Something Interesting in Financial Video July 2013 - page 4
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A lesson on how to trade the Bullish and Bearish Engulfing Candlestick Chart Patterns for active traders and investors using technical analysis in the stock, futures, and forex markets.
A lesson on how to trade the Hammer and Hanging Man Candlestick Chart Patterns for active traders and investors in the forex, futures, and stock markets.
Like the Spinning Top and Doji which we have studied in previous lessons, the Hammer candlestick pattern is made up of one candle. The candle looks like a hammer as it has a long lower wick and a short body at the top of the candlestick with little or no upper wick. In order for a candle to be a valid hammer most traders say the lower wick must be two times greater than the size of the body potion of the candle, and the body of the candle must be at the upper end of the trading range.
When you see the Hammer form in a downtrend this is a sign of a potential reversal in the market as the long lower wick represents a period of trading where the sellers were initially in control but the buyers were able to reverse that control and drive prices back up to close near the high for the day, thus the short body at the top of the candle.
After seeing this pattern form in the market most traders will wait for the next period to open higher than the close of the previous period to confirm that the buyers are actually in control.
The Hanging Man is basically the same thing as Hammer formation but instead of being found in a downtrend it is found in an uptrend. Like the Hammer pattern, the Hanging man has a small body near the top of the trading range, little or no upper wick, and a lower wick that is at least two times as big as the body of the candle.
Unlike the Hammer however the selling pressure that forms the lower wick in the Hanging Man is seen as a potential sign of more selling pressure to come, even though the candle closed in the upper end of its range. While the lower wick of the Hammer represents selling pressure as well, this is to be expected in a downtrend. When seen in an uptrend however selling pressure is a warning sign of potential more selling pressure to come and thus the categorization of the Hanging Man as a bearish reversal pattern.
As with the Hammer and as with most one candle patterns most traders will wait for confirmation that selling pressure has in fact taken hold by watching for a lower open on the next candle. Traders will also place additional significance on the pattern when there is an increase in volume during the period the Hanging Man forms as well as when there is a longer wick.
A lesson on how to trade the morning and evening star candlestick chart patterns for active traders and investors using technical analysis in the stock, futures, and forex markets.
In our last lesson we looked at the Hammer and Hanging Man Candlestick Chart Patterns. In today's lesson we are going to look at two more reversal candlestick patterns which are known as the Morning and Evening Star.
The Morning Star
The Morning Start Candlestick Pattern is made up of 3 candles normally a long black candle, followed by a short white or black candle, which is then followed by a long white candle. In order to have a valid Morning Start formation most traders will look for a close of the third candle that is at least half way up the body of the first candle in the pattern. When found in a downtrend, this pattern can be a powerful reversal pattern.
What this represents from a supply demand situation is a lot of selling into the downtrend in the period which forms the first black candle, then a period of lower trading but with a reduced range which forms the second period and then a period of trading indicating that indecision in the market, which is then followed by a large up candle representing buyers taking control of the market.
Unlike the Hammer and Hanging Man which we learned about in our last lesson, as the Morning Star is a 3 candle pattern traders often times will not wait for confirmation from the 4th candle before entering the trade. Like those patterns however traders will look to volume on the third day for confirmation. In addition traders will look to the size of the size of the candles for indication on how big the reversal potential is. The larger the white and black candle and the further that the white candle moves up into the black candle the larger the reversal potential.
The Evening Star
The Evening Star Candlestick Pattern is a mirror image of the Morning Star, and is a reversal pattern when seen as part of an uptrend. The pattern is made up of three candles the first being a long white candle representing buyers driving the prices up, then a short white or black second candle representing indecision in the market, which is followed by a third black candle down which represents sellers taking control of the market.
The close of the third candle needs to be at least half way down the body of the first candle and as with the Morning Star most traders will not wait for confirmation from the 4th period's candle to consider the pattern valid. Traders will look for increased volume on the third period's candle for confirmation, the larger the black and white candles are and the further the black candle moves down the body of the white candle the more powerful the reversal is expected to be.
