance line to continue a prior up move
Descending Triangle The descending triangle is a bearish formation that usually forms during an downtrend as a continuation pattern, meaning that further downside is expected. Whether this pattern occurs during and uptrend or downtrend, the ascending triangle is a bearish pattern that is indicating that the stock is being sold. The descending triangle makes the same lows but lower highs creating the triangle The volume usually declining during the triangle formation and then rises as the stock breaks down past support (that’s what we should be looking for) The example below shows a breakdown past the support line to start a down move
Flags and Pennants Flags and Pennants are short-term continuation patterns that are a consolidation before the previous move resumes. These patterns are usually preceded by a strong advance or decline with heavy volume. The strong move is referred to as the flag pole. Flags and Pennants can be bullish or bearish Flags are box ranges while pennants are angled trend lines coming together The flag makes the same lows and highs creating the flag. The flagpole is the distance from the first resistance or support break to the high or low of the flag or pennant. The sharp advance (or decline) that forms the flagpole should break a trend line or resistance/support level. A line extending up from this break to the high of the flag or pennant forms the flagpole. The pennant makes higher lows and lower highs creating the pennant. Volume usually declines inside the flag or pennant then rises as the stock breaks out
Flag Example The example below shows: A flagpole as a number of bullish candles but the flagpole can also be one bullish candle before the flag forms The flag is a number of sideways candles in a box range in a fairly tight range. A bullish breakout continues the bullish movement before the flag formed by breaking the resistance at the top of the flag fulfilling the expected bullish movement.
Pennant Example The example below shows: A flagpole as a number of bullish candles The pennant is a number of sideways candles with a downtrend line and an uptrend line that are coming together to indicate a breakout A bullish breakout continues the bullish movement before the pennant formed by breaking the resistance at the top of the pennant fulfilling the expected bullish movement.
Types of Technical Indicators Categories of Technical Indicators: 1. Volatility based indicators – Bollinger Bands, ATR – Average True Range 2. Money flow indicators –Accumulation/Distribution 3. Volume Indicators - OBV – On Balance Volume 4. Trend Indicators – ADX, Moving Averages 5. Oscillators – Stochastics, RSI 6. Momentum – MACD, Williams %R, Acceleration Bands, etc 7. Positive or Negative Divergence Use different categories of indicators together and focus on the category of indicator that fits your style of trading. If you want to trade the trend, focus primarily on trending indicators.
Focus on Trending Indicators Types of Trending Indicators: Support and Resistance Generally the more touches and the more time that prices trade at support or resistance levels, the significance of that level increases Volume also measures the significance of support and resistance Change of Polarity is support becoming resistance or vice versa Importance of round numbers as support and resistance Price Patterns like an ascending triangle can have a trend within the pattern Moving Averages
ADX & DMI - Filter to determine if a market is in a trending mode ADX over 20 is often the sign of a new trend starting ADX dropping from above 40 is a warning of trend weakening DI+ over DI- is often seen as a buy signal DI- under DI+ is often seen as a sell signal
Focus on Trending Indicators Trend lines as a Trending Indicator: •Breaking of trend line is one of the best early warnings of a trend change •The significance of a trend line is determined by time and number of touches •Drawing a trend line should include all the price action in a candle so highs and lows should be used primarily instead of opens and closes •A close beyond a trend line is more significant than intraday penetration •Higher time frames are more important trend lines than lower time frames (weekly charts more significant than daily)
Channels •Are two trend lines that show the trend(s) •Failure to reach the top is often an early warning that the lower line will be broken •Measured move equals width of channel
Conclusion 1. Concentrate on price trends. 2. Learn to spot significant support and resistance levels 3. Look for important breakouts or breakdowns with patterns. 4. Master a few of the more important price patterns. 5. Understand the role volume plays in confirming price action. 6. Draw trend lines and keep an eye on them after you’ve drawn them. 7. Use moving averages to help keep track of trends. 8. Follow a few of the patterns and indicators and master their use first. 9. Learn to tell the difference between markets that are trending and those that are not. 10. Watch relative strength. 11. Look for divergences between indicators. 12. Analyze charts for price behavior like candles in relation to indicators. 13. Analyze different time frames, moving from long-range to shorter time frame charts. 14. Place the messages of the technical indicators into the overall picture of Fundamental analysis and general market conditions.
