Fundamental of Technical Analysis and Algorithmic Trading

Report
Doğu Akdeniz Üniversitesi
Faculty of Business and Economics
Department of Banking and Finance
Saeed Ebrahimijam
FINA417
FALL 2013-2014
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Fibonacci
Fibonacci Numbers
The Fibonacci Sequence
The Golden Ratio
Price and Time Targets
Elliot Waves
Basic Elliott Wave Theory
Impulse Waves
Corrective Waves
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and Algorithmic Trading
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1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144,…
Fibonacci numbers are simply a sequence in
which the last number is added to the
previous number to arrive at the next
number.
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and Algorithmic Trading
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The relationship that the sequence has to the "golden ratio."
13/21=0.618 61.8%
34/55=0.618 61.8%
34/21=1.618 161.8%
55/34=1.618 161.8%
21/55=0.382 38.2%
13/34=0.382 38.2%
23.6%, 38.2%, 50%, 61.8% and 100%
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Except in the very low numbers, the ratio of any number in the sequence to the
next lower number is 1.618 (e.g., 144/89 = 1.61798);
The ratio of any number in the sequence to the next highest number approaches
0.618 (e.g., 55/89 = 0.61798).
The number 1.618, known as the "golden ratio," and its reciprocal of 0.618,
possess many interesting properties.
For example, it is the only number that when added to 1 is the same as 1 divided
by itself. Another fascinating fact is that 1.618 multiplied times 0.618 = 1.
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and Algorithmic Trading
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The two most important are 38 percent and
62 percent.
Each Fibonacci number is approximately 62
percent of the next higher number (e.g.,
5/8= .625);
hence, the 62 percent retracement level. 38 is
the inverse of 62 (100 − 62 = 38); hence, the
38 percent retracement number.
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and Algorithmic Trading
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They are very popular among professional
traders and are widely used to determine:
“how far price corrections will retrace ? “
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and Algorithmic Trading
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Because it is vastly applied by the traders.
At last the prices are converge to those
sequences.
Note: The Fibonacci method can be applied for
all the time horizons from 5min to weekly …
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and Algorithmic Trading
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Fibonacci retracements use horizontal lines to
indicate areas of support or resistance.
They are calculated by first locating the high and
low of the chart. Then five lines are drawn: the
first at 100% (the high on the chart), the second
at 61.8%, the third at 50%, the fourth at 38.2%
and the last one at 0% (the low on the chart).
Find MAX and MIN levels Known as, Beginning
swing price and Ending swing price
Maybe you need to go back for daily or weeks.
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and Algorithmic Trading
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38.2%, 50%, 61.8%, 78.6% (76.4%)
The market always correct itself after each strong
movement and before continuing the previous trend.
Wait until point C forms. (BUY or SELL @ C)
Where is C (Problem???)
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and Algorithmic Trading
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and Algorithmic Trading
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and Algorithmic Trading
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162%
Price expansions
expand the price range
of a price swing by
chosen ratio amounts.
The most important
ratios for expansions
are:
62%, 100%, 162%, 262%, 424%
A
100%
61.8%
B
ending swing price
beginning swing price
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and Algorithmic Trading
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After BUY @ C , According to Fibonacci price
expansions calculation, the price target will be @
point D.
If retracement Happens @ 61.8%, it will usually
continue till 161.8%.
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and Algorithmic Trading
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and Algorithmic Trading
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Fibonacci sequences convergence
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Some traders use Fibonacci on different time horizons
(daily, weekly, monthly,…), so in this situation, coverage
of some of the sequences will be more significant.
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and Algorithmic Trading
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and Algorithmic Trading
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and Algorithmic Trading
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In addition to the extent of price movements
in waves being related by Fibonacci numbers,
times in stock market data have also been
related to the Fibonacci ratio.
Tables are often used to show the time
differences between important peaks and
valleys in market prices that occurred in a
Fibonacci number of years, months, or days.
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and Algorithmic Trading
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Elliott himself used the example of the 34
months between the peak in September 1929
and the bottom in July 1932 and the 13 years
between the peak in 1929 and the low in
1942 (see Figure 20.12).