Trading the Gold Silver Ratio :
For the hard-asset enthusiast, the gold-silver ratio is part of common parlance, but for the average investor, this arcane metric is anything but well-known. This is unfortunate because there's great profit potential using a number of well-established strategies that rely on this ratio.
In a nutshell, the gold-silver ratio represents the number of silver ounces it takes to buy a single ounce of gold. It sounds simple, but this ratio is more useful than you might think. Read on to find out how you can benefit from this ratio.
How the Ratio Works
When gold trades at $500 per ounce and silver at $5, traders refer to a gold-silver ratio of 100. Today the ratio floats, as gold and silver are valued daily by market forces, but this wasn't always the case. The ratio has been permanently set at different times in history - and in different places - by governments seeking monetary stability.
Here's a thumbnail overview of that history:
- 2007 – For the year, the gold-silver ratio averaged 51.
- 1991 – When silver hit its lows, the ratio peaked at 100.
- 1980 – At the time of the last great surge in gold and silver, the ratio stood at 17.
- End of 19th Century – The nearly universal, fixed ratio of 15 came to a close with the end of the bi-metallism era.
- Roman Empire – The ratio was set at 12.
- 323 B.C. – The ratio stood at 12.5 upon the death of Alexander the Great.
These days, gold and silver trade more or less in sync, but there are periods when the ratio drops or rises to levels that could be considered statistically "extreme." These "extreme" levels create trading opportunities.How to Trade the Gold-Silver Ratio
First off, trading the gold-silver ratio is an activity primarily undertaken by hard-asset enthusiasts like "gold bugs". Why? Because the trade is predicated on accumulating greater quantities of the metal and not on increasing dollar-value profits. Sound confusing? Let's look at an example.
The essence of trading the gold-silver ratio is to switch holdings when the ratio swings to historically determined "extremes." So, as an example:
- When a trader possesses one ounce of gold, and the ratio rises to an unprecedented 100, the trader would then sell his or her single gold ounce for 100 ounces of silver.
- When the ratio then contracted to an opposite historical "extreme" of, say, 50, the trader would then sell his or her 100 ounces for two ounces of gold.
- In this manner, the trader would continue to accumulate greater and greater quantities of metal, seeking "extreme" ratio numbers from which to trade and maximize his or her holdings.
Note that no dollar value is considered when making the trade. The relative value of the metal is considered unimportant.For those worried about devaluation, deflation, currency replacement - and even war - the strategy makes sense. Precious metals have a proven record of maintaining their value in the face of any contingency that might threaten the worth of a nation's fiat currency.
Drawbacks of the Trade
The obvious difficulty with the trade is correctly identifying those "extreme" relative valuations between the metals. If the ratio hits 100 and you sell your gold for silver, then the ratio continues to expand, hovering for the next five years between 120 and 150, you're stuck. A new trading precedent has apparently been set, and to trade back into gold during that period would mean a contraction in your metal holdings.
What is there to do in that case? One could always continue to add to one's silver holdings and wait for a contraction in the ratio, but nothing is certain. This is the essential risk to those trading the ratio. It also points out the need to successfully monitor ratio changes over the short and medium term in order to catch the more likely "extremes" as they emerge.
Conclusion
There's an entire world of investing permutations available to the gold-silver ratio trader. What's most important is to know one's own trading personality and risk profile. For the hard-asset investor concerned with the ongoing value of his or her nation's fiat currency, the gold-silver ratio trade offers the security of knowing, at the very least, that he or she always possesses the metal.
A lesson on how to trade the Inverted Hammer and Shooting Star Candlestick Chart Patterns for active traders and investors using technical analysis in the stock, futures, and forex markets.
In our last lesson we learned about the Morning and Evening Star Candlestick Patterns. In today's lesson we are going to wrap up our series on candlestick patterns with a look at the Inverted Hammer and the Shooting Star candlestick patterns.
