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The Application Of Technical AnalysisIn the
Financial and Commodity Markets
Robin WilkinGlobal Head of FX and Commodities
Technical Strategy
JPMorgan Chase [email protected]
0207 777 1345
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The JPMorgan FX Technical Team
LondonLondon
Robin Wilkin Robin Wilkin –– 0207 777 1345 0207 777 1345
New YorkNew York
Niall O’Connor Niall O’Connor –– 001 212 834 5108001 212 834 5108
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Popular misconceptions of Technical Analysis
Technicals are a stand alone system only
Not True – Technicals can and are widely used in conjunction with fundamentals.
Technicals are merely a reaction to the fundamental outlook.
Not True – More often than not the markets have topped or bottomed way before the fundamental picture is evident.
Market commentators use Technicals as an excuse when the driver is unclear
True – When it is not clear about why a market is moving it is put down to technical buying or selling.
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EURUSD – a base developed at the end of 2000, but fundamentals didn’t become bullish till late 2002
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The greatest misconception…
It doesn’t work! - Untrue
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What makes a good technician?
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OBSERVATION
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We combine Elliott Wave with a number of other tools available
– Predictive techniques• Elliott wave• Pattern Analysis• Candlesticks
– Mechanical techniques• RSI• Stochastics• Moving Averages
We combine all these methods into a powerful predictive tool that can be applied across all the markets.
“If you don’t know where you are going , you’ll probably end up somewhere else”
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The Elliott Wave Principle
“Elliott waves are visible measures of the ebb and flow of investor psychology that repeat themselves as patterns. They allow us to anticipate the next move more accurately than anything else.”
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Predictive techniques
Elliott Wave Theory:– Background
• Method developed by Ralph Nelson Elliott which argues that social or crowd behaviour trends and then reverses in recognisable patterns.
• Technique further developed by Robert Prechter after Elliott’s death
– Details of the principle• Trends are identified by a sequence of waves termed impulse waves,
which are numbered 1-5, and a shorter corrective sequence of waves which are lettered A-C
• There are also 9 different ‘degrees’ of scale, spanning short and long term, from ‘Grand Supercycle’ to ‘Sub-minuette’
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Basic Tenets
Movements in the direction of the trend develop into Movements in the direction of the trend develop into five wavepatternspatterns
CounterCounter--trend movements display trend movements display three wave structuresstructures
Elliott Wave Analysis assesses Elliott Wave Analysis assesses probable outcomes by outcomes by determining the current position within the larger patterndetermining the current position within the larger pattern
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The Structure of the Wave Pattern
1
2
3
4
5
1
a
b
c
2
1
2
3
4
5
3
a
b
c
4
1
2
3
4
5 51
1
2
3
4
5A
a
b
cB
1
2
3
4
5
C
2
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Vocabulary
Impulse Waves ---- movements in the direction of the trendmovements in the direction of the trend
Corrective Waves ---- movements against the trendmovements against the trend
Fibonacci Ratio ---- a mathematical ratio that often occurs between related a mathematical ratio that often occurs between related waves.waves.
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Three Rules of Elliott
Wave 2 Wave 2 CANNOT retrace past where wave 1 retrace past where wave 1 began.began.
CORRECT
1
2
3
4
5
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Three Rules of Elliott
Wave 2 CANNOT retrace past where wave 1 began.
Wave 3 can Wave 3 can NEVER be the shortest.be the shortest.
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CORRECTThree Three is notis not the shortestthe shortest
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2
3
4
5
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Three Rules of Elliott
Wave 2 CANNOT retrace past where wave 1 began.
Wave 3 can NEVER be the shortest.
Wave 4 Wave 4 NEVER ends in the price territory of Wave 1.ends in the price territory of Wave 1.
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CORRECT:iv does not overlap i
i
ii
iii
iv
v
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Know when to break the rules
Diagonal First and Fifth Waves
1
2
3
4
5
Diagonal Fifth Waves
Diagonal Fifth Waves
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Guidelines - True most of the time
EQUALITY
When 3 is longest, 5 will approximate 1When 3 is longest, 5 will approximate 1
Guideline of Equality
1
2
3
4
5(1)
Wave 3 is the longesttherefore wave 5 equals wave 1
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Guidelines - True most of the time
EQUALITY
When 3 is longest, 5 will approximate 1
ALTERNATION
If 2 is sharp, 4 will be sidewaysIf 2 is sharp, 4 will be sideways
If 2 is sideways, 4 will be sharpIf 2 is sideways, 4 will be sharp
Guideline of Alternation
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22
33
44
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Two is sharp, so...Two is sharp, so...
