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The Rounded Bottom
This formation is perhaps easiest to recognize, and many traders believe that a rounded bottom is a strong signal of an impending change in market direction. The formation begins with prices gradually moving either up or down and then gradually changing direction. The rounded bottom is evident in absence of an abrupt change in market direction.
Head-and-Shoulders Formation
Considered by many to be most reliable analytical tool available, head-and-shoulders formation has become increasingly popular among traders as an indicator of a sizeable market reversal. The pattern is developed from three rounded bottom formations situated such that middle one is higher than other two, both of which are sitting at approximately same level. The resulting configuration resembles a person’s head and shoulders. The formation indicates end of an up trend in market; while reverse head-and-shoulder formation indicates end of a down trend.
Sideways Channels – Trading Breakout
This trading strategy involves looking out for markets that appear to be trending in a horizontal direction. If a market seems to be trading sideways, with same tops and bottoms along way, it may be ready to break out of that trend either up or down. The difficulty of course lies in determining for how long horizontal trend will continue, and then predicting direction of breakout.
Triangle Formations
These formations are similar to sideways channels in that market being analyzed has been moving within a relatively narrow range for a considerable time. The difference is that in a sideways channel upper and lower limits of market movement tend to be parallel, whereas in a triangle formation these areas converge until a breakout one way or another occurs. Three types of triangle formations are recognized: symmetric, ascending and descending. Descending triangles develop when higher price limits converge toward lower price barrier, which has tended to stay flat. Symmetric triangle formations resemble sideways channels except that their upper and lower price limits continue to converge. Ascending triangles form when upper price limits tend to stay flat, while lower price limit converges upward.
The 1-2-3 Formation
The theory of this strategy is embedded in belief that a particular market will indicate a new trend in three steps. When a market has reached a new 12 month high or low, a trader begins to look for a 1-2-3 formation. The trader labels position of high or low on chart as point #1. If market rebounds from point #1, this theory claims rebound will only be of a certain magnitude. When limit of rebound has occurred, this is labeled as point #2. If market then retraces itself back toward point #1, but does not reach point #1 before reversing, this new secondary low is labeled point #3. Once this third point has been identified, trader waits to see if market will move past point #2. If market breaks out from second point, then trader would enter market in direction of breakout (opposite of direction that market was moving when it originally hit point #1).
Simple and Weighted Moving Averages
Moving averages are product of a mathematical analysis of market. Generally, analyst selects a pre-determined number of days to examine (usually four), and then totals all of prices for that time frame. A division of this total by number of days being analyzed will yield an average. With each day going forward, first day is subtracted and new day is added, thus giving a new average. This is done for however many days one chooses to examine. Once moving averages are calculated, results are charted on a graph. Some analysts calculate a weighted average using a formula that places more value on more recent prices. This strategy is called a Weighted Moving Average.
The Big Lie
Software packages are available today that can assist with culling through historical data. All of that is futile. At exact moment a trader enters market, there exists precisely a 50.000000% chance that market will move up or down from that point of entry, completely independent of any analysis that led trader to enter at that point. No amount of hand waving, and no amount of fancy math, will change that reality. Denying that fact is Big Lie.
Why is trading near level of chance death of a system? To trade successfully, a trader must win enough to generate earnings that exceed costs of commissions, slippage and losing trades, and this requires a wining average greatly exceeding 50%. For every losing trade, you must win another just to break even: that means two trades for no gain, and all cost of trading. If third trade happens to be a win, that means that 3 commissions, slippage 3 times and one loss must be subtracted from win. Because of these downstream impacts of a loss, as a general rule of thumb at least 7 out of 10 trades must be winners to trade profitably. Not gonna happen.
To rely on any of these methods of analysis in making trading decisions would be height of folly. The hard reality is that all of these analytical methods are down right silly. They are product of hope triumphing over reason. Traders are desperate for anything that will give them longevity and profit in market in face of desperate losses. But all of these technical trend methods, and fundamental methods as well, fail at a primary level, and placing any hope in them is a form of financial suicide. That 80% or more of traders lose is no surprise when majority place faith in methods that by definition can never work over any extended period of time.
All is Not Lost
Yes, Virginia, there is a way out of this mess. Accepting that future can never be predicted requires a shift in world view, one that rejects virtually every assumption embedded in current world of trading, and leap may simply be too great for many. But for those who reject big lie, step across to other side, and realize there is no leverage in tea leaves and eyes of newt, a tremendous freedom and clarity await. Unshackled by false hopes, trading becomes predictable and mechanical, freed from agony of watching market move in “wrong” direction because in fact no prediction of market direction is involved at all. The idea is to create a position in market that is truly cyclical, and therefore independent of underlying market movement, and of known amplitude. How to establish such a position is described in: A Simple Guide to Astronomical Wealth. Go to www.tradetofreedom.com.
Copyright © Jeff Schweitzer
PERMISSIONS TO REPUBLISH: This article may be republished in its entirety free of charge, electronically or in print, provided it appears with included copyright and author’s resource box with live website link.
Jeff Schweitzer received his Ph.D. from UCSD in 1985. Jeff was appointed as a science advisor at the White House under the Bush and Clinton Administrations for three years before devoting attention to generating wealth through trading futures. He has published more than 60 articles in diverse areas, including neurobiology, marine science, international development, environmental protection and aviation.