Presented by Dave Forster – Nison Certified Options Trainer ™
Western Technical Analysis
• • • • • • • • • • • • • •
Types of Technical Analysis Why Use Various Types of Technical Analysis Support & Resistance Technical Patterns Double tops and Bottoms Triple tops and Bottoms Ascending Triangle Descending Triangle Flags and Pennants Flag and Pennant Examples Types of Technical Indicators Focus on Trending Indicators Conclusion Live Demonstration
Types of Technical Analysis Common Types of Technical Analysis 1. Technical Indicators - MACD, CCI, RSI, moving averages, etc. 2. Technical Patterns - Double Bottoms, Triangles, etc. 3. Price Action - Candlesticks, Gaps, Volume 4. Drawing Tools - Fibonacci, Linear Regression 5. Multiple Time Frame Confluence - Monthly, Weekly, Daily all in agreement
Special Types of Technical Analysis: 1. Tape Reading 2. Inter-market Analysis – How do currency markets affect commodities?, How do bonds affect stocks?
Why Use Various Types of Technical Analysis? Combining different types of Technical gives a broader perspective on how an underlying is behaving. By combining Candles with Western Technicals you can identify more perspectives. Candles should be primary but they have some limitations: • Candles don’t offer price targets but some technical patterns do. So by combining candles with technical patterns, a more complete technical picture can be obtained by using each alone • Candles can indicate a neutral market like a box range but they don’t indicate an overall uptrending or downtrending market like Western technicals can All technicals – indicators, patterns, etc. – consist of price, volume, and time. So if you’re watching the price with candles then you’ll have the most clear understanding of what has the greatest impact on a trades profitability – the price itself Focus on learning candles and add a few technicals that you find helpful.
Support & Resistance Technical analysis’ key idea is that prices move due to supply and demand. Resistance represents too much supply and support represents demand. A trend line is used to connect points of support and resistance
Technical Patterns Patterns put buying and selling into perspective by showing the forces of supply and demand into a picture. Patterns provide a framework to analyze the forces between bulls and bears. More importantly, chart patterns and technical analysis can help determine who is winning the battle, allowing traders and investors to position themselves accordingly. Patterns use multiple trend lines to create a more complex version of combined trend lines . Pattern analysis can be used to on any time frame and can be used to forecast future expected moves once the chart pattern completes.
Double Tops and Bottoms The double top is a bearish reversal pattern where the pattern is made up of two consecutive peaks that are roughly equal in price, with lower prices in-between the two tops. The double bottom is a bullish reversal pattern where the pattern is made up of two consecutive lows that are roughly equal in price, with a higher prices in-between the two lows.
In the example below there is a top and then a double bottom and then the second top. In the top channel there is also a measured move from the top channel where once the top channels support was broken, an equivalent dollar amount of movement occurred to the downside.
Triple Tops and Bottoms The triple top is a bearish reversal pattern where the pattern is made up of three consecutive peaks that are roughly equal in price, with lower prices in-between the three tops. The triple bottom is a bullish reversal pattern where the pattern is made up of three consecutive lows that are roughly equal in price, with a higher prices in-between the three lows. One caution is that the more a support or resistance line is touched, the greater the potential there is of a breakout. There can be measured move with a triple top or bottom similar to double tops and bottoms. In the example below there is a triple top where support was broken.