Four is sidewaysFour is sideways
And vice versa
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22
33
44
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Guidelines - True most of the time
EQUALITY
When 3 is longest, 5 will approximate 1
ALTERNATION
If 2 is sharp, 4 will be sideways
if 2 is sideways, 4 will be sharp
CORRECTIONS
Often end in the area of the previous wave 4Often end in the area of the previous wave 4
Guideline of previous fourth wave support
1
2
3
4
5
a
b
c
(1)
(2)
Span of 4th waveof previous degree
Previous 4th wave
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Popular Corrections……….
1
2
3
4
5 A
a
b
cB
1
2
3
4
5C
ABC Zig Zag
A
B
C
Regular Flat or Irregular Flat is when wave Bmakes a new low/high
a
b
c
d
e
Triangle
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1
2
3
4
5
A
B
C
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Trading with Elliott Wave
Initial 5 wave rally breaks the sequence of lower highs
First buy opportunity occurs on the pullback in wave 2. FX the last couple of years has more often than not been a shallow and quick correction
Take profits at ideal target - 1.618 x wave 1
4th wave typically retrace 38-50% of wave 3 -provides 2nd buying opportunity
Exit all longs and look to initiate small shorts
Wave A typically overlaps the top of wave 3
Wave B fails to test the wave 5 high - add to short positions
Wave C targets at least the previous 4th wave lows
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USDZAR – a walkthrough example
1
2
i
ii
iii
iv
v 3
A
B
C
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1
2
3
5
4
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1
a
b
c
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USDNOK – another example
a
b
c
A
a
b
i
ii
iii
iv
c
B
1
2
3
4
5
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USDNOK EURNOK
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GOLD – why were we bullish?
i
A
B
C
D
E
ii
iii
iv
v
i
i
ii
iii
iv
v
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Mechanical Techniques
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Mechanical techniques
Oscillators– RSI - (Relative Strength Index)
• Uses an average of period’s higher and lower closes to provide anumber which shows extremes of market buying/selling power by using deviations outside of a ‘band’.
– Stochastic -• Comprises 2 lines, one leading (the %K) line and one lagging (the %D
line) that provide buy and sell signals through deviation outside of a ‘band’. When the 2 lines cross, at the outside of the band, then this is a strong signal. Numbers are derived from measuring the latest, lowest and highest closes within 5 periods.
– Confirmation• Both indicators give a similar reading.
– Divergence• Condition where prices register a further extreme print, while the
oscillators do not make a similar extreme reading.
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Stochastics in a range trade environment
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RSI – Use them to get into the trend
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Japanese Candlesticks
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What are the candles telling you…price action!
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Markets are generally driven by
EMOTION
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Remember the Cycle of Psychology in Mike’s presentation
ConfidenceConfidence
Greed
* The Trade ** The Trade *
HopeHope
ComplacencyComplacency
FearFear
Anger?Anger?
PanicPanic
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“Jedi” trading – The 3 key words are:
Greed
FearFear
AngerAnger
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What’s your edge ?
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The checklist………Plan your Trades. Trade your plans
Keep records of your trading results
Keep a positive attitude, no matter how much you loose
Don’t take the market home
Continually set higher trading goals
Successful traders buy into bad news and sell into good news
Successful traders are not afraid to buy high and sell low
Continually strive for patience, perseverance, determination and rational action
Limit your losses - use stops
Never cancel a stop order after you have placed it
Place your stops the time you make the trade
Never get into the market because you are too anxious because of waiting – beware of “into wishing” over “intuition”
Avoid getting in or out of the market too often
Losses make the trader studious - not profits. Take advantage of every loss to improve your knowledge of market action
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The reading List………Technical Analysis of the Financial Markets – John J Murphy (The Bible – A little bit of everything)
Trader Vic – Methods of a Wall Street Master – Victor Sperandeo (A market wizard tells all)
Trader Vic II – Principles of Professional Speculation – Victor Sperandeo
Elliott Wave Principle – Robert Balan (great for examples at the back)
Market Wizards 1 and 2 – Jack Swager (Straight from the horses mouth)
Reminiscences of a Stock Operator – Edwin Lefevre (the classic)
Technical Analysis of Stock Trends – Edwards and Magee (The best for patterns)
Backgammon for ……. - Bill Robertie (wanna learn about probabilities and luck versus skill this is the game)