The Inverted Hammer
As its name implies, the inverted Hammer looks like an upside down version of the Hammer pattern which we learned about several lessons ago. Like the Hammer Pattern, the Inverted Hammer is comprised of one candle and when found in a downtrend is considered a potential reversal pattern.
The pattern is made up of a candle with a small lower body and a long upper wick which is at least two times as large as the short lower body. The body of the candle should be at the low end of the trading range and there should be little or no lower wick in the candle.
What the pattern is basically telling us is that although sellers ended up driving price down to close near to where it opened, buyers had significant control of the market at some point during the period which formed the long upper wick. This buying pressure during the downtrend calls the trend into question which is why the candle is considered a potential reversal pattern. Like the other one candle patterns we have learned about however, most traders will wait for a higher open on the next trading period before taking any action based on the pattern.
Most traders will also look at a longer wick as a sign of a greater potential reversal and like to see an increase in volume on the day the Inverted Hammer Forms. \
The Shooting Star
The Shooting Star looks exactly the same as the Inverted Hammer, but instead of being found in a downtrend it is found in an uptrend and thus has different implications. Like the Inverted Hammer it is made up of a candle with a small lower body, little or no lower wick, and a long upper wick that is at least two times the size of the lower body.
The long upper wick of the pattern indicates that the buyers drove prices up at some point during the period in which the candle was formed but encountered selling pressure which drove prices back down for the period to close near to where they opened. As this occurred in an uptrend the selling pressure is seen as a potential reversal sign. When encountering this pattern traders will look for a lower open on the next period before considering the pattern valid.
As with the Inverted Hammer most traders will see a longer wick as a sign of a greater potential reversal and like to see an increase in volume on the day the Shooting Star forms.
34. Why Most Traders Lose Money and The Solution
A lesson on the importance of money management in trading and how most traders of the stock, futures, and forex markets ignore money management because they do not consider it important and therefore loose money trading.
Why the Majority of Traders Fail
In our last lesson we finished up our series on Candlestick Chart Patterns with a look at the Inverted Hammer and the Shooting Star Candlestick Chart Patterns. In today's lesson we are going to start a new series on money management, the most important concept in trading and the reason why most traders fail.
Over the last several years working in financial services I have watched hundreds if not thousands of traders trade, and over and over again I see smart people who have been intelligent enough to accumulate large sums of money in their non trading careers open a trading account and loose huge sums of money making what you would think are easily avoidable mistakes that one would think even the dumbest traders would avoid.
Those same traders are the ones that consider themselves too good or smart to make the same mistakes that so many others make, and that will skip over this section to get to what they feel is the "real meat" of trading, strategies for picking entry points. What these traders and so many others fail to realize is that what separates the winners from the losers in trading is not how good someone is at picking their entry points, but how well they factor in what they are going to do after they are in a trade into their trade entries and how well they stick to their trade management plan once they are in the trade.
For the few who do get that money management is far and away the most important aspect of trading, the large majority of these people don't understand the large role that psychology plays in money management or consider themselves above having to work on channeling their emotions correctly when trading.
35. Why Traders Hold On to Losing Positions
A lesson on how the ability and willingness to take losses when trading the forex, futures, or stock markets is one of the key factors that differentiates successful traders from unsuccessful ones.
In our last lesson we introduced the concept that money management and the psychology of money management as the most overlooked but most important component of trading success. In today's lesson we will begin to look at one of the most important components of the psychology of money management: a willingness to be wrong.
Humans in general grow up being taught by their environment of the importance of always being right. Those who are right are envied as the winners in society and those who are wrong are cast aside as losers. A fear of being wrong and the need to always be right will hold you back in general, but will be deadly in your trading.
With this in mind lets say that you have been watching my videos and feel that I am an intelligent trader, so you want me to give you a method to trade. I say fine and give you a method and tell you that the method will trade 100 times a year with an average profit of 100 points for winning trades and an average loss of 20 points for loosing trades. You say great and take the system home to give it a try.