Although others also have seen a relation
between Fibonacci time counts and important
events,
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and Algorithmic Trading
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and Algorithmic Trading
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Modem methods have included marking the Fibonacci ratio numbers of
38.2% and 61.8% and drawing the speed lines through them. As retracements
do not seem to follow a consistent percentage, it seems doubtful that much
merit should be applied to speed lines, but they are often seen in the
literature on technical analysis.
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and Algorithmic Trading
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It is a pre calculated price before entering to a trade.
 Stop Loss is applied for exiting fro the market when the market
acts in the opposite of your expectations.
 One suggestion is using the resistance and support line which
are consistent with the Fibonacci sequences as S/L value.
 In FOREX, Each pair has a specific behavior that should be
considered in determining S/L.
For example USD/CAD, USD/JPY have quick movements and
noise than the price of USD / CAD, USD / JPY Which causes
further S/L limit to be calculated.
 MOVING S/L strategy:
Keeping the obtained profit is very important. One of the
methods used is when your trade enters to profit, change the S/L
to reduce your risk.
Note: You should keep S/L away from market price fluctuations not
to be affected by the market noises.
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and Algorithmic Trading
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and Algorithmic Trading
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Devised by Ralph Nelson Elliott, the Elliott
Wave Theory (EWT) is an attempt to define a
structure to the stock market, and by
implication, other trading markets.
EWT is based upon the notion that the market
behaves in an irregular cyclic manner.
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and Algorithmic Trading
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The terms called waves, in fact, are explain
how people behave.
These
waves
show:
volume,
market
psychology, and optimistic and pessimistic
wave’s movements and corrections and
Furthermore, the measurement level of
patterns.
One of the things that we see in the financial
markets, is the changes in investor
psychology in the form of displacement
(change) in prices.
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and Algorithmic Trading
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The main research of Elliot, he examined
changes and mutations in 11 different
patterns of waves that occurred between the
price data were examined.
Then named them.
The explained how those patterns are related
to each other and explained how these waves
are also present in pattern with larger
dimensions.
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and Algorithmic Trading
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Wave theory can not tell us complete and
certain market future. It is only what is
probably happening, and the target range is
used for changing.
The Elliot wave analysis is not appropriate for
Gold market.
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and Algorithmic Trading
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Elliott's theory describes the market structure as a
nested series of waves of various length and size. A
wave is a sustained price move in one direction as
determined by the reversal points that initiated and
terminated the move.
A wave cycle is composed of two waves—an impulse
wave and a corrective wave.
The impulse wave is in the direction of the current
trend;
the corrective wave moves against the trend's
direction. During a bull market, the overall trend is
called a "motive impulse wave" (upward price
movement) and ends when a downtrend begins,
signaling a major change in market direction.
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and Algorithmic Trading
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Impulse (divided to sub waves):
 Market moves by 5 waves (motive waves) and
corrects itself with 3 or 5 waves(counter
market movement) before the a larger trend
starts.
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and Algorithmic Trading
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Wave 1 is an impulse or a leading diagonal.
Wave 2 can be any corrective pattern but a triangle.
Wave 2 does not retrace more than 100% of wave 1.
Wave 3 is always an impulse.
Wave 3 is larger than wave 2.
Wave 3 is never shorter than waves 1 and 5.
Wave 4 can be any corrective pattern.
Waves 2 and 4 do not overlap in price.
Wave 5 is an impulse or ending diagonal.
Wave 5 retraces at least 70% of wave 4.
In the fifth wave, a diagonal, extension, or truncation
indicates that a major reversal is to occur soon.
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and Algorithmic Trading
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and Algorithmic Trading
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Rising
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Falling
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and Algorithmic Trading
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Wave one is rarely obvious at its inception.
When the first wave of a new bull market begins,
the fundamental news is almost universally
negative.
The previous trend is considered still strongly in
force. Fundamental analysts continue to revise
their earnings estimates lower; the economy
probably does not look strong.
Sentiment surveys are decidedly bearish, put
options are in vogue, and implied volatility in the
options market is high. Volume might increase a
bit as prices rise, but not by enough to alert
many technical analysts.
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and Algorithmic Trading
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Wave two corrects wave one, but can never
extend beyond the starting point of wave one.
Typically, the news is still bad. As prices retest
the prior low, bearish sentiment quickly builds,
and "the crowd" haughtily reminds all that the
bear market is still deeply ensconced.