Ascending Triangle The ascending triangle is a bullish formation that usually forms during an uptrend as a continuation pattern, meaning that further upside is expected. Whether this patter occurs during and uptrend or downtrend, the ascending triangle is a bullish pattern that is indicating that the stock is being accumulated. The ascending triangle makes the same highs but higher lows creating the triangle The volume usually declining during the triangle formation and then rises as the stock breaks out (that’s what we should be looking for) The example below shows a breakout past the resistance line to continue a prior up move
Descending Triangle The descending triangle is a bearish formation that usually forms during an downtrend as a continuation pattern, meaning that further downside is expected. Whether this pattern occurs during and uptrend or downtrend, the ascending triangle is a bearish pattern that is indicating that the stock is being sold. The descending triangle makes the same lows but lower highs creating the triangle The volume usually declining during the triangle formation and then rises as the stock breaks down past support (that’s what we should be looking for) The example below shows a breakdown past the support line to start a down move
Flags and Pennants Flags and Pennants are short-term continuation patterns that are a consolidation before the previous move resumes. These patterns are usually preceded by a strong advance or decline with heavy volume. The strong move is referred to as the flag pole. Flags and Pennants can be bullish or bearish Flags are box ranges while pennants are angled trend lines coming together The flag makes the same lows and highs creating the flag. The flagpole is the distance from the first resistance or support break to the high or low of the flag or pennant. The sharp advance (or decline) that forms the flagpole should break a trend line or resistance/support level. A line extending up from this break to the high of the flag or pennant forms the flagpole. The pennant makes higher lows and lower highs creating the pennant. Volume usually declines inside the flag or pennant then rises as the stock breaks out
Flag Example The example below shows: A flagpole as a number of bullish candles but the flagpole can also be one bullish candle before the flag forms The flag is a number of sideways candles in a box range in a fairly tight range. A bullish breakout continues the bullish movement before the flag formed by breaking the resistance at the top of the flag fulfilling the expected bullish movement.
Pennant Example The example below shows: A flagpole as a number of bullish candles The pennant is a number of sideways candles with a downtrend line and an uptrend line that are coming together to indicate a breakout A bullish breakout continues the bullish movement before the pennant formed by breaking the resistance at the top of the pennant fulfilling the expected bullish movement.
Types of Technical Indicators Categories of Technical Indicators: 1. Volatility based indicators – Bollinger Bands, ATR – Average True Range 2. Money flow indicators –Accumulation/Distribution 3. Volume Indicators - OBV – On Balance Volume 4. Trend Indicators – ADX, Moving Averages 5. Oscillators – Stochastics, RSI 6. Momentum – MACD, Williams %R, Acceleration Bands, etc 7. Positive or Negative Divergence Use different categories of indicators together and focus on the category of indicator that fits your style of trading. If you want to trade the trend, focus primarily on trending indicators.
Focus on Trending Indicators Types of Trending Indicators: Support and Resistance Generally the more touches and the more time that prices trade at support or resistance levels, the significance of that level increases Volume also measures the significance of support and resistance Change of Polarity is support becoming resistance or vice versa Importance of round numbers as support and resistance Price Patterns like an ascending triangle can have a trend within the pattern Moving Averages
ADX & DMI - Filter to determine if a market is in a trending mode ADX over 20 is often the sign of a new trend starting ADX dropping from above 40 is a warning of trend weakening DI+ over DI- is often seen as a buy signal DI- under DI+ is often seen as a sell signal
Focus on Trending Indicators Trend lines as a Trending Indicator: •Breaking of trend line is one of the best early warnings of a trend change •The significance of a trend line is determined by time and number of touches •Drawing a trend line should include all the price action in a candle so highs and lows should be used primarily instead of opens and closes •A close beyond a trend line is more significant than intraday penetration •Higher time frames are more important trend lines than lower time frames (weekly charts more significant than daily)
Channels •Are two trend lines that show the trend(s) •Failure to reach the top is often an early warning that the lower line will be broken •Measured move equals width of channel
Conclusion 1. Concentrate on price trends. 2. Learn to spot significant support and resistance levels 3. Look for important breakouts or breakdowns with patterns. 4. Master a few of the more important price patterns. 5. Understand the role volume plays in confirming price action. 6. Draw trend lines and keep an eye on them after you’ve drawn them. 7. Use moving averages to help keep track of trends. 8. Follow a few of the patterns and indicators and master their use first. 9. Learn to tell the difference between markets that are trending and those that are not. 10. Watch relative strength. 11. Look for divergences between indicators. 12. Analyze charts for price behavior like candles in relation to indicators. 13. Analyze different time frames, moving from long-range to shorter time frame charts. 14. Place the messages of the technical indicators into the overall picture of Fundamental analysis and general market conditions.