A few days later the first trade comes and quickly hits its profit target of 80 points. Great you say and call a bunch of your friends to tell them about the great system you've found. Then a few days later the next trade comes but quickly takes a loss. You hold tight however and then the next trade comes, and the next trade etc until the trade has hit 5 losers in a row and amounting to 100 points in loses on the losers so you are now down 20 points overall, and all your trader buddy's who started following the system after the first trade are now down 100 points.
A lesson on two of the most common mistakes that traders make when trading the stock, futures and forex markets.
One of the most common mistakes is sticking in a trade where you know you are right in your analysis, but the market continues to move against you. As the famous economist John Maynard Keynes once said:
"The markets can remain irrational longer than you can remain solvent"
Perhaps one of the best examples of this are those who shorted the NASDAQ into the runup in 1999 and early 2000. At the time it was pretty obvious that from a value standpoint NASDAQ stocks were way overvalued and that people's expectations for growth that they were buying on were way out of line with reality. There were many great traders at the time who recognized this and began shorting the NASDAQ starting in late 99. As you can see from the below chart and the huge sell off that ensued after the peak in 2000, these traders were right in their analysis. Unfortunately for many of them however stocks continued to run up dramatically from already overvalued points in late 99 wiping out many of these traders who would eventually be proved correct.
So as we learned about in last lesson, people's strong desire to be right will often times keep them in trades that they should have moved on from even though the market may eventually prove them correct.
For those traders who are able to initially move on from trades where they feel they are correct but the market moves against them, another common theme which arises is for a trader to initially stick to his plan, but after being proved correct and missing out on gains he becomes frustrated and deviates from his plan so that he will not miss out on another profitable opportunity.
One place of many where I have seen this time and time again is when watching traders who trade reversals at support or resistance levels. Many times when the market touches a support or resistance level it will have a brief spike upwards or downwards which hits the stops of a trader looking to profit from the reversal, taking him out of the market just as it turns in his favor. Because many traders think a like, often times the level at which the trader is taken out of the market is right at his stop level as well.
After this happens once or twice to a trader he will then stop placing hard stops in the market and instead convince himself that he will manage the trade if it moves against him. This may work a few times for the trader giving him more confidence in the strategy until the market does finally break. As we have learned about in previous lessons often times when the market breaks significant support or resistance levels it will break violently to the point where the trader in the above situation is quickly down a large amount on his trade. Typically what will happen at this point is instead of taking the big loss, learning his lesson, and moving on the trader will remain in the position or worse add to it with the hopes that the market will turn back in his favor. If the trader gets lucky and the market does turn back in his favor this only goes to support this bad habit which will eventually knock him out of the market.
Successful traders realize that situations such as the above occur constantly in the market and that one of the main things that separates successful traders from unsuccessful ones is their ability to accept this, stick to their strategy, accept that loosing trades are a part of trading, and move onto the next trade when the market does not move in their favor.
A lesson on crowd psychology and how it relates to trading the stock, futures, and forex markets.
The best summary that I have seen on this subject, as well as a great book on trading in general is Dr. Alexander Elder's book Trading for a living. As the Trader and Psychologist points out in his book, people think differently when acting as part of a crowd than they do when acting alone. Dr Elder points out that "People change when they join crowds. They become more credulous, impulsive, anxiously search for a leader, and react to emotions instead of using their intellect."
In his book Dr. Elder gives several examples of academic studies which have been done which show that people have trouble doing simple tasks such as choosing which line is longer than the other when put in a situation with other people who were instructed to give the wrong answer.
Perhaps no where is the strange effect is the psychology of crowds seen than in the financial markets. One of the more recent examples as I have spoken about in my other lessons of the effect that the psychology of crowds can have on the markets is the run-up of the NASDAQ into 2000. As you will find by pulling out the history books however, this is not an isolated incident as financial history is littered with similar price bubbles created and then destroyed in the same way as the NASDAQ bubble was.
So why does history continue to repeat itself? As Dr. Elder points out in his book, from a primitive standpoint chances of survival are often much higher as part of a group than they are alone. Similarly war's are often one by militaries with the strongest leaders. It is thus only natural to think that human's desire to survive would breed a desire to be part of a group with a strong leader into the human psyche.
So how does this relate to trading? Well as we learned in our lessons on Dow Theory, the price is representative of the crowd and the trend is representative of the leader of that crowd. With this in mind think about how difficult it would have been to short the NASDAQ at the high's in 2000, just at the height of the frenzy when everyone else was buying. In hindsight you would have ended up with a very profitable trade but, had the trade not worked out, people would have asked how could you have been so dumb to sell when everyone else knew the market was going up?
Now think about all the people who held on to their positions and lost tons of money after the bubble burst in 2000. As they had lots of company there were probably not a whole lot of people who were laughing at them. Yes they were wrong but how could they have known when so many others were wrong too?
By looking at this same example, you can also see how panic selling often ensues after sharp trends in the market as this is representative to a crowd whose leader has abandoned them.
In order to trade successfully people need a trading plan which is designed before entering a trade and becoming part of the crowd so they can fall back on their plan when the emotions which are associated with being part of a crowd inevitably arise. Successful traders must also realize that there is a time to run with the crowd and a time to leave the crowd, a decision which must be made by a well thought out trading plan designed before entering a trade.
CONSUMER PRICE INDEX
The CPI measures the changes in retail prices for goods and services. In the US, it is considered the number one indicator for inflation, and it is one of the main economic reports the Fed uses when determining when to change interest rates.
The consumer price index measures a weighted basket of about 200 commonly purchased goods and services. Each month, the BLS determines the retail prices for these items and compares them to the prices from the previous month to gauge the change in the average cost of living. The data is then grouped into 2 separate indexes.
CPI (W) category is for for wage earners, and clerical workers.
The CPI (U) is for all Urban workers.
The data most economists pay attention to, the main statistics reported in the media, and the information used in this video come from the CPI(U) report.
CPI (W) report for wage earners category, covers about 1/3 of the working population, and is used for things like cost of living adjustments in social security payments.
For each category, an index number is provided that is an ongoing, continuous percent of change in prices from an original start date. For the main categories, this date is 1982 to 1984. In other words, every month they compare prices to what the average prices were in 1982 to 1984, and then add to, or subtract from, the total percentage of change since then.
So again, they add up the prices in the basket of goods, compare it to the prices from 1982 to 1984, generate an index number, and then compare it to the previous index number.
They take the difference between these two numbers, and then divide it by the previous month index number.
The CPI report is issued monthly about 3 weeks after the month being reported.
The report contains one main table, A, and several follow up tables. There are also several short summaries of the data for table A that contain the most important statistics.
The two main statistics reported in the media are the seasonally adjusted percent change for the total index from the previous month, and the non-seasonally adjusted 12 month percent change of the total index.
The first is the one month total change in prices for goods and services throughout the country, adjusted for seasonal factors such as weather conditions. This is the seasonally adjusted inflation rate for one month.
The second is the total change in prices for goods and services for an entire year. This change is not adjusted for seasonal factors, so it more accurately reflects the total change of prices consumers pay. In other words, this is the total inflation rate for a whole year.
In addition, perhaps equally important, is the seasonally adjusted rate of change for all items less food and energy. In this section, items relating to food and energy are removed. Because of the volatility of prices of items in these two categories, some economists feel that by removing these items, one gets a more accurate view of inflation. This category is often referred to as Core CPI.
As I mentioned before, there are several follow up tables at the end of the report. The first table is the change of prices for the entire basket of goods broken down into detail which shows the change of price for individual sections, sectors and commodities.
The 2nd table is the same thing, only the prices and index numbers have been seasonally adjusted.
The third table is the change of prices broken down by different areas.
On table worth mentioning is table 7- the chained consumer price index. This report attempts to take into account substitutions consumers make when prices change in the regular CPI basket of goods ...