Still, some positive signs appear for those who
are looking: volume should be lower during wave
two than during wave one, prices usually do not
retrace more than 61.8% (Fibonacci) of the wave
one gains, and prices should fall in a three wave
pattern.
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and Algorithmic Trading
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Wave three is usually the largest and most powerful
wave in a trend (although some research suggests
that in commodity markets, wave five is the largest).
The news is now positive and fundamental analysts
start to raise earnings estimates.
Prices rise quickly, corrections are short-lived and
shallow.
Anyone looking to "get in on a pullback" will likely
miss the boat.
As wave three starts, the news is probably still
bearish, and most market players remain negative;
but by wave three's midpoint, "the crowd" will often
join the new bullish trend. Wave three often extends
wave one by a ratio of 1.618:1.
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and Algorithmic Trading
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Wave four is typically clearly corrective.
Prices may meander sideways for an
extended period, and wave four typically
retraces less than 38.2% of wave three (see
Fibonacci relationship).
Volume is well below than that of wave three.
This is a good place to buy a pull back if you
understand the potential ahead for wave 5.
Still, fourth waves are often frustrating
because of their lack of progress in the larger
trend.
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and Algorithmic Trading
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Wave five is the final leg in the direction of the
dominant trend.
The news is almost universally positive and
everyone is bullish.
Unfortunately, this is when many average
investors finally buy in, right before the top.
Volume is often lower in wave five than in wave
three, and many momentum indicators start to
show divergences (prices reach a new high but
the indicators do not reach a new peak).
At the end of a major bull market, bears may
very well be ridiculed.
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and Algorithmic Trading
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Corrections are typically harder to identify
than impulse moves.
In wave A of a bear market, the fundamental
news is usually still positive.
Most analysts see the drop as a correction in
a still-active bull market.
Some technical indicators that accompany
wave A include increased volume, rising
implied volatility in the options markets and
possibly a turn higher in open interest in
related futures markets.
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and Algorithmic Trading
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Prices reverse higher, which many see as a
resumption of the now long-gone bull market.
Those familiar with classical technical analysis
may see the peak as the right shoulder of a head
and shoulders reversal pattern.
The volume during wave B should be lower than
in wave A.
By this point, fundamentals are probably no
longer improving, but they most likely have not
yet turned negative.
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and Algorithmic Trading
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Prices move impulsively lower in five waves.
Volume picks up, and by the third leg of wave
C, almost everyone realizes that a bear
market is firmly entrenched.
Wave C is typically at least as large as wave A
and often extends to 1.618 times wave A or
beyond.
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and Algorithmic Trading
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Impulsive or Motive Waves - Moving with the
Larger Trend
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and Algorithmic Trading
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Diagonal – also known as a Diagonal Triangle:
Leading (LD) and Ending (ED)
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and Algorithmic Trading
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Zig Zag
Double and Triple Zigzags (DZ and TZ):
Flat
Triangle (Contracting and Expanding)
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and Algorithmic Trading
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• Wave A is a zigzag or a flat.
• Wave B is only a zigzag.
• Waves C and D can be any corrective pattern except a
triangle.
• Waves A, B, C, and D move within the bounds of the
channel lines between A to C and B to D.
• Bounds converge (one may be horizontal), and the
intersection of the bounds occurs beyond the end of
wave E.
• Wave E can be a zigzag or a converging triangle.
• Either wave A or B is the longest wave.
• Wave E ends in the range of wave A.
• Wave E moves within or closes within the bounds.
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and Algorithmic Trading
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• Wave B is smaller than wave C but more than
40% of wave C.
• Wave C is smaller than wave D but more than
40% of wave D.
• The intersection of the bounds occurs before
the formation of the triangle.
• Wave E is longer than wave D.
• Wave E ends outside the territory of wave A.
• Either wave A or B is the shortest wave.
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and Algorithmic Trading
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Submicro – minutes to hours
Micro - hours to days
Subminuette - days to weeks
Minuette - days to months
Minute - weeks to months
Minor - weeks to quarters
Intermediate - months to quarters
Primary - months to years
Cycle - quarters to years
Super cycle – years
Grand Super cycle – decades or longer
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and Algorithmic Trading
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Elliot technique expects that all the correction
waves happen near the Fibonacci numbers
38% , 50%, 62%.
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and Algorithmic Trading
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5
B
3
A
C
1
4
